We have spent the last three weeks discussing our approach or method in investing and how we have applied those principles to our stock selec tions. For readers who missed those articles, here is a brief recap. We will end this article with a review of the performance of the Malaysian Portfolio and global Absolute Returns Portfolio for 2024. We wish all our readers Happy New Year and may 2025 bring you more exciting opportunities and rewarding challenges.
As our readers well know, our team members are trained and educated as analysts (we studied in related fields such as accounting, finance, economics, political science and engineering). Therefore, it comes as no surprise that we are rational, data-driven val ue investors. Fundamental to our beliefs is that stock valuations are based eventually on the sum of all its future discounted cash flows. Both the intrinsic values and stock prices can, and do, fluctuate wildly because the variables that determine the cash flows change over time. And, more importantly, the expectations of these variables are uncertain (as they will happen in the future) and therefore can differ greatly between different individuals.
There is also the element of the “animal spirits”, of greed and fear that create exuberance and panic, causing rational expectations to be exaggerated. After all, the stock market in the short term is no different from any other markets, it is subject to demand and supply. And this is important because most investors are short-term investors, and the liquidity and resulting price volatility is, itself, an important determinant to the clearing price since higher liquidity implies less risk (risk is also a factor in calculating the stock’s fundamental value).
Two identical companies with different liquidity will have different valuations. This is why well-developed markets tend to have higher valuations, even if we ignore other considerations like transparency and governance.
All the above (differing valuations and short-term price gyrations) create opportunities. Investing success is driven by two key factors — intellect and luck. Luck averages out in the long run.
Back to our investment philosophy. Here are some of our key guiding principles:
See also: Investment philosophy of Tong’s Portfolio: Part 3 — Strategic thinking with a helicopter view
Top-down value investing
We are top-down value investors. Basically, we start with a macro analysis to decide on the theme and then choose the stocks using value investing methodology — that is, investing in stocks that are either undervalued by the market relative to their intrinsic or fundamental worth or in companies with strong growth prospects, even if they are priced at fair valuations. Remember, sustainable earnings and cash-flow growth are the most important variables in fundamental stock valuation. It is investing with a long term perspective. For those interested in more in-depth research, here are some good books to read: Security Analysis by Benjamin Graham and David Dodd, Common Stock and Uncommon Profits by Philip A Fisher, and The Little Book that Still Beats the Market by Joel Greenblatt.
Contrarian momentum trading
See also: Part 2 — Investing is always about valuations based on intelligent and rational assumptions
In the short to medium term, stock prices are driven by changes in earnings, hope and expectations, and storytelling. We, too, follow momentum trading — but by being the contrarian, that is, taking the opposite side of the trending momentum.
Momentum investing is commonly used by short-term stock traders using charts. They look for price trends and breakouts based on stock price moving averages, trading volume and so on. These traders basically buy or sell following the market trends. Because we believe the stock market in the short term is a market for stocks — like a fish market, for example — prices are determined by demand and supply. When most people already own the stock, the marginal propensity for more buyers decline. Meaning, it is more likely for the stock price to fall as demand falls, and vice versa.
Diversification
We subscribe to the Modern Portfolio Theory, in that a diversified portfolio of stocks instead of just owning one or two stocks minimises your risk, by removing what is called “unsystematic risk” in finance.
Management integrity
Critical to our philosophy is investing only in companies in which you believe the management is capable and has integrity. A good business under bad management will turn bad.
To repeat a quote from Warren Buffett: “The behaviour of the people who run the business is absolutely critical. We look for three things in a person: intelligence, energy and integrity. If someone doesn’t have integrity, you want them to be dumb and lazy.”
For more stories about where money flows, click here for Capital Section
Know when to cut loss
Last but not least, the willingness to accept and acknowledge a mistake, and reverse course even at great loss. Taking a loss and moving forward is far better than sulking and hoping. Hope is not a strategy. Neither is luck. There is opportunity cost to money — it is far better to cut loss on a bad decision and reinvest in gainful opportunities, than to wait for a losing position to break even. If the market goes against you for a long time, you are wrong, not the market!
Malaysian Portfolio gained 12.8% in 2024
Now, on to a short review of our portfolios. As we said, we are top-down value investors. Asia Analytica selects 10 stocks near the end of each year based on themes we think will do well for the new year. The stock picks are always based on fundamentals — profitability, balance sheet strength and prospects — and typically a mix of growth and more defensive, high-yield stocks.
The weightage depends on our overall outlook for the year, whether we think it warrants being more aggressive (when we are optimistic on the outlook) or defensive (when greater caution is necessary). For the Malaysian Portfolio, this is also reflected in our cash holdings. As we always remind in vestors, it is not about maximising profits but maximising your risk-adjusted returns. (The 2025 Top 10 stocks will be available to all AbsolutelyStocks subscribers by Dec 31.)
The Malaysian Portfolio performed reasonably well in 2024. Total portfolio value gained 12.8% (as at the close on Dec 24), better than the FBM KLCI and FBM Emas index’s 10.2% and 13.5% gains respectively. Save for the first few weeks, we maintained a relatively high percentage of our capital in cash throughout the year, averaging 30% of total portfolio value. That tempered the portfolio’s absolute returns, but our risk-adjusted returns are higher (owing to lower risks). Following Bursa Malaysia’s strong rally at the start of the new year, we grew more cautious on whether the gains were sustainable.
We made two outsized investments at the beginning of 2024, in REDtone Digital and Insas. We acquired REDtone based on Asia Analytica’s theme for 2024, which was digitalisation and property/construction. Its share price rallied strongly in January-February, so we decided to lock in gains early, netting returns totalling 59%. In hindsight, the disposal was fairly well timed, as the stock has since traded flattish.
