Senvest Wins Big on Gamestop

Anyone following Senvest recently knows that the company made a huge bet on Gamestop (GME), and it paid off big! Management finally divulged the details in the Q1 report just released.

The company accumulated 5.05M shares of GME stock over the fall and winter of 2020. That is 7.24% ownership in GME. The company hovered below $20 for all of 2020. In January, the only positive news was that Ryan Cohen, a big investor with lots of retail creds, announced three of his people were now on the board. But then, in late January, Wallstreetbets forum and Keith Gill really got into touting the stock and the 140% of stocks short. And the rest is history. We saw an epic short squeeze that only happens once a decade.

The following chart shows the meteoric rise of GME in late January. Based on the Q1 report, Senvest sold all of its holdings between Jan 22 and Jan 28, also shown in chart. Senvest's timing was almost perfect and the company managed to sell a portion at the very top of $380. Remember they had 5M shares. Depending on their exact selling price they could have made USD$1B. That's billion, with a captial B!

Senvest really did its homework on this. They even spoke with Ryan Cohen. Well done Senvest. I had no idea all this was in the works, but I am glad to come along for the ride. Senvest stock has quadrupled from the lows around when the company was building its GME position.

Today it trades at CDN$342, which is still only 52% of the book value of CDN$647!.

Why I Sold Installux

In my earlier Installux post, I said I was on the fence about my Installux holdings and I would wait until annual earnings report before doing anything. Three weeks later I got cold feet and decided to dump all my shares.

My rationale was mainly the price support. The following chart shows that the current price is at a recent high. But I found that the company in 2020 bought back 5452 shares and the entire year's volume of trading was only 8534. Therefore, the company bought back 64% of the total shares traded in 2020! In 2019, the company began its buyback program with a cap of € 410. I just sold all at € 390 because I figured that's as high as it will get. There isn't enough support from the open market to ever go above the € 410 cap. As I have shown in an earlier post, the company's revenue and income numbers have shown mediocre growth in the last several years. And the stock price has justifiably never surpassed the 2017 high.

Installux was one of the first stocks I bought since writing this blog. In 8 years the stock has returned 14.5% including dividends. In USD, my functional currency, the stock has returned 13.5%. My gut says that's a resounding success. But after pondering about it for a while, I am a bit disturbed. If 13.5% is a resounding success, then I am expecting most of my other holdings to perform worse. What is average? Maybe 9-10%. What is bad? Less than 4%? Then by my admission, my methodology may only be able to get about 10% total returns. Now I have never disclosed my overall returns, because I simply don't know. But when I started this blog the back of my mind was saying I could do 12%. I am kind of disappointed that I clearly cannot.

Why I Bought Grigeo AB

For much of my investing career, my approach has been based on some basic value investing principles. Firstly, I look for cheap, well managed companies in good industries. This has been called GARP (growth at a reasonable price). Secondly, I would concentrate in relatively few companies — around 20. I would eschew investing in multiple companies in the same industry and geographical location. This avoids diversification, which Buffett has often called di-worsification. Thirdly, I would focus my investments mostly in the US. As this where the most famous and successful investors all focus on. The US has been by far the best market for the average investor in the past decades. Plus, its laws and regulations are very shareholder friendly. And fourthly, I would focus on small caps, the purpose is to avoid the space of the better and more knowledgeable professional investors.

But the investing environment is changing all the time. One reason for this is that others are learning the same lessons as me. I always want to maximize my gains by increasing my edge. As a result, in the last few years, I have begun to modify my investment strategy in some major ways.

Looking for good companies that fit some greatness critieria and holding for a long time is one of Munger's favourite advice. That's great and all if you are one of the smartest and most experienced investors on earth. But what about us little guys, I do not have an accounting or finance background. I am not as worldly as Munger, and I am not a great reader. If I want to outperform, I cannot rely on more insight on well-known large or mid-sized great companies. And looking around in the small cap newsletters, blogs, and internet forums, I see some global markets with very little coverage. For small developing regions in the world with unique cultures, the biggest companies there may not be anything but small cap. This is my experience with South Africa. The companies that I invest there are well known by the local consumers. But their market cap may "only" be USD $100 M. But I consider this still small cap because it would be overlooked by large global investors with deep pockets. This fact is also very convenient at a time when the US market is simply too crowded with professionals and Robinhood investors. At this point, no rationale is strong enough to justify the valuation for US equities, it cannot go up much farther.

