Portfolio Management

I was reading a blog. The author is a professional portfolio management.

He has very good points about investment.

Here are the whole article.

The Wall Street Transcript regularly presents interviews with analysts, corporate managements, and portfolio managers. In a recent Wall Street Transcript interview (subscription required) Gary Furukawa describes his firm's approach to investing:

We have a strong contrarian bias that helps us be opportunistic in our approach. While we recognize that the market is very efficient in discounting information, investors as a group can form incorrect opinions, biases, or assumptions regarding the prospects for a particular company. We like to question those core assumptions and assess how we would view those assumptions differently than how the Street might be viewing them. At some point in time, whether it be through an internal catalyst, through some type of exogenous event, or whether it just be through the passage of time, sentiment usually begins to swing back toward the company.

Mr. Furukawa and his firm are quite right. Isn't this the essence of buying a turnaround situation or optimizing the short-sale of an expensive stock? Very early in my career there was an unshakable belief in the ever-present threat of inflation and the inevitability of higher energy prices. Those 1970's and early 80's beliefs were congenitally implanted into portfolio managers' DNA. You were an idiot, not to accept those assumptions.

I was an idiot...thank God, I built a career out of questioning what was a ubiquitous mainstream assumption. The ability of the consensus to delude itself entirely and miss the obvious is one of those features of human behavior that you can overcome and master to create investment performance.

Assess the critical assumptions that you endorse when you select a security. How reasonable is a 30% or 40% growth rate when that represents the consensus? What would the valuation look like if a more "normal" 10-15% growth rate were the future growth rate? What can go wrong in your assumptions?

Here is a screen of companies that have high estimated growth rates greater than 20% and have appreciated YTD greater than 30%: Spreadsheet link

Bottom line, know what you own and why. Don't deceive yourself into accepting assumptions that are arbitrary or indiscriminate.

In yesterday's marketthoughts.com (subscription required) Henry To presents my post on self-deception. I think one of the keys to successful portfolio management is the ability to avoid self-delusion. If all of us are operating with the same assumptions in thinking about a business, why would any of us expect to garner an advantage?


As I say in the article,

Guard yourself against the possibility of self-deception. Wishful thinking is not a subset of thinking; it is merely a substitute for thinking. Don't succumb to the seduction of conventional wisdom and elegant theories. Remember, mankind has subscribed to a belief in a flat earth for much longer period of time than the modern viewpoint. But for many years, the prevailing wisdom assumed the tenets of flatness! Theories tend to rely on simplifying assumptions…theories represent an approximation of reality.

More on this topic in a later post and book review!

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Keep it in record for my future review

Happy New Year

Just realize that I have not post a single message for year 2006.

This year is quite interesting for me. I visited China in February. Since then, quit my job in Seattle and moved to Atlanta and joined a Forbes 400 company. It is quite interesting and after six months, I quit my job and joined a much smaller publicly traded company in Philadelphia. I have more chances to visit China and Asia. That is the whole idea.

This year, my clients' and my portfolio have not outperformed because I did not actively trade the oil stocks. Also the big holdings in income trust have been got hit by Canadian government new tax policy. Luckily, I stick to diversification principle. Our portfolios are recovering.

The lesson we have learn is you can easily tell politicians are lying because their lips are moving. Stephen Harper specifically stated if he was elected in 2005, he will not tax on income tax.

Here is his speech. http://www.youtube.com/watch?v=U9mibZYpVPY

For 2007, I am betting on gold/silver and base metal stocks. Our Chinese stocks appreciate significantly. I will sell my petrochina at $150. This stock has done extremely well for me.

I miss PD 20% jump in one day. Not sure I have done the right thing. But since Jim Cramer recommended it, this is a clear sign to sell. Anyway, I am not regret since I have gain more than 100%.

Happy New Year!

An interesting post from yahoo board

I was reading a message on yahoo message board. It does include a basket of interesting stocks. For disclosure purpose, I own SSL and HW for myself and my client.



Author therealgabewhatley
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Dr. Jonathan Lipow is Chief Economist at Forum Consulting and Business Development, which represents Vanguard and Wellington in Israel. He was formerly Vice President of Banc of America Securities responsible for business development in Israel.I am not in a position to argue or debate with Dr. Lipow, or you. My knowledge is limited. It was Food For Thought. That's all. Chill out.

The oil price rise is generating some absurd analysis, but also interesting opportunities.

