3rd Quarter, 2012 – Watching them driving by

As the title suggests, we basically did very little to the Partnership’s fund during the months of July, August and September 2012. We did however disposed our entire stake in a machinery equipment business, for reasons stated in my previous post. I should have highlighted too that we added to our existing stake in an auto paint manufacturer, a smallish company, rarely mentioned in the media but has had a steady climb of net profit for the five straight years with an average return on equities at 15%. Further readings of their annual report highlighted their ability to pass the cost of rising raw materials to consumers, while requiring very little reinvested earnings and capital expenditure to grow their business. 21% of the Partnership’s capital are now invested in this company.

The Partnership’s return up to 28^th of September, 2012 is shown in table below. Returns are reported with dividends reinvested, but before advance payment to new capital added by partners during the year 2012 and before any additional capital or withdrawal made by partners.

Year	Partnership	Public Ittikal Fund	FBM KLCI	ASB
YTD 2012	26.7%	8.8%	6.9%	N.A

Sources: Morningstar Malaysia & Citibank Weekly Market Updates dated 1^st Oct 2012

Stay quiet and do nothing

Just to share what I've been doing with the Partnership's money since the last post for Q2 2012 update, quite a while ago.

1. Sell entire stake in one company worth 10% of the Partnership's fund size.
2. That is all.

Yes, that's right. We did nothing to the Partnership's stable of companies (part-ownership, at least) except for selling our entire stake in a machinery equipment business where although the balance sheet is strong with plenty of 'margin of safety' between its selling price against its book value, I failed to notice any long term advantage to its business. I believe it's worth more time and effort to find a company where one can be at least clearer if not entirely sure of its' long term potential, acknowledging my own limit as well. Additionally the said company too has not been really earning above average returns on capital employed (less than 10% - the minimum that we'd like to see our companies do).

I chose to stick to a common investment mantra - invest in the best AND cheapest companies, instead of invest in the best OR the cheapest companies available. All investors are afforded with the ability to have both best and cheap, why choose either one? That being said, since I am unable to find both best and cheap companies available in the stockmarket today, I'd stay quiet and do nothing until the next good opportunity to employ the Partnership's capital in Bursa Malaysia presented itself. We shall wait indefinitely, if we must.

First Half 2012 Commentaries – This can’t go on forever

During the 2^nd Quarter of 2012 I have identified (on behalf of the Partnership) several companies in Bursa Malaysia which basically ‘flew under the radar’ – having a small (if any) number of investors following their stocks. They are simple and easily understandable businesses, attractively priced, and doing the basic things well – sell more of the same product and passing incremental cost of raw materials to customers. We initiated positions in their stocks with a healthy dose of amateurish hesitation from my part. But before long, others took notice of these companies and their stock prices soon moved up quickly and are now beyond our buying range.

Two lessons here – buy big with conviction and if you are a buyer of stocks, you better hope prices won’t skyrocket; else you’ll be priced out. In short term the quick, sizeable return will make you look good and may even lead you to be boastful and overconfident in your investing capability, but it hurts your performance in the long run.

Year	Partnership	Public Ittikal Fund	FBM KLCI	ASB
YTD 2012	22.2%	5.31%	4.5%	N.A

Sources: Morningstar Malaysia & Maybank IB report

The Partnership’s capital standing until 30^th June 2012 is presented in the preceding table, measured against FBM KLCI benchmark index and the largest unit trust in Malaysia in terms of fund size, Public Ittikal Fund. Returns are reported with dividends reinvested, excluding advance payment (new capital) added by partners during the year 2012 but before the pre-agreed advance payment return. Be mindful of the presented numbers, for the return on the Partnership’s investment in Bursa Malaysia equities has to be measured against ASB’s return at year end, over a minimum period of three years.

We now have 85% of AIN Partnership capital invested in Malaysian stocks, the rest we stick to cash. Also worth noting, during the months of April – June 2012, we received RM13,323.15 of new capital from existing and new partners. We treat this as advance payment from each partner, drawing a pre-agreed return per annum which will be added to the partners’ beginning capital for the year 2013.

I personally expect the stocks investment climate in Bursa Malaysia to move southward in coming months. When this happens, rest assured I will remain as candid and you will be made aware of your money’s performance, as much as mine.

