January Fire Portfolio Report

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Includes: CAT, EWH, FB, THC, TIF, YMAIF, YY
by: Big Alpha Research
Summary

Initiated long positions on YY Inc., Hong Kong Index ETF.

Exited Caterpillar Inc. and Tiffany & Co.

Maintaining long positions on Facebook.

Considering the value of adding leveraged fixed income investments to the portfolio.

Introduction

I am building a portfolio that is high yield and growth-oriented in order to retire within 7 or 8 years. At the point of retiring, this portfolio will transition into a safer distribution yield-based portfolio which is targeted to yield 4% or 5% to cover my daily expenses.

Note: This is meant for a 5- to 7-year portfolio, and I hence take a longer-term approach to stock-picking and selection.

There is a need for some active management in terms of selection and market timing. I am not assuming I am confident or more intelligent in being able to beat the market, but I am willing to take more risks to generate the returns while I continue to have a stable job supplemented by a high savings rate.

Objectives of the Portfolio

Please do read this to understand my context of building the screen, but I also welcome feedback and opinions about building this nest egg because, at the moment, I have decided, while still young, to incur more risks and to hunt for growth, in what I call a FIRE Building Portfolio.

Note:

While I am able to continue generating income through employment and am confident, I can and want to take on more risks to accelerate the retirement plan. However, others who are more patient and more risk averse should consider this article only as an alternate viewpoint to consider. Do your own homework.

Current month on month performance:

Jan.-19 Dec.-18 Nov.-18 Remarks
Cash $113,000 $101,000 $50,000
in-flow (savings from work) 0 $29,000
in-flow (withdraw from brokerage) $12,000 $22,000
P2P Lending $200,000 $212,000 $220,000 Portfolio of loans made under 12 months
out-flow (withdrawal) ($12,000) ($8,000)
Illiquid (Long Term)
Traded Endowment Policies $60,000 $60,000 $60,000
Stocks/Trading Portfolio $64,102 $55,000 $85,000 Loss of $7,700 and withdrawal of $22,000
Amarin Corp. (Long) $17.50 $12.41 $20 2,000 shares, historical position average cost at $5.48
BHF 6.25% (Long) $24.80 $21 $24.71 100 shares, initiated in November at $24.71
Deutsche Bank (Long) $8.54 $7.91 $10.21 100 shares, initiated in November at $10.21
Newell (Long) $21.65 $17.95 $17.61 200 shares, initiated in November at $17.607
Sumitomo Chemical (Long) ¥561.00 ¥488.00 200 shares, initiated in December at JPY585
Facebook Call Option (Long) $22.00 $8.10 1 Option, initiated in December at $14.50
XAUUSD Option (Long) $17.49 $20.04 1 Option, initiated in December at $17.33, sold at $17.49
Yoma Strategic Holdings (Short) SGD 0.37 SGD 0.33 SGD 0.36 50,000 shares initiated at SGD0.31, closed at SGD0.37
Caterpillar Inc Put Option (Short) $6.34 $10 $8.85 6 Options initiated at $8.85
Tiffany & Co Put Option (Short) $19 $24.55 $7.93 4 Options initiated at $7.93
YY Inc call option (Long) $18.37 2 options initiated at $14.84
iShares MSCI Hong Kong (Long) $24.74 300 shares at $22.76

January was a lean month for the family, after having to settle the bills for our newborn child. Overall, portfolio grew to $455,000 from $428,000. The stocks portfolio was largely impacted by a huge loss on Yoma Strategic Holdings (OTCPK:YMAIF) which I covered short at SGD0.37 with a realised loss of $2,200. I covered my short positions on Caterpillar (CAT) and Tiffany & Co (TIF) as well, but held on to Facebook (FB) call options. While I do continue to view the FB call option trade as a risky one, I intend to review this position with a view to go long on FB outright.

Commentary on key long positions

Facebook had a good earnings season and I do believe the value of this stock to be at least $190, which represents 25.2x PE but FB should have net cash of at least $50 billion (current market capitalization of $468.34 billion).

I have initiated long positions in the MSCI Hong Kong ETF (EWH) which yields 2.61% and because Hong Kong shares had been deeply impacted by the US-China trade tensions. EWH shares trade at a reasonably low valuation of 12.75x PE based on a current price of $25.30.