From my experience in the last few years, I have learned it is too hard to predict the unknowable. It is much better to take positions in decent profitable undervalued overlooked companies, and wait for something good to happen. To do this consistently to improve my results, I would need to expand the number of stocks I own, and pay less attention to each, and also be very patient.

So recently, I have been digging deeper to find more stocks from hidden away markets. One I just started buying is Grigeo AB from the Vilnius stock exchange. Vilnius is the capital of Lithuania. Lithuania is a Baltic country that used to be part of the Soviet Union. The other Baltic countries are Estonia and Lativa. All the Baltic states are part of the EU and therefore use the Euro. They are also part of NATO, which is very important since they share a border with Russia.

I consider the Baltic countries as part of a developing region. From my past experience investing in Japan, I've realized that demographics is a very important factor. Countries with rising populations and therefore a rising consumer market will have a strong economic tailwind. Companies in countries that do not, like Japan, are discounted. Unfortunately, the Baltic countries have a dwindling population because of a declining birth rate and a restrictive immigration policy. The three Baltic states have a total population of 6 million but it is expected to decline by 10% in ten years. Japan's population is only expected to decline by 4% over the same period.

Therefore, I am careful not to invest too much in the area, and I am also more focused on companies that don't just cater to the local markets.

Grigeo AB (TLX:GRG1L) is a vertically integrated pulp and paper producer. The company makes toilet paper, cardboard and other paper and wood products for Lithuania and other European countries. It sells 30% to its local market, and 45% to the Baltics including Lithuania.

The company has a long history. The company originally started in the current form as the Gregiskes factory in 1923 making paper and cardboard. Through the years it was nationalized by the Soviets and then became private again in 1990. In the years since then it has modernized and also acquired other paper and cardboard companies. The following shows the chart of the stock price in the years against the backdrop of the US dollar against the Euro. As one can see the stock price growth has been respectable and somewhat consistent.

	GRG
Price (Apr 6)	€ 1.34
Marketcap (M)	€ 88.04 $ 103.8
ROE (%)	14.70
PE	6.67
PTBV	1.02
Div Yield (%)	4.48 (2019) 0 (2020)

Grigeo also has great valuation metrics. It has tremendous return on equity and has negligible debt. The company didn't pay divdends this year due to covid, but has regularly done so in the past. The following chart shows this. The chart also shows how well revenue has climbed. It has steadily risen by 10% per year! And the earnings and dividends have grown even faster. This is a reflection of greater profitability over time. Please note that I have multiplied the dividend and income by ten to better illustrate. The company has a few commercial or promotional videos on youtube, and they show extremely modern and automaticed plants. I think this confirms why the results have been so good. So given the company has grown steadily and is so cheap at present, this is a serious mispricing. Imagine in the US a company performs like this. The PE would be 20x instead of 6.7x.

I think it really is true when many investing gurus mention opportunities in the developing markets. I have noticed quite a number of good ones just with the tools I have. This is the second one I have written up in as many months. I have bought several others actually and hopefully will get to write them all. So, stay tuned......

Why I Bought Clientele Ltd

Clientele Limited (JSE:CLI) is one of my newest holdings. The company is in South Africa and is primarily in the business of providing insurance to individuals of modest means. Clientele provides life, health, funeral, legal, and estate insurance. It also provides annuities. Other than financial products, it generates 10% of revenue as a mobile services provider.

The company's business model is unique. Most insurance companies do not serve the low-end demographic because the policy premium is not worth the cost to acquire it. But Clientele has thrived in this area.