Keeping the base covered first

Scouring the Internet nets you plenty of investment lessons and advices, but this article from Forbes.com entice me to publish a very common but important principle central to the Partnership's workings when it comes to investing our capital. To quote:

"Contrary to conventional wisdom, the key to investment success isn’t getting higher returns. It’s keeping your losses within your comfort zone, so you don’t panic and sell out at the wrong times"

We shall keep our capital intact (short-term fluctuations notwithstanding) before we can really aim for above-average return on invested capital. After all, we can't grow the capital if we have none. Yes we can leverage, but aren't we leveraging to have/create the capital?

Very much looking forward to share the Partnerships's first half of 2012 mistakes and lessons.

A thought on the issue of the low participation of retail investors in Bursa Malaysia

Readers of this entry ought to understand I am not against the idea of PNB/Unit Trusts or other professional investment management companies in Malaysia. In fact, I'm very much for investing through a professionally managed funds for the know-nothing or know-something investor in Malaysia, but more needed be done in terms of educating the investing public on the benefits and perils of self/direct investment in Malaysian equities.

To reflect on my personal thoughts on retail investors in Bursa Malaysia, I would like to share a comment I placed in a very good blog on Corporate Governance in Malaysia, in an article entitled Wooing retail investors in Malaysia:

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As a layman direct stockmarket investor in Malaysia, I thought the creation of PNB to increase Bumiputera's (nowadays non-Bumi included) ownership of Malaysian equities via indirect investment through PNB's funds has its good and bad side, from this article's POV. Lets not talk about EPF, they are a 'must'. PNB is an option.

Way before today, investment funds like PNB impressed upon investors of one thing - invest through us, your capital are guaranteed and you get 'good' returns of 8%. (Fine with that, you can't expect much with that low, almost non-existent risk of losing capital).

As time passed by, the offsprings of PNB early investors and young adults have this firmly planted in their mind - "my dad/mom/grandparents lose money when they invest directly in stockmarket in the 90s, why should i try?. Okay, I will open ASB/ASW2020/ASM account tomorrow, ask PNB to invest for me at a 'good' 8% return".

This 'stay safe,stay low' stance eventually distanced investors away from directly investing in Bursa Malaysia. I get the same reaction when I told friends and family I invest directly in Bursa - "aren't you afraid of losing money?" What they don't know is that, the money they placed in PNB or mutual funds were also used to invest in Bursa equities!

To increase retail participation in Bursa, the perception of Bursa as a place to make/lose money easily must be aggresively retorted, against the aggresive marketing of unit trusts and safe-haven investment management companies alike.

First Quarter 2012 Commentaries

Mistakes are bound to be made in one’s management of his or her money for investment purpose, especially when it involves emotions and subjectivity. I am not immune to this either.

During the first quarter of 2012, the earlier part of it saw more than a handful of cheap stocks in Bursa Malaysia, which yours truly failed to resist the temptation to invest in many of it. However, this hurted our performance by way of increased transaction costs as a result of my terrible attempt at being the Jack of all trades – trying to grab it all. Eventually I wisened up, but it was already too late. By calculations, all these clumsy ‘trades’ and lack of investing discipline contributed to an opportunity cost of close to 2.6% – means we may have increased our capital value additionally by that much had I not try to be too smart.

From this portfolio update onwards I’d like to share as well, the movement of the largest unit trust fund in Malaysia, Public Ittikal Fund and the FBM KLCI during the same period of year-to-date (YTD). Public Ittikal Fund, with the size of RM 3 Billion has been closed to new investors since June 2011.

These figures shall bear no indication on how we performed, because our performance has to be measured against ASB’s return at year end, over a minimum period of three years.

Year	Partnership	Public Ittikal Fund	FBM KLCI	ASB
YTD 2012	10.2%	3.63%	4.3%	N.A

Sources: Morningstar Malaysia & The Star Online

What stocks does the Partnership invest in?

Firstly the question may also be written as “What kind of business does the Partnership invests in?”. Remember, when one buys stocks of a company, one is buying a part the company, effectively becoming a part-owner of the company. Hence the term ‘public-listed company’ – the company is listed so that the general public can purchase part of the company previously owned only by the private owners/founders of the company.