In August, we decided to reduce our exposure to Insas. It was looking increasingly unlikely that management was interested in boosting minority shareholder value — for instance, by returning some of its excess cash to shareholders. We sold the shares — making more than 31% returns — but retained our investment in its warrants. That decision turned out rather poorly for us. Insas-WC has severely underperformed in the past few months on the back of Insas’ falling share prices, driven by consecutive quarters of contracting profits for its key subsidiary, Inari Amertron (owing partly to forex losses because of the ringgit’s appreciation against the US dollar in 3Q2024).
Elsewhere, we made a smart 38% return on CCK Consolidated as well as gains totalling 11.8% and 7.5% respectively from our investments in Singapore-listed Oversea-Chinese Banking Corp and DBS Group Holdings, especially considering the short four-month-or-so holding period for the stocks. We sold both Singapore banks from the Malaysian Portfolio in March 2024 after we included the stocks in our newly formed global Absolute Returns Portfolio. At the same time, we disposed of our investments in two Singapore real estate investment trusts (REITs), which were not performing to our expectations. We made the decision to include all future acquisitions of non-Malaysian stocks in the Absolute Returns Portfolio.
We continue to hold several other Asia Analytica 2024 Top 10 stocks in the portfolio: KSL Holdings, Gamuda, UOA Development and United Plantations. Notably, shares in United Plantations have done very well in recent months on the back of sharply higher crude palm oil prices. The stock is up by 18.2% from our cost of investment. Our investment in Gamuda has fared well, too, and we are currently sitting on gains of 20%. We believe KSL will continue to benefit from strengthening property demand in Johor. Valuations remain attractive at only 0.4 times book value. UOA Development is our defensive high-yield investment. We will look to deploy some of our cash into Asia Analytica’s new stock picks for 2025.
The Malaysian Portfolio fell 1.8% for the week ended Dec 24. KSL Holdings (+1.8%) was the only gainer for the week. Shares of United Plantations fell 9.9% on profit-taking while Insas Bhd-Warrants C (-6.5%) and Gamuda (-3.4%) also ended in the red. Last week’s loss pared total portfolio returns to 200.8% since inception. Nevertheless, this portfolio is outperforming the benchmark FBM KLCI, which is down 12.4% over the same period, by a long, long way.
Absolute Returns Portfolio up 19.7% in inaugural year
We started the global Absolute Returns Portfolio in March 2024 because we believe that investors need to look beyond just Bursa Malaysia and the Singapore Exchange for greater investment opportunities, in terms of sectors and stock selections, and potential returns. For instance, there are very limited options in the high-growth AI-related tech or renewable new energy sectors on both bourses. As we wrote last week, US companies are the leaders in AI adoption, which will drive innovation and productivity gains, earnings and growth. We think the US market will continue to outperform the rest of the world in the next few years at least.
The objective of the Absolute Returns Portfolio is to grow a retirement fund. The portfolio has outperformed our target — minimum of 10% compound annual returns — in its inaugural year. Having said that, this is a very long-term-focused portfolio. We may well underperform in some years, given that we are prepared to sit and wait, and hold any stock that we believe has a good risk-reward proposition, even if we are “early” in our call. The target is to earn an average of 10% compound annual returns over time.
As mentioned above, we moved DBS and OCBC from the Malaysian Portfolio to the Absolute Returns Portfolio in March 2024. Both stocks have outperformed, up 42% and 28% respectively over the past nine months. We intend to hold the stocks for the long term. Both banks are good proxies to economic growth in the region, given that Singapore is the de facto financial hub and attracts the largest share of foreign direct investments destined for Asean.
On the other hand, we have disposed of some of our initial acquisitions to make way for what we see as better opportunities. Some have outperformed. For instance, we made 40.7% returns on Tencent Holdings, 15.1% on Itochu Corp and gains totalling 20.7% from DR Horton. We bought Tencent back in March 2024, when Chinese stocks were out of favour and valuations were low relative to most major markets. This is an example of our contrarian philosophy.
Others such as European aerospace firm Airbus (-18%) have not met our expectations. The company appears unlikely to perform in the near-medium-term, owing to persistent industry-wide parts shortage that is affecting its production. Thus, we felt the money would be better reinvested elsewhere, even though Airbus remains a company with good long term prospects. It has been steadily gaining market share, with a long order backlog. We are holding on to Berkshire Hathaway and Swire Properties, as we believe their risk-reward propositions are still attractive, even if gains for the latter are slower in coming.
One of our themes earlier this year was lower interest rates in the US, which would benefit home builders such as DR Horton and materials suppliers such as CRH and Home Depot. Disinflation has stalled in recent months, however, as the US economy continues to expand at a stronger than expected clip. And the re-election of Donald Trump has changed expectations. Interest rates are now likely to stay higher for longer, though much is still dependent on policies of the incoming administration. We should gain better clarity over the coming months. We will talk more about our market outlook for 2025 in a future article.
One of our big themes going into 2025 is AI software and platform providers as well as end users of AI-related tools, which we discussed in depth last week — hence our acquisition of Palantir Technologies, Uber Technologies, CrowdStrike Holdings and energy company Talen Energy Corp. All have done well so far, save for Uber, owing to a couple of negative developments in recent days. We decided to dispose of the stock and switched to Grab Holdings, its peer that operates primarily in Asean. Rounding out our current 10 stocks is Indonesian-based footwear retailer MAP Aktif Adiperkasa.
The Absolute Returns Portfolio gained 2.6% in a holiday-shortened trading week, lifting total returns to 19.7% since inception. The top gainers were Palantir Technologies (+15.2%), Talen Energy (+5.8%) and Crowd Strike (+4.8%); while the notable losers were MAP Aktif Adiperkasa (-4.9%), OCBC (-2%) and Swire Properties (-0.3%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