Clientele manages its costs of acquiring policies by outsourcing the work to francisees, called Independent Field Advisors (IFA), who themselves buy the company's products. The company does a lot of its advertising using late night informercials. In this way the company has kept the cost of acquisition at just below 50% the cost of the policies.

Clientele started its business only 23 years ago by the Enthoven family. The low-profile Enthoven family built its wealth in South Africa specializing in the insurance sector. The family owns 80% of the company through a holding company and they also own the Hollard Group of insurance companies. The Hollard Group in turn owns 9% of Clientele through a subsidiary. So, the Enthoven family has indirect control of almost 90% of Clientele.

Clientele has had phenomenal growth, as the chart below shows. While the company has grown steadily through the years, it has done so without losing underwriting discipline. The company's loss ratio — the money paid out in claims to the total premiums — has actually been falling. The loss ratio for the years 2017 to 2020 has been 23%, 22%, 20% and 20% respectively.

	CLI
Price	R 9.49
Earnings TTM	R 329.00 M
Marketcap	R 3182.00 (US$212 M)
ROE (%)	32.50
PE	9.67
PTBV	3.27
Div Yield (%)	10.01

Being such a good performer, one would think the company's valuation metrics are high. But that isn't the case, as the side table shows. This stock yields 10% earnings and dividends! A look at the price chart below gives some indications why. The stock has dropped precipitously through the COVID crisis even though the company's earning power has not been drastically affected. In the last three fiscal years, from 2018 to 2020, the net income did drop. The drop from 2018 to 2019 was mainly due to a large drop in investment gains. The drop from 2019 to 2020 was mainly due to odd tax accounting. The EBIT was actually rose significantly from 2019 to 2020. Furthermore, I've noticed when the Rand falls in value South Africa stocks fall also. So when the Rand vs the USD curve rises in the chart, it means the Rand is getting cheaper. And one would expect Clientele price to fall. And vise versa. But in recent weeks, the Rand price has been falling and yet Clientele is not rising. So, unless I am missing something this is a big mispricing.

For the last several years I have held a strong belief that the US markets are overvalued. I believe this more than ever now. I believe we may be at an inflection point for the emerging markets. The value of the Rand as shown in the previous chart may be a good proxy for this. Note how it rose for pretty much the last ten years but it has handily recovered from the all time lows of the COVID crisis. There is no more room for the US stockmarket to grow, and emerging markets is where the stock growth will come from in the coming decade. Clientele could be a very good illistration of this.

We shall see.

Some Updates on the First Full Year of COVID

COVID hit most of the world starting in March 2020. So, many companies have (almost) had a year of impact from COVID. Many Japanese companies end their accounting year in March and thus their year coincides almost exactly with the start of COVID. So, their annual results will be able to tell us a lot about the true extent of the world's business slowdown.

Tachibana Eletech (TSE:8159) year end revenue is expected to fall 6.2 % to ¥ 160.0 B (2020 ¥ 170.5 B). Year end EPS is expected to fall 26.0 % to ¥ 128.8, (2020 ¥ 173.9), which implies a 13.0 x earnings multiple.

Riken Keiki (TSE:7734) Year end EPS is expected to fall 19.4 % to ¥ 150.5, (2020 ¥ 186.8), which implies a 20.4 x earnings multiple.

Takamatsu Machinery Co.,Ltd (TSE:6155) year end revenue is expected to fall 38.7 % to ¥ 13.4 B (2020 ¥ 21.9 B). Year end EPS is expected to fall to ¥ -12.7, (2020 ¥ 130.8).

Installux SA (PAR:STAL) H1 revenue fell 26.6 % to € 52.5 M (2020 € 71.5 M). H1 EPS fell 73.7 % to € 4.4, (2020 € 16.6). Their year ends in December.

In H1 2020, installux experienced shutdowns in their Spain and France locations and therefore revenues fell significantly. They were still profitable though. However, the company provided no guidance for H2 2020, so we don't know what happened in the last 7 months.