On behalf of AIN Partnership, I invest the Partnership’s capital in stocks of good-standing Syariah-approved listed companies in Bursa Malaysia. In general, there are two types of companies which we are likely to invest in their stocks:

a) Stocks belonging to companies with foreseeable growing profit year after year that at the same time generate cash to their coffers. Remember, the reason why everyone wants to start a business is because they want to earn money, the same reason on why everyone had to work just to earn cash at the end of the month to buy foods, groceries, go vacation etc. In a business, these earnings is translated into how much cash can the business generate after all expenses, to keep the business grow and generate more cash in the future. And to generate more cash every year a business has to (at least) make sure they are more profitable every year. This is the kind of business that a sensible investor or individual wants and should own, but not at just any price. However, sometimes their stocks are temporarily mispriced against its true value. This can be due to unfavorable market sentiment or folly actions by current stockholders who may sell the stocks down because a chap in USA said something terrible about Malaysian economy (what does the fellow had to do with your invested money in a supposedly good company here in Malaysia?). Whatever the reasons are, I will only buy the stock at a mispriced pricing that I am very comfortable with. This is to ensure any mistakes that I make during the purchase of the stock will not be punished severely but if I am right then the potential profit is substantial to the Partnership.

b) Stocks of companies who may not fulfill my criteria above, but are severely mispriced against its balance sheet valuation. This type of stocks demand the greatest amount of careful analysis, because as a small fry retail investor like us, we may not know the exact reason the price is so low. For this reason, an investor must require a bigger margin of safety (a bigger discount to its supposed value) just to ensure that if he or she is wrong on the purchase, the losses may not be so terrible that the investor can lose sleep at night. In the other way, if the investor is right, at some time the price will be corrected by the market so he or she can sell the stocks at a decent return.

Personally I believe that cash employment to purchase stocks will generate the most favorable return when the price one pay for the stocks is fair, relative to its current valuation and the earnings potential of the company. Of course – the cheaper, the better.

About the Partnership

I spoke to a few people about AIN Partnership, raising a few questions regarding the Partnership. I may have answered these questions casually, so let me ‘blog’ here clearly for my future reference as well.

1) Is AIN Partnership a legitimate and registered business?

AIN Partnership is a legitimate and registered business with Suruhanjaya Syarikat Malaysia (SSM), Business Registration No. 002093548-P.  The ‘Type of Business’ is stated as ‘Investment and Ownership of Stocks of Listed Company in Malaysia’.

2) What does the Partnership do?

Partners will pool their money meant for investment (not for savings purpose) into AIN Partnership to purchase and sell stocks of listed companies in Bursa Malaysia with the sole aim of earning a rate of return on its investment greater than the rate of return from the same amount of capital invested in Amanah Saham Bumiputera (ASB) fund in a given calendar year.

3) My role in the Partnership.

As the General Partner and majority partner of the Partnership, I make all decisions on the stocks the Partnership invests in. This includes analyzing the company’s financial structure, placing the buy and sell orders through a brokerage account and keeping records of our investment. Similary, I am responsible to my partners on the rate of return from the Partnership’s investment in Malaysian stocks (see above paragraph).

4) Why invest on your own? Why not just give your money to ASB/unit trusts and let them invest it for you? Or why not Swisscash/cicak tokek (gecko)/gold investment and get rich in a very short time, buy a BMW 3 Series and go holiday in Australia?

Reason is because I believe that stocks investment represents a wonderful chance to grow your money at a greater rate of return than most readily available investment instruments around us. A right company’s stock at a right price and a right time will turn your money many times over positively, letting you sleep well at night knowing the money you make now, will grow and help you live a comfortable life in the future. Some people can get rich from their ventures in what I listed in the question, but I firmly believe in stocks investment and I intend to do well in it with my partners to achieve that greater return.

5) But stocks are risky, and the price can go up and down.

Yes indeed.  But how can one reduce the riskyness? There are plenty of essays/writeups on the Internet about risk but allow me to make it simple at least from my point of view - if you know what you are investing in, why invest in it, and how do you invest in it, then you have made the risk look like a tame, cute kitten that roars at you but you know very well how to hold it by its neck and place it back in the cage. (The kitten will grow and be fond at scratching you but by then you already know how to cut their nails)

A stock price fluctuates up and down, that’s a certain. Your action as an investor is to simply look at stock price fluctuations like someone who knows very well the taste of McDonald’s Prosperity Burger and desires it, waited every year to buy it everytime Chinese New Year is near, but clever enough to buy the McValue Meal only from 12pm to 3pm any day because the price is cheapest at that time.

6) Does the Partnership guarantees positive return to its partners?

