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Portfolio update: August 2020

Performance during COVID-19


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A quick update on my portfolio

Much has changed since the previous post on 3rd May 2020 — the trade tensions are back in play, countries are rushing vaccines through the final phase of the clinical trials, lockdowns have loosened, and the financial markets looked to have erased its losses. This post is to share a quick update on my portfolio and some new insights that were gained from my experience investing in such volatile times.

Where we left off

Investment gains / losses (S$, May 2017 – May 2020)

In the first post on The Hatch Fund, I shared the arduous journey that my investment portfolio took since I started investing in 2017. In short, my portfolio went through a rollercoaster ride: At its peak, my portfolio was up SS$3,715 (realized and unrealized gain); At its trough, it was down S$13,190 (realized and unrealized losses) with about S$11,000 in realized losses.

In May 2020, it finally turned a profit and erased the massive losses. As any profitable investor would say, a large part of investment recovery/gain has to do with luck. But beyond luck, I believe reflecting on my investing behavior, and the subsequent corrections in my course of action led to this beautiful turnaround. This journey led me to pen down 9 crucial investment lessons that were learned along the way, which I shared in our first post on The Hatch Fund (linked here).  

Where are we today?

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Cumulative realized and unrealized gain (S$)

As at 13 August 2020, I am happy to share that the current cumulative realized and unrealized gain of my investment portfolio stands at ~S$11,000 (exclusive of cumulative dividends) and ~S$12,500 (inclusive of dividends). In percentage terms, my portfolio is currently up 26.5% (calculated based on total injected capital).

Investment gains / losses (S$, May 2017 – Aug 2020)

What is in my portfolio?

New lesson learnt

The Allied Capital Short

Last year, I came across a book called “Fooling some of the people all of the time: A long short story” written by David Einhorn, the founder and president of Greenlight Capital (hedge fund). In 2002, he grew skeptical of Allied Capital, a small Washington-based business lender. He shorted the stock and started publicly criticizing the company over what he considered bogus accounting. Over the next six years, Einhorn feuded with Allied. He repeatedly brought his findings to the attention of regulators and reporters, but these were largely ignored by the public. Allied shares held steady and gradually rose over the next few years despite Einhorn’s repeated whistle-blowing and only took a nosedive after this book was published in 2008.

The Herbalife Short

The David Einhorn story reminded me of how Bill Ackman, founder and CEO of Pershing Square Capital Management, shorted a nutraceutical multi-level marketing company, Herbalife. 

In May 2012, Ackman shorted ~US$1B worth of Herbalife stocks when he found that it was engaged in a pyramid scheme (what is a pyramid scheme?). This caused Herbalife stock to tank about 20% initially. 

However, the stock later rebounded when activist investor, and Ackman’s long-time nemesis, Carl Icahn, engaged in a “short squeeze” by taking the opposite side of the trade and took their rivalry to live TV to publicly call Ackman a “liar” and to tarnish his image. Icahn wanted to drag Ackman’s name through the mud and make a handsome profit in the process. 

Despite numerous accounts of fraudulent practices and indications of a pyramid scheme gathered by Pershing Square, Herbalife share price kept rising as the public turned a death ear to these reports and findings. Ackman later closed his position in 2018. 

At the point when Ackman disclosed his short position, Herbalife was trading at about US$23 (adjusted for 2-for-1 stock split in 2018) and it is currently trading at US$48 (as at 12 August 2020).

There is a very interesting documentary on Netflix (Betting on Zero) which covers this story if you wish to find out more.

Jargon explained: “Short squeeze” 

In essence, a short squeeze refers to the purchase of shares (long) to push up the share price and force short sellers to close their short positions, which in turn pushes up the share price again. 

The reason I brought up the two stories above is to show how irrational the markets can be. And this is a new lesson that I have learnt from investing in some medical glove counters during this period: “As long as there is a group of people that are willing to provide price support without fundamentals backing it, share prices can and will stay up”

In my opinion, this is why we see sky-high valuations for medical gloves stocks. While it is clear that current profitability and revenue growth is unsustainable in the long run, many still willingly invest in these companies. Most of these companies were only able to turn profitable recently due to increases in ASP and increases in production scale to offset high fixed costs.

Despite these short-term growth drivers, many continue to rely on, and chase after, the target prices released by brokerage firms. These target prices are largely based on the forward P/E multiple (i.e. the expected traded P/E in the future e.g. FY21). 

Sources: Analyst reports, CapitalIQ

Looking at the compilation of target prices from various analyst reports, we see that most of the projections are ~1 to 2 s.d. above the historical average P/E that these counters traded at. Essentially, the core assumption is that investors will still have a very rosy outlook at the end of 2021, which allows them to trade at a “higher-than-normal” valuation. It is important to think about the “what’s next” at this point. 

Let’s do a thought exercise: Suppose we get a viable vaccine by late 2021 and by Q1 2022, it is widely manufactured and distributed. 2021 revenue will likely continue to stay up and extend into 1H22 as there will be a continued demand for medical gloves to administer the vaccines and to take care of those that have not been vaccinated / do not react well to the vaccines. 

But what’s next? I think one should err on the side of caution and conservatism to assume that revenue and profitability will start declining in 2H22 and FY23 as a larger population gains immunity to the virus. While stockpiling remains a valid argument, it is unlikely to remain at such a high level as today given that governments have to start thinking about repaying the debts that were accumulated, or investing in IT security / defense given the escalating international tensions. Thus, when investors no longer foresee continued growth in profits, the core assumption for the target prices (forward multiple) collapses — i.e. investors no longer expect high future earnings and P/E multiple falls.

Case in point: 12 August 2020 selloff

Just yesterday (12 August 2020), the news of Russia announcing its registration of a vaccine that passed its clinical trials sparked a selloff in several medical glove counters: 

This was despite the fact that this vaccine only underwent 2 months of clinical trials and has not yet undergone phase 3 trials. While I have made some profit from trades in UG Healthcare and Riverstone Holdings, I would remain extremely cautious in treating medical glove manufacturers as a good long-term investment. The readiness to sell off exemplifies the fact that this is ultimately a game of Musical Chairs. 

In the next post, I look to discuss where i think the market is headed, and how I intend to position my portfolio in anticipation of a vaccine.

Feel free to share an alternative view on this matter in the comments section below. Stay safe and profitable!


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