Posted: 3 May 2020
Disclaimer
The Hatch Fund is not a registered investment, legal or tax advisor or a broker/dealer. All investment/financial opinions expressed by The Hatch Fund are from personal research, analysis and experience of the owner of the site, and are intended for educational purpose. Please conduct your own due diligence before relying on the opinions presented on the site for your investment use. If in doubt, please seek advice from your legal, financial, tax, or other professional adviser(s). In the event that you choose not to seek advice from such advisers, you should consider whether the product in question, or any course of action recommended, is suitable for you. While best efforts are made to ensure the quality of our content, The Hatch Fund will not be liable for any gains/losses arising out of any recommendations made.
The Recovery – Light at the end of the tunnel
After the second half of 2019, I started reflecting upon my mistakes, which led me to the various lessons I penned down in this article. Keeping them in mind, I begin correcting my bad habits and enforcing new ones.
I traded much less frequently and started doing proper due diligence on the companies that I held. At this point, I had diversified into the telecommunications and hospitality industries by buying shares of Singtel and CityDev. AEM Holdings turned out to be a well-managed firm led by a private-equity investor, Novo Tellus. The company had low/no debt, strong operating profit margins; It was the test handler provider for Intel (testing Intel’s microchips) and was also diversifying into new revenue streams like MEMS (microelectromechanical) testing, and 5G network cable testing for Huawei. As the company had a lot of cash, they were able to conduct a series of accretive acquisitions to reinforce and expand its capabilities. In essence, AEM Holdings turned out to be a gem, and I began swooping up shares at the lower end of S$0.99, S$1.14, and S$1.95 during the second half of 2019.
The AEM Hedge
Later, news broke that the COVID-19 was spreading to countries outside of China. Even though the circumstances were not as dire as they are now, the financial markets tend to react in anticipation of changes. I decided to sell half of my shares in AEM Holdings at S$2.21 to lock in my gains and to act as a hedge. The logic here is simple: the price is at an all-time high so price moment upwards was going to be limited but the downside risk, as we’ve seen before, can be tremendously devastating. This transaction helped to recover about S$5,000 of my losses.
The DBS Flop
With cash in hand, I bought some shares in DBS at S$24.21 to diversify my portfolio. Thinking back, I don’t think I really had a thesis in mind other than “DBS is a really good bank/strongest local bank and it was trading at S$26+”. Despite a close friend’s warning that many institutional clients are deleveraging and selling, I held on to DBS.
Evidently, I had not fully adjusted to systemizing my investments, and had gone back to my old ways. As the pandemic spread and worsened, many countries went into lockdown which battered their economic health. People began worrying about hotels and airlines collapsing, which will result in mass defaults that can be detrimental to the banks. Banking shares fell lower and lower. In the same month that I bought DBS’ share, I sold two-thirds of my DBS shares at S$18.80 and locked in a loss of S$1,111.
Lesson 8: Cut your losses when you do not have a strong reason/hypothesis to hold
Often, people become so emotionally vested in a position that we do not know when to call it quits. When we do not have a strong reason for holding the stock, and when downside risks remain a possibility, we need to learn to cut our losses.
Realizing/locking in losses may seem counterintuitive when we have the option of just holding on to the shares until it recovers. In most cases, this will work. In other more unfortunate cases, like the recent Luckin Coffee fraud (80% dip in share price followed by a trading halt for investigation), holding on to shares just meant losing your hard-earned money.
Having said that, I am not advocating for you to sell any stock that dips into a loss position. Rather, we need to ask ourselves what has fundamentally changed about the business or the environment, and whether the dip was warranted. For the case of DBS, I feel that it is only a matter of time before we see minor payment defaults. When that happens, banks will start to restructure debts, which will negatively impact their income. In any case, even if a vaccine is discovered tomorrow, employment rates and cross-border economic activity will take some time before it returns to the norm (if it even manages to return to the previous norm).
Furthermore, when we hold a position without a valid reason/hypothesis, we are also incurring an opportunity cost – not being able to free up the invested cash for investment in something else. Had I not liquidated my DBS position, I would not have had the liquidity to invest in AEM and Mapletree Commercial Trust, which helped my portfolio to turn green again.
The Beautiful Recovery
By the first two weeks of March, my AEM hedge paid off. The share price fell from the high of S$2.23 to S$1.37 on 19 March 2020. By reducing my holdings in AEM, I successfully evaded big losses and freed up cash for investments. This exemplifies the beauty of keeping up with business, economic and international news in order to move in anticipation of, rather than in reaction to, these changes.