The investment in YY Inc. (YY) was made for the same reasons of a low valuation. At the current price of $69.82, YY trades at 9x forward PE and this is a great growth stock to own. YY is likened to the Netflix of China and for good reason. Although YY Live growth has slowed and JPMorgan only forecasts a 5% growth in revenue from YY Live, the company still remains on a growth trajectory and its share price has not included potential growth areas from Bigo. YY had a net cash position of about $1.2 billion which is a third of its market capitalization!

Ideas for Q1 2019 - leveraging on short-term financing for fixed income investments

Going forward, I am intent on researching more on taking more debt to fund my portfolio positions, especially for fixed income investments. Based in Singapore, where there is no home equity line of credit (HELOC loan packages), I have decided to open an overdraft facility with a pledge of fixed deposits against my Singapore dollar loan for the same amount, paying 5% interest. The fixed deposit earns a very low rate of 0.3% for a 4-month term, so the net interest rate is 4.7%.

This is an opportunity to learn about taking an overdraft facility pegged at prime lending rates (which is floating). At the same time, I wanted to understand how leverage helps or impacts my investment and retirement goals, and to see whether such an idea works for a shorter pathway to retirement.

The idea initially seemed counterintuitive. If I already have funds in the bank, why take on a loan? Here's a doodle to illustrate my initial reservations:

borrowing money to lend money (illustration)

Essentially, the same risk is taken for a lesser return of 1.3%! The problem with this is the P2P lending loan even though it yields higher at 6%, bears a risk of default, but essentially in order to obtain the 5% overdraft facility, I had to lock in a really low interest yielding fixed deposit. Hence, there was no significant upside, but instead terrible downside versus the risk I assumed.

So, how does leverage work in this case?

Firstly, let's start with a bankable loan which has collateral value, to be used for the initial overdraft lending. If you have owners' equity on your home, do consider using a HELOC. The video below explains how, and it was meant for building a multiple income property portfolio. However, the principles are similar, requiring a return or cash flow yielding asset to pay down the loan balance on the HELOC.

Nonetheless, I have a mindset that I committed to in 2019, which is to start small and test out so I commit to the investment, publish it out online for scrutiny and transparency, and learn along the way. Hence, I plonked $60,000 into the fixed deposit for 3 months which would roll over and made a loan out for 6 months at 6%. I put another $15,000 outright into the same 6 months loan without leverage.

Leveraging based on a bankable asset

Similar to the concept of a HELOC, which is a means of taking a loan against a non-leveraged asset (or part of it), there are loans accepting shares and bonds as collateral. The crucial understanding, however, is whether the bankable asset matches in duration and has a higher return (you will be assuming the risk) than the loan you take against the asset.

The next is getting it levered up by using the funds from loan to buy a bond or a share and having that asset yield a return to service the loan. Each time this leverage is incurred, the returns are multiplied, but the risk multiplies as well. So, the critical point is still to do research on the underlying and not blindly hunt for yield.

Another issue with leverage is market value fluctuation on the underlying assets. Pledging shares for loans are especially risky. These operate similar to trading on margin in the sense that the underlying share value fluctuates daily. More stable shares in the form of blue chip and dividend yielding shares may not necessarily yield a return more than the cost of funds as well.

Example using a high yield bond - Tenet Healthcare (THC) 8.125% maturing April 2022.

Tenet Healthcare Bond 8.125% April 2022

Assuming this carries a 100% collateral value, I could potentially invest in the bond yielding 6.568%. This could also be any shorter term bond which yields higher than my cost of funds.

Essentially, the trade would look like this:

e.g. THC Bond (for illustration only) Amount Yield
THC bond -$10,000 6.568%
Loan $10,000 -5.00%
Use loan proceeds to reinvest in THC bond -$10,000 6.568%

The impact on leverage would be a net yield of 8.14%, but I would incur greater risk. While I am continuing to explore options to leverage my portfolio to get more returns, I ought to stress that the risk is still not fully known to me except that I ought to match duration and pick an underlying asset that does not fluctuate too much in the near term prior to maturity. Hence, this is as much a learning exercise for me!

Disclosure: I am/we are long FB, BHFAL, YY, EWH, DB, AMRN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.