This week, we take a hard look at our portfolio performances. We started the Malaysian Portfolio in October 2014 and added the Global Portfolio in December 2017. As a reminder for readers, both are real portfolios, the former denominated in ringgit and the latter in US dollars. Enough time has passed, we think, for us to make some conclusions as to how successful (or otherwise) we have been — and what it implies for our strategy going forward. We tabulated the performances of both portfolios as well as for the relevant benchmark indices (see Table 1).
We have done remarkably well for the Malaysian Portfolio, with a total return of more than 160% since inception, or equivalent to a compound annual return exceeding 12.1%. By comparison, the Global Portfolio — while making a positive return of 28.5%, and far better than the average return on US dollar bank deposits — is lagging the 45.9% gains of the benchmark MSCI World Net Return Index. In fact, over this period, the Malaysian Portfolio handily beat the Global Portfolio — and the global benchmark index to boot — logging in a total return of 50.8% (in ringgit terms). This was despite the dismal performance of the broader Bursa Malaysia, with the FBM KLCI falling by 15%. The return of the Malaysian Portfolio was lower, however, at 39.1% in US dollar terms, owing to the depreciation of the ringgit over this period. What conclusions can we draw from these results?
For starters, the Malaysian Portfolio far outperformed both the Global Portfolio and MSCI World Net Returns Index. This is what we would expect — because of our competitive knowledge in the domestic market and companies. Our investing ideas (whether buy, sell or ignore) tend to be original and ahead of others. We have a home-ground advantage that allows us to pick better stocks, especially among small- and mid-cap companies that are often under-researched and, therefore, where there are greater opportunities for finding undervalued gems. Thus, we can beat the market (other investors). Table 2 shows our best and worst stock investments for the Malaysian and Global portfolios.
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Obviously, we cannot possess the same level of competitive knowledge when it comes to foreign stocks. We simply do not have that kind of intimate knowledge of the changing trends, politics, consumer behaviours, operating environment as well as idiosyncratic challenges faced by these companies. As a result, we tend to invest in larger-cap stocks, names that we know well and are extensively covered by analysts. Indeed, from experience, our attempts at lesser-known stocks were a bit of a hit or miss.
Despite our best efforts, it is increasingly evident that we have neither the budget nor the resources to compete with teams of hundreds (comprising economists, chartists and analysts with backgrounds of different disciplines) based around the world, such as BlackRock and Vanguard. The truth of the matter is that we get our information second-, third- or fourth-hand. For example, we thought China’s reopening would boost oil prices. It did not, not really. It turned out that China had been stocking up on cheap Russian oil ahead of time. We also expected quantitative tightening in the US and Europe to drain liquidity globally. In reality, the Bank of Japan was buying so many bonds that it more than offset the combined actions of the US Federal Reserve, the European Central Bank and the Bank of England — adding to global liquidity. We could not know all this — until someone compiled the data and we read about them in the news.
We read, we think and then we decide. And that just does not work well in equity investing, which is a “winner takes all” environment. The one with the new information makes the biggest gains, and returns for all subsequent investors, trading on that same information, fall very steeply, and even into negative territory. This is unlike the situation for typical products and services. Yes, there is also the first-mover advantage, but the next round of businesses with similar products or ideas can still make good, but declining, profits (see Chart 1).
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Therefore, even when the Global Portfolio was doing well, we were barely ahead of the market, unlike the consistent outsized gains over the benchmark index for the Malaysian Portfolio (see Chart 2).
Notably, the Global Portfolio lost ground against the benchmark index over the past year. This was primarily due to our underinvestment in US stocks in favour of low-risk bonds and being too long on Chinese stocks, especially Alibaba Group Holding (see Chart 3).
We believed that earnings forecasts for US companies were far too optimistic — against the backdrop of rapid interest rate hikes and a likely recession. And we were right — analysts have been continuously cutting their estimates for months — but instead, investors continued to chase stock prices higher, leading to even higher valuations. As we wrote last week, there is a widening gap between stock and bond market expectations currently. Sometimes, we think we are too rational for our own good! Case in point: Based on valuations, Alibaba is trading at a huge discount to Amazon.com.
The biggest takeaway here is this: To invest successfully, you must focus on your competitive knowledge, whether it is in specific countries, industries or companies. As Warren Buffett once advised, never invest in a business you cannot understand. We must acknowledge the reality that our knowledge is limited when it comes to the intricacies of foreign markets and companies. Having said that , we will still continue to write and maintain the Global Portfolio. It is fun and educational and, importantly, increases our knowledge, as it forces us to read, learn (including from our mistakes) and think, and keeps us — and our readers — informed.
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As mentioned, we do have greater insights into the workings of the domestic market and companies, their management and shareholders. But our greatest strength, and success of the Malaysian Portfolio, we believe, lies in the fundamental analysis and valuations of companies — more so than our readings of broad macroeconomic trends, such as differentials in growth, interest rates and currency strength at any particular point in time.
Therefore, from hereon, we will focus more on vigorous fundamental analysis. We will go back to the basics. There are certain immutable facts when it comes to valuations. The question is how to transform them into more pragmatic and usable filters, applicable to the overwhelming number of stock potentials for the Global Portfolio. We will elaborate more on this subject in the near future. This may well lead to us making larger bets on few, high-conviction stocks, though this higher concentration will carry more risks.
We agree with Buffett, that for the average investor — who lacks competitive knowledge — the next best thing to do is to buy low-cost index funds: ETFs (exchange-traded funds). In fact, we might do this for the Global Portfolio, allocating a percentage of money to ETFs, in markets or assets where we do not have a competitive advantage. One reason market indices tend to trend upwards over time is that they benefit from diversification and rotational sectorial performances. Some stocks in some sector will always outperform in any one environment, be it during a recession or boom, rising or falling interest rates, strengthening or weakening of domestic currency and so on. Investors could also balance the risks in equities by putting part of their portfolios in safer bonds and/or properties.
We are not suggesting that readers emulate our strategy. Our portfolio is never a call for others to buy or sell, but simply a sharing of our thoughts, analysis and experience. We want to continue to run real portfolios, because we love the thrill of a challenge, where the results are transparent and outcomes are instantaneous.
The Global Portfolio fell 2.9% for the week ended Feb 22. Only Oversea-Chinese Banking Corp (+0.9%) gained for the week. The big losers were Alibaba (-7.8%), Tencent Holdings (-5.5%) and the Global X China EV and Battery ETF (-5.2%). We disposed of all our holdings in GoTo Gojek for a net gain of 22.1%. Total portfolio returns since inception now stand at 24.8%, trailing the MSCI World Net Return Index’s 41.6% returns over the same period.
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.
