Portfolio Review Closing on 31-03-2017

Hi readers, as it comes to the end of first quarter in 2017, we hope everyone is doing well and stay healthy. In this post, let us review our 2 experimental portfolios that we setup early of this year. Both portfolios are tracked by using i3investor portfolio manager. First of all, these portfolios are formed purely based on quantitative analysis or balance sheet investing. We would like to examine and compare the performance between actively and passively managed portfolios, more details can be accessed here.

No trade was made for both portfolios in the first quarter of 2017. The portfolio (insert link to portfolio) is up by 7.9% since inception, which contributed by unrealized gain from FAVCO (+14%), HEXZA (+19.7%), MFCB (+35.5%), OKA (+23.4%) and TGUAN (+7.8%), while FLBHD, JAYCORP, and LIIHEN did not change much from our entry price. Nevertheless, this portfolio has two losers which offset some of the unrealized gain, they are : CSCSTEL (-17.4%) and HEVEA (-4.9%). So what should we do with the losers? Should we cut loss / realize the loss and replace it with another better companies? Or should we continue to keep the companies in our portfolio? Before making these decisions, let us go back to the fundamental of the companies to have a check, if any of the invested companies including the gainers, are still in tact.

 Figure 1: Current holdings in Stockify Experimental Portfolio (31/03/2017)

To find out the current status of the company, we like to check on the FA score of the company. The FA score basically consists of a list of all these key quantitative metrics: 

  1. PE Ratio

  2. PB Ratio

  3. EV/EBIT

  4. ROE (Dupont: Asset turnover, Financial Leverage, Profit margin)

  5. ROIC

  6. CROIC

  7. Quality of Earnings (CFFO/Net Profit)

  8. FCF/Revenue

  9. Debt/Equity

  10. Liquidity ratio (current ratio, quick ratio, cash ratio)

We find it extremely useful to use this as a checklist, which allows us to be more efficient in analyzing a company. However, we have to remind our readers that, most of the criteria are solely based on general and our personal benchmarks. From our past experience in applying the fundamental checklist, we find that companies with over 70% FA score appear to have solid balance sheet. Apart from that, we also like to check on the current financial position of the companies. So, let us add some additional columns and also some of our own criteria for EV/EBIT, ROIC, CROIC to the previous table (Figure 1).

Figure 2: Additional columns for FA score and Financial position

As we can see from Figure 2, all of the companies in the portfolio appear to have solid fundamental (FA score averaging 92%) and in NET CASH position, where 4 of them are debt free. This tells us that the companies have low risk to be exposed to any financial issue in near to mid term. Other than that, all of them are still remained to be Magic Formula candidates, which still intact with our initial balance sheet investing strategy. For these reasons, we decided to keep the portfolio unchanged in the first quarter.

Some Notes on Diversification

Nevertheless, despite of all these fundamental analysis, we might always keep in mind that low risk should not be mistaken as risk free. Very often we might face some unforeseen circumstances such as accounting fraud, company’s integrity issue, sudden change in company business structure, etc. These events could impose additional risks to our portfolio, hence, we could not help to stress enough on having adequate portfolio diversification while investing.

For beginners who just about to step into the stock market, we suggest to focus more on forming an adequately diversified portfolio of 5 – 10 stocks, before starting to average down on existing holding (especially single company). This could help to reduce the volatility of your portfolio as well as lower the concentration. As far as the market movement is concerned, managing a portfolio of companies are far easier than holding a “single stock portfolio”. It also calms down our human emotions during holding period the investing process. We also ought to remind our readers that building up a portfolio does not happen in a single day, so be PATIENT.


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