No, the Partnership does not guarantee any returns (positive or negative) to the partners nor does it provide capital guarantees. But what the partners are guaranteed of is the fact I will continue to have a substantial stake in the Partnership and I seek to preserve the initial capital provided by all partners before earning any return on it. I dislike losing money to stupid investment decisions, like everyone else too.

Dare I point out that if one is eager and joyous to see 15-20% returns on their stocks but worry and will lose sleep at the sight of losing 15-20% from stocks although their analysis, reasoning and the company is still right, then one must not invest their hard-earned money in stocks directly. To this investor, ASB is the best because they provide capital guarantees and a decent dividend return of 7-8% for the past few years consistently.

Of Syariah-approved Stocks

Upon thorough checkings and verification, The Partnership in the first week of January 2012 had just sold an entire holdings in Stock F based on the sole reason that it is not a Syariah-approved stocks as deemed by the Securities Commission. That aside, I still think that Stock F has the potential of upward earnings in years to come, as the company gain more rights to act as agents and distributors in Peninsular Malaysia, apart from their presently admirable position as a major distributor of many FMCG brands in East Malaysia.

Alas, as long as a stock of a listed company in Bursa Malaysia is not deeemed as a Syariah-compliant stock, the Partnership will refrain from employing its capital in the stocks of the company.

The Partnership Portfolio

I have explained in earlier post a brief history on the origin of AIN Partnership portfolio and where it stands now. Please take a look:

Stocks of Company	Gross Investment	Market Value	% Profit & Loss	Portfolio Percentage
A	4,300.00	5,360.00	24.65%	22.62%
B	2,562.00	2,820.00	10.07%	11.90%
C	2,660.00	2,725.00	2.44%	11.50%
D	2,552.00	2,640.00	3.45%	11.14%
E	2,453.10	2,509.00	2.28%	10.59%
F	2,384.20	2,429.00	1.88%	10.25%
Others	4,172.50	5,105.00	22.35%	21.54%
Cash	109.42	109.42	-	0.46%
Total Portfolio Value	21,193.22	23,697.42	11.82%	100.00%

* Figures in Ringgit Malaysia (RM)

** Cash includes dividends received and realized gains before being utilized for stocks purchase in the beginning of the year.

Stock A belongs to one of the senior citizens of Bursa Malaysia whom primary business is car distribution and property management. I bought them when the stock price is exactly the same as the amount of cash per share (a staggering RM4.30 per share). I should have bought more instead of placing a restriction of “maximum 25% of portfolio in one stock”. Lesson here – if you did all your research well and you have full conviction that your reasons to buy a stock are right, by all means load up at a fair if not cheap price.

A savings and loans company partly owned by Employees Provident Fund (EPF) is represented as Stock B. They made it big in personal financing in the public sector. I lived in Putrajaya and one can clearly see how these personal financing schemes boomed by the number of leaflets in the mailbox.

Stock C is a clothing brand company with exceptional growth for the past ten years in a competitive retailing industry. I like them so much that I made sure I only buy my working pants from them since I started working. What more can you do to make sure they returned the money to you as dividends?

Stock D is a Sarawak-based infrastructure company who has recorded above 20% ROE for the past five years with above 15% NPM consistently. I find no other reason to own part of the company except for how fair they are selling now relative to their growth and strong balance sheet. And oh, they started their business with swamp land reclamation.

Stock E is a vessel builder company operating out of Sabah. I have been in oil & gas industry for few years with direct exposure to offshore supply vessel (OSV) operations, and I can see the tremendous potential in it. The number of companies entering the business grew, and more Datuks than not tried to get into it. You ought to know who can profit from their ventures – the builder of the vessel that the Datuks buy.

Stock F represented a company whose chief business it acting as agents to their principal in product distribution. In East Malaysia they conquer everything from FMCG products to building materials. I’ve been a salesperson before (still am) and I can appreciate the fact that if you cannot get high margin, seek volumes. The company’s NPM was historically below near 5%, ROE was so-so at 8 – 10%. But look at the East Malaysia map – just how many more consumers can there be? Next stop – Peninsular Malaysia.

The ‘Others’ is collection of stocks that individually does not reach 10% threshold of total portfolio size, so I find it less compelling to share. Most of them were companies whose financial statements I deemed attractive, but not enough studies were made to warrant a bigger position in their stocks.

In total, there were 12 stocks that the Partnership owned as of 30^th December 2011.