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War is nothing but a continuation of politics with the admixture of other means
- Carl von Clausewitz, On War
The headlines of March has been concentrated on the conflict between Ukraine and Russia. What was expected to be a clean sweep and quick invasion by political commentators had an unexpected twist of events. The endless hordes of Russian tanks are being effectively pushed back by the Ukraine defenders, geographical and logistical impediments, and advanced antitank weaponry supplied by NATO/US. This dragged out the invasion which transited to become a stalemate. Supply chains and ammunition lines continued to flow from NATO and US supply chains, and the intelligence and advanced weapons / drones provided by the western powers allowed Ukraine from incurring catastrophic losses and allowed them to disrupt the supply chains of the invaders effectively.
Battles are won by men and wars are won by logistics. It is incredible how conventional warfare (train logistics and tank invasions) by the Russians against a city state, evolved into global sanctions and widespread disruption on the Russian economy. Global and US companies around the world withdrew their products and services to Russia, imposed trade sanctions of Russian commodity exports, and the US-EU controlled SWIFT financial system managed to unilaterally freeze and confiscate Russian foreign reserves, and force the rest of world against conducting transactions and trades with the Russian economy. I do not claim to be an expert in the NATO-Ukraine-Russia geopolitical tensions and economic linkages, but I fear the day whereby Singapore can be used as a pawn in a proxy war between the large countries and political powers. More-so than any other time, I believe in the importance of a globally diversified portfolio with cash flows beyond any single country's borders.
An incredible insightful analysis about the origination of the conflict
This conflict has spillover effects on the financial side of things. Global index funds are forced to make a decision to remove all Russian stocks and bonds from global ETFs, generating large unrealized losses (Until the Russian exchanges resume trading and capital controls are lifted). This heavily hurt investors whom has exposure to Russia / emerging markets. Credit rating agencies withdrew all coverage on Russian financial assets, creating huge uncertainty on how the assets should be valued. Russian sovereign bonds ran a risk of technical default whereby sanctions may force US banks to be unable to deliver payouts from coupon payments. And global commodity prices shot up to unexpected levels, climaxing to the point whereby the London Metal Exchange did an unprecedented (Doctor strange moment) to reverse time and Nickel trades to a former period to prevent a major nickel producer from being short squeezed on its own shorts. The financial market can move rapidly in unexpected areas, and no amount of experience or knowledge can fully price in the tail cases.
With the spike in commodity prices which are the major input or global products, and spike in oil which affects energy and transportation costs, inflation is almost certainly not <transitory> and I expect a bumpy ride in the asset markets as well as higher daily expenses for the months ahead.
Portfolio Decision for the month of March
1) It might be a mistake for me to deter from making quick trades and grabbing the low lying fruit like Lockheed Martin or Oil companies (which spiked premarket via institutional trading) as the armed conflict escalated, but I prefer to stay focused on reducing the number of stocks in my portfolio. I prefer to focus on analysis of higher quality /mispriced companies and not trade in and out of stocks that are favored by the market. Focused investing requires one to not simply say yes to interesting opportunities, but saying no to conserve capital and go for ones that I have an analytical edge in.
2) I allocated a mid conviction position into Hang Seng Tech ETF at HKD 9.42 on 17 Mar 22 as China gave an official announcement of their governance policy on Chinese tech companies.
To my interpretation from the original text,
1) The Chinese regulators will be working with the SEC to collaborate on managing the audit and information disclosure rules to allay delisting fears.
2) The Chinese regulators gave an official stand that they will continue to encourage companies to raise capital / get listed overseas
3) Regulatory departments governing the Platform businesses need to follow market norms and practices. They will focus on orderly predictable transparent ways to govern and push for healthy development of platform business to improve China competitiveness.
4) For HK market upheaval and stability issues, mainland regulators will work with HKEX to improve communication means.
5) The finance community will start a focus group to research financial market trends and capital raising issues. Central govt will work with local government finance heads to have meetings / discussions. Policy stability and predictability must be aligned and synchronized. Every department must be more open to communication and discussion
6) Respective departments must autonomously bear responsibilities to govern themselves. They should push out measures that are good for the market and be responsive when queried by others. Any large policies affecting financial markets must be discussed with the ministry of finance.
7) Need to focus on big picture and economy to encourage long term investments. Encourage long term healthy economic growth and stability of financial markets.