Installux is conservative, well-run, and highly profitable. They expand opportunistically and thus do not overpay for acquisitions. Their expansion has mainly focused on control of the supply chain. Their niche aluminum product offering remains unchanged. Still their sales figures are respectable. It has consistently risen by about 3.5% per year for the last dozen years. And of course they have no debt!

The company currently trades at 13 times 2019 earnings, the last full year of data before COVID. While this PE is not super cheap. The company looks much better when using the EV to EBIT ratio because it has no debt and ample cash. The company's EV is 7.2 times 2019 EBIT.

The coming challenges for the company is how to put its cash to use. The following figure shows the cash and equity buildup through the years. Note that in 2018, cash dipped and PPE rose by the same amount because of the acquisition of a factory in Spain.

The simplest way to get rid of cash is to pay generous dividends but management indicated it prefers not do do so to show solidarity with stagnant employee wages. I suppose this can partially explain why the company recently began share buybacks. So far the company has bought back 2% of the shares. 

Right now, I am really not sure whether I should hold Installux for the longer term, or reduce my position. At € 390, it is probably fairly valued. So, I'll just wait and see. Their annual report should out by April, then I'll decide.

New Century Group HK: My Worst Performer

New Century Group Hong Kong (HK:234) has been a sad performer for a long time in my portfolio. I bought it initially around HK$0.13 and today it is at $0.06!

New Century operates in several segments in primarily Hong Kong. Formerly, they were cruise lines, hotels, rental properties, and securities (i.e., stocks) trading. Besides the rental properties business, all the other segments are becoming less prominent on the company's bottom line. In fact, the company sold it's last hotel and exited that business several years ago.

The company's cruise lines wasn't doing all that great before covid came along, and understandably its revenue dropped considerably during this time.

The company has a security trading business because of an unique feature of Hong Kong tax laws. In most other countries a company must pay capital gains taxes on realized securities gains. But Hong Kong does not. So effectively Hong Kong encourages companies like New Century that have ample cash to engage in securities trading.

In the place of the under-performing segments, the company added a money lending business two years ago, called ETC. This business was completely owned by the same family trust that owns the majority of New Century. And New Century acquired 60% of the lending business in exchange for the cash equivalent of the equity acquired.

Assets (HK ¢ )	2020	2021 H1
Cash	7.59	7.13
Stocks	0.24	1.12
Receivable	2.14	1.15
PPE	5.85	4.98
Rental Property	9.54	9.28
Private co.	0.03	0.04
ETC loans	11.88	12.47
Repossions	0.24	0.63
Liabilities
Payables+Dep	0.35	0.73
Misc liabilities	0.35	0.42
Debt	1.93	1.93
Minority Interest	6.91	6.57
Shareholder Equity	27.98	27.15

The company usually has had a lot of very liquid assets and I always wished the company would distribute it to shareholders, either with stock buybacks or dividends. Unfortunately, the company used the available cash to buy a company from its owners. The company paid HK$480 mil for the money lending business. That's $0.08 per share.

New Century's investment property business consists of high-end retail and office real-estate. Their rental occupancy has consistently been 100%. And the real-estate value on their books is not an illiquid asset that is held indefinitely. In 2011, for example, the company sold a large chunk of their property for HK$485 mil. On the right is the company's balance sheet with values divided by the number of share and expressed in HK ¢. As the table shows, their real estate value is only about a third of the companies equity, so it is not overly exposed to a housing bubble.

I liked New Century because of the company's huge and liquid balance sheet. I feel showing the value per share can really put a perspective on the attractiveness of this stock.

Note that the minority interest ownership is almost entirely a claim on the money lending business.

Note also that the company debt are monies owed to related parties paying little or no interest.

Other than these two items, pretty much the rest of the company belongs to the shareholders. The following chart shows the company grew its equity consistently throughout the last 16 years. The chart also shows the company paid out more than HK$0.07 per share in dividends over that period. That's pretty good considering the current price of $0.06 ! Please ignore the spike in book value in 2019, that is only due to an accounting quirk that requires the company to recognize the money lending business one year before the money is paid to acquire it.