Jonathan Lipow 20 Oct 05


With oil “stabilizing” in the $60-70 per barrel range, there has been a lot of talk about the impact of high oil prices on global output and inflation. Nearly all of this talk is simply a distraction. What investors have to focus on is the long run implications of higher oil prices, and what this means for portfolio strategy. First, let us consider the popular obsession with the “inevitable” oil shock induced recession that the press claims is around the corner. While it is certainly true that a decline in oil production would trigger recession as it has in the past, today’s high oil prices are the result of burgeoning demand rather than supply disruptions. In other words, people concerned with oil induced recessions are effectively saying that rapid economic growth causes recessions. The claim is nonsense. The argument that rising oil prices will induce inflation is equally silly. Inflation, or more accurately excessive inflation, is a situation in which rapid growth of the money supply pushes up prices so quickly that it becomes difficult to tell whether a price for a particular good has risen because it is in short supply or just because all prices are rising. It is the resultant confusion that makes inflation so costly to the economy. Oil is getting costlier because it is in short supply, not because there is excessive liquidity sloshing about the global economy. Hence the proper functioning of the price system requires that oil prices rise. So what do high oil prices mean for investors in the long run? The starting point for any analysis is to understand that while oil prices may soon breach the $100 per barrel mark, in the long run, oil prices must stabilize somewhere around $30 - $45 per barrel. How can I say this with confidence? The answer is that various technologies exist that make it possible to profitably convert less convenient and currently far cheaper sources of energy into liquid transportation fuels. These technologies become economically viable when the long-term price of oil exceeds $30 per barrel. What technologies are we talking about? Primarily methods of converting coal and natural gas into clean liquid fuels. Such methods are hardly something new. The Nazis exploited this approach extensively during World War II in order to fuel their war machine using coal based fuels.

Of course, today’s methods while based on the same scientific principles are far more efficient than those used by the Nazis. Today, CTL (“coal to liquids”) and GTL (“gas to liquids”) plants are operating in the US and South Africa, while new plants are being built in China, Nigeria, and Qatar. Far more are planned. So what does this mean for the world economy? As GTL and CTL plants come on line, oil prices will stabilize at lower levels than those we see today. The price of coal and natural gas will rise substantially as these fuels steadily replace oil as the source of transportation fuel. Meanwhile, higher prices for coal and gas will lead to higher electricity prices, and render unconventional methods of generating electric power such as solar, wind, and “inherently safe” nuclear reactors economically viable propositions. And, as a side effect, global CO2 emissions will not rise anywhere near as fast as is currently projected. How should investors exploit these trends? One obvious idea is to invest in utilities that rely heavily on nuclear power. Higher electricity prices will fall straight down to their “bottom lines.” Examples would include Germany’s E.ON (NYSE: EON) and Korean Electric Power (NYSE: KEP). Another “no brainer” is to invest in railroads. Due to their energy efficiency, railroads will benefit long term from relative oil scarcity. America’s CSX (NYSE: CSX) and Genesee and Wyoming (NYSE: GWR) are my current favorites, while China’s Gunagshin (NYSE: GSH) is a more speculative alternative. Firms that produce coal and natural gas will also be big beneficiaries. Amongst coal producers, America’s Peabody (NYSE: BTU) and China’s Yanzhou Mining (NYSE: YZC) are good selections. As for natural gas, no firm is a match for Russia’s Gazprom (OTC: OGZPMY). Investors should not shy away from oil firms either. Oil firms’ valuations have not risen anywhere near as fast as spot oil prices, reflecting the markets’ sober assessment that oil prices are heading back down to more reasonable levels. America’s Chevron (NYSE: CVX) and Spain’s Repsol (NYSE: REP) are good choices. Both firms have large natural gas deposits, and Chevron is heavily involved in commercialization of GTL technology. What about firms directly involved in GTL/CTL technology? America’s Headwaters (NYSE: HW) and South Africa’s Sasol (NYSE: SSL) are solid profitable choices. As for the coming boom in nuclear power, America’s Duratek (NNM: DRTK) is a leader in the management of radioactive waste streams, and is superbly positioned to benefit from nuclear power’s renewed popularity. Then, of course, there is General Electric (NYSE: GE), a firm involved in wind power, nuclear power, clean coal technology, energy conservation, and a myriad other unrelated activities.

I am back.

I finally found my password and username. I am delayed to write my blogger because I was prepared for my CFA exam. Thank god, I passed my level II. Hope I will pass level III next year.

Anyway, I am back to write my investment idea.

So far so good. I have placed my chips on the table of oil and energy in the first three quarters of year (2005), which handsomely rewarded me. However, recent sharp drop in two weeks has cut my profit in half, especially my client's account.