Although I am relieved that the Chinese stock markets bottomed out and rode the sharp rebound from the trough, my positions are still a far cry from the all time high back at 2021. The major Chinese companies is facing economic headwinds from the government self imposed regulatory actions as well as macroeconomic issues from supply chain disruptions, global inflation, and geopolitical tensions from the Russia - Ukraine conflict. Much as I believe in the economic outlook and long term growth prospects of those companies over the next 5-10 years, I have no crystal ball on how far the armed conflict could escalate over the next 6 months to one year.
3) I allocated a position on Alphabet on 31 Apr 22 as I read up on the developments on Google Pay, YouTube and Waymo which are the current faster growing products that Alphabet is scaling. YouTube and GPay should be profitable and at duplication phase as they managed to monetise these products via ads and have the ability to scale with the growth of content and users in the YouTube growth flywheel, and ad-coupon based rewards in GPay. I personally believe payment networks scale well with inflation and will like to have a dominant payment network with untapped pricing power and white space to grow to in my portfolio.
Waymo is a bet on self-driving EV smart-car Operating systems, which scale with the growth of the hardware developments of the EV space. Despite being a leader in self-driving technology, Waymo projected the limitations of scalability of self driving tech across different geographies (due to different driver behaviour) and this technology will not be in market for another 5 years (contradictory to Elon Musk claims). I do not have good technical insight on this space but the smart car OS is something I will keep a lookout for.
The recent acquisition of cybersecurity provider Mandiant (Large market to tap to) sounds promising as Internet content and cloud computing grows in size and scale, and is a strategic asset to deal with future cyber-threats and provide an additional monetisation layer to the products and services (Google Cloud, Android) Alphabet offers. As I am interested in cybersecurity exposure but find the industry and competitive landscape of its providers difficult to analyse objectively, I will let Alphabet manage the exposure while I check in occasionally for updates. With the current undervaluation of alphabet and the planned stock split at July, this eventual catalyst might improve the liquidity of the shares and increase index and retail ownership of Alphabet.
4) There are a long list of companies which I looked into but did not make it past the portfolio inclusion criteria as they are idiosyncratic problems affecting the company. Although there are investors I respect greatly that bought into them and provided their analysis in their annual letter to shareholders, they are operational risks in the companies that I do not understand well, unable to underwrite, and as such unable to include in my portfolio. It might be a mistake to not buy into them at this period of share price weakness, but I have to operate within the monetary constraints of my warchest as well as my limited circle of competence in different industries and businesses.
5) I made the active decision to exclude stashaway in future allocation of CPF funds as there are troubling asset allocation decisions that they recently made. Per user feedback, Stashaway is an active asset allocator (fund manager) disguised as a robo advisory service, which has a history of herding and getting into hot asset classes, and do not have conviction in its analysis when prices are cheaper and instead selling at the bottom. It does not have a buy and hold index fund mentality and I do not believe this active macro fund manager have superior insight and analytical edge over others, or a lower fee structure which makes its performance strictly inferior to a passively held portfolio like the SandP 500. Moving forward, I will be very careful on reading the prospectus of these (fund of funds) robo advisors before deciding whether to allocate my CPF funds to them.
I will also reject the use of the Magic formula portfolio as a blunt investment strategy in the future. Joel Greenblatt caveat of the Magic formula under-performing at certain periods and his choice of discarding his (magic formula) over a long-short hedge fund strategy seems puzzling to me when he published his books, and I am uncertain if any other hedge fund can simply duplicate the strategy and erode the alpha from this methodology. Certain retail practitioners of the (Magic formula portfolio) has found that the magic formula claim of superior volatility adjusted returns is inferior to the absolute performance of an unmanaged SandP500 precovid until now. Although the portfolio execution and time period is fairly short (2 years old) and the portfolio implemented is not as diversified as recommended in the book, I do not like the idea of churning the portfolio and increasing trading fees and I am not sure whether the pitch of <Superior risk adjusted returns> via mean reversion is actually superior to a low cost method of buying and holding a portfolio of quality growth stocks at subdued valuations. I believe there is merit to implement the criteria as a screening tool but I do not have the right tools and mentality to rigorously test and trade in and out on a yearly basis as of now.
On hindsight, it might be a mistake to DCA throughout the speculative highs from QE last year and hoping that a longer time horizon can ride out the valuation risk, and ending up with a more subdued warchest to allocate into the cheaper valuations this year. Nonetheless, many active fund managers also did not have the foresight to do so, least to say the US congress and officials in the federal reserve whom continued to buy stocks at the heightened valuations throughout the course of last year (per their SEC filings). I can only hope that <time in the market> beats <timing the market> and will try to maintain a disciplined posture for the months ahead.