On 27 March 2020, I bought into AEM Holdings at S$1.54 again on the expectations that the U.S. will be passing a US$2 trillion fiscal stimulus. Prior to this trade, the Federal Reserve (U.S. central bank) had announced unlimited quantitative easing (printing of new money) to buy corporate debts. It also established several swap lines with foreign central banks to ensure that there was no shortage of USD in countries outside of the U.S., which will push USD further up.
While QE and the swap lines were well and good, they do not fundamentally resolve the root cause of the problem – the virus. As long as the virus persists, supply chains will continue to be disrupted, and consumer demand will continue to fall as more cities enter into lockdown. Thus, I was looking towards a fiscal stimulus as a more direct relief measure. On 27 March 2020, U.S. lawmakers signed the US$2T Coronavirus Stimulus Bill into law.
My hypothesis going in was that (1) the fiscal stimulus will help to support SMEs and prevent a wave of bankruptcies, and (2) as more people begin to work remotely, semiconductors (microchip or processors) will be in greater demand, driven by demand for notebooks and cloud computing. Moreover, Intel provided guidance for 2020 CAPEX (capital expenditure) of around US$17 billion (US$1 billion higher than 2019). While only US$350m, out of the US$2T stimulus bill, was planned for SMEs, any lifeline thrown to them buys the world more time to find a vaccine/cure before a deep economic crisis sets in.
In the following weeks, prices did not move much, and I decided to sell 3,000 shares of AEM Holdings at S$1.60 as I had not studied the impact that QE and fiscal stimulus had in the past (e.g. in the 1930s-45 period or during the 2008/9 Global Financial Crisis). However, nothing has changed fundamentally to prove my initial hypothesis wrong.
As the broader markets started picking up, I regained confidence and bought 2,100 shares of AEM Holdings at S$1.80. Investors slowly rotated back into the semiconductor industry – shares of teleconferencing apps like Zoom were soaring; Network infrastructure owners like Netlink Trust saw a quick recovery; Data center providers and REITs, like Keppel DC REIT, also saw a swift bounce back to an all-time high.
AEM’s share price continued to rise steadily as the U.S. passed a US$484 million coronavirus-relief package to replenish two depleted small-business loan programs, send more assistance to hospitals and fund the expansion of COVID-19 testing capacity on 23 April 2020. This week, AEM announced a record-breaking first quarter result – revenue increased 178% y-o-y (from 1Q19), net income increased 448% y-o-y.
This sent AEM’s share price soaring up to an all-time high of S$2.55 on Thursday (30 Apr 2020), before closing at S$2.45.
Lesson 9: Zig when the market zags when you have a strong reason to do so
As cliché as this sounds, buying when the overall market is going down and selling when it is going up can be a very difficult thing to do. When markets are down, we have to live with the fear that it will continue to go south. On the contrary, when markets are going up, we tend to get greedy and refuse to let go of our positions.
Because these emotions can play against us, we need to come up with a strong hypothesis that gives us legs to stand on. In my case, conducting due diligence and forming a strong hypothesis were only a part of the equation that gave me the confidence to buy when prices were ~50% down and when many equity indices entered bear territory. Understanding valuation metrics, and being able to conduct an independent valuation on the company, provided extra confidence in my investment decision.
This is why I hope to familiarise my readers with financial jargon so that we can all make better investment decisions going forward.
My Portfolio – A fresh reset
The recent rally has given my portfolio a new breath of life. For the first time in over two years, my portfolio was green again. Reflecting on my past mistakes and noting down the lessons that I learned along the way has helped me massively throughout this process. I intend to continue building upon these investment principles, and have set up this site for that the purpose of creating an investment playbook to systemize my trades. The goal of The Hatch Fund is to bring you along this learning journey and to help all of us become better investors as we move along.
While a S$12,000 loss may not be much, in relative terms, almost half of my net worth was wiped out because of my past mistakes and oversights. Going through it was definitely a humbling experience that taught me to humble myself and to continue learning. As painful as it was, what I experienced continues to drive me to keep abreast with the markets in order to prevent such an experience in the future.
If you managed to read till the end of this article, and have found it useful, please share it with your friends or family so that we don’t make the same mistakes again.
Comment below if you have any questions and I will try my best to address them!
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