I have already cut my oil holding. I only hold petroChina, which I think will be isolated from the rest of the world. I also own gas stock - Encana, which was beaten up by 20%.

I still stongly believe Encana is a winner, since it has quit its oil operation and focuses on the natural gas exploration and operation. The natural gas price actually remains high. I think I am going to buy more Encana stocks, if it drops more. Especially for my client's account.

I am bearish on the outlook of US equities, even Corporate America has plenty of cash on its balance sheet. I am not going to hold any US$ paper.

Have bought ICICI bank (Indian) recently. It is still a good buy.

I am wondering whether someone read my blog.

I just read the news from yahoo website, which mentions that a few employees fired by their companies including Microsoft, Google and Delta Airline. The reasons are at least companies believe that they inappropriately disclosed some information of their companies.

I don't know whether it is wrong or right. I kind of agreeing with those companies. But I also want to read others' blog. I think it is fun.

Does anyone read my blog? Can you please let me know?

My intention to write this blog is not to ask someone to read it. I think it is convenient for me, because I can write it anywhere and anytime.

South africa and Argentina

I am always thinking about diversiying my holdings. I am interested in South Africa and Argentina.

Talking about Argentina, it has broken some investors' hearts. How does this country convince new investors? I don't know the answer. But one argument would be that they have learnt the lesson and would be more prudent in the coming future. Recently, I have noted a lot of good news about south America, which talks about high growth potential. PBR is one Brazil oil company. I am interested in this company.

South Africa is an interesting country. I have never noted this country. It is under everyone's rador's screen, which can be translated into low cost producer. Could it be higher polictical risky country? I don't know. I thought so. But right now, I have no idea. SSL is one oil company. I like this a lot.

IBN is an indian bank stock. I am going to look into it. It is quite cheap and has been penatrated into U.S. and Canada.

My portfolio is doing ok. One month is 8% return. It basically thanks to the higher oil price. I am very concerned about what will happen if oil price drops.

bull market for commodity stocks

Before I write anything, I should write down about the comments from Ross Healy on ROBTV.

He mentioned that there are three steps for a sector heading to a bull market. First, it is disappointing. Everyone dislike this sector and every company in that sector. Second, it is the growth of book value. At this stage, no one will take notice on them because they have already delivered enough disappointment. I think it is the excellent opportunity to build the position. I think right now it is the end of second stage for the commodity stocks. Third, it is the stage to take off. I agree with David Prince and Don Coxe. This is a 15 years bull market for commodity stocks. The net increase demand for commodity from China, India and South America drives base metal and oil and gas stocks price.

Don also suggests that investing in dividend-paying stocks will be a good hedge strategy, because if we come into recession market, at least, it generates income for the investors. I sense that Don is predicting a long period of time recession, like Japan. Normally, he predicts 15 years for triple waterfall collapse. Japan is in 13th year. Hence, he recommends investing in long duration bonds or zero-coupon bonds as well as dividend growing faster than inflation such as Bank of America.

I believe it is a good strategy.

Come back to my recent performance. I have purchased suncor for Siang at $33.30. I was very lucky that after my purchase, stocks shot to $39.5 in one and half week. I currently use stop limit protection to limit the risk of sharply decline in one day.

I heavily invest in base metal and oil and gas stock. Encana is another one. I bought it at $64.60. It was close at $67.77 on Friday. It is going to ride because they are going to stock split in April 2005. That will be a good news for this stock price.

I continue to invest in those sectors. I have not found a good agriculture stock. I am interested in those stocks now.

PBR and SSL are very interesting stocks. I have watched them and will pull my trigger.

January has already passed

Most major indexes were down in January. Generally, it is not a good sign because most of time new money will enter into mutual funds. Don Coxe has already expressed his concern. However, most traders know that every 5 ending year was up in the past century. Whether it applies 2005 as well is worth watching.

Laura has expressed her optimism for this year. She forecasted 8% to 10% return for 2005. I am not sure for her prediction. I think she meant that investors must be selective. She also mentioned normally commodity stocks are peak at 1.3 times book value.

I have built a position for Alcan (AL). It was purchased after the earning warning. I have confidence in aluminum price. The dividend yield is 1.5%. I like this company.

I found I am the type of person who likes to buy and hold. Have missed some profit taking oppotunities. Sometimes I asked myself whether I should change myself a little.

God stocks really hurt me. Placer Dome has been down 20%. Should I dump them? I think I still bet on weaker US $. I am thinking purchsing more.

I continue to purchse more stocks. Right now, more than 80% are in basic metal and pharma setctors. I am very bullish on them.