On the face of things there isn't much justification for the stock to trade at $0.06. But the narrative on such an obscure Hong Kong stock can deter the market. Namely, Hong Kong is experiencing a slowdown due to the political turmoil of the last few years. There may be a long term exodus from the island which will make it less of a financial hub of southeast Asia. In addition, the stock is of the foreign and small cap value variety, which has suffered terribly in the last 10 years.

The company's owners also haven't done much to help the stock price. It hasn't been paying regular dividends last few years. And it siphoned off a huge chuck of the company's cash to buy the money lending business. Initially, I was extremely worried when New Century acquired the lending business. Are the owners enriching themselves at the expense of us minority shareholders?  Recently, I am less worried because I see the lending business become a big contributor to income.

So all-in-all New Century has become the worst holding in my current portfolio, but I still use the logic of analysis and I feel the stock is still good enough to hold.

My Annual Schedule of Investments

2020 has arguablly been the wildest year in the history of the stockmarket. As is the annual tradition, I post my largest positions.

Click here for last years positions.

Company	Category	Business	Duration
European Reliance ( ATH: EUPIC )	Greek small cap	Life and Health insurance	6.5 yrs
Kansas City Life ( KCLI )	US small cap	Life insurance	6 yrs
Senvest Capital ( TSE: SEC )	Japanese small cap	Investment Company	5.5 yrs
IEH Corp ( IEHC )	US microcap	Manufacturing	7.5 yrs
Tachibana Eletech ( TSE: 8159 )	Japanese small cap	Electronic Distributor	7.5 yrs
Installux SA ( PAR: STAL )	French microcap	Manufacturing	7.5 yrs
Riken Keiki ( TSE: 7734 )	Japanese small cap	Manufacturing	7.5 yrs
Investors Title Company ( ITIC )	US small cap	Title Insurance	6 yrs
Lewis Group ( JSE: LEW )	South African midcap	Fumiture Retail	5 yrs
MIND C.T.I.Ltd ( MNDO )	US small cap	Billing	0.5 yrs
Philip Morris Int ( PMI )	US large cap	Tabacco	20 yrs
Altria ( MO )	US large cap	Tobacco and alcohol	0.5 yrs
Karelia Tobacco Company Inc. (ATH:KARE)	Greek small cap	Tobacco	6 yrs
Combined Motor Holdings (JSE:CMH)	South African small cap	Car Retail	6 yrs
Seaboard Corp ( SEB )	US midcap	Food conglomerate	15 yrs
McRae Industries ( MCRAA )	US microcap	Footware	8 yrs
New Century Group HK ( HK: 0234 )	Hong Kong microcap	Hotel,cruise line	6 yrs

We all know there was a huge crash in March followed by an amazingly fast rebound. Like almost all investors, I've been busy repositioning my portfolio. What I did this time was like in past corrections, I have opportunisticly added to some formerly small positions and initiated a few new ones.

ITIC was a large position that I regrettably reduced five years ago. Now I have added back sufficiently that my position is the same as back then. The same story goes for PMI, my position now is the same as before. A similar story goes for MO. I closed my position 9 years ago, and my position now is the same as before.

I have also added to EUPIC, SEC, IEHC, KARE.

The only completely new stock that I own is MNDO. This is an incredible dividend payer that I've followed for several years. To get into it, I will have to make a writeup sometime in the future.

The only position that I reduced is SEB.

I still own S&P 500 shorts. In fact I have added to it this year! And this has been the big drag on my portfolio performance. I am down slightly for the year, but the bright side is that my long positions are up by single digits percentage points.

Will Kansas City Life Ever Go Up?

Kansas City Life Insurance (KCLI) is a conservatively family-run company that has been in business for over a hundred years. The company does mostly life insurance and annunities with some health insurance.  It has paid $1.08 in annual dividends for the last two decades.  Currently it is trading at $37.65.  So its  dividend yield is almost 3%, a full 50% higher than the 2% of the S&P500 as a whole.

I've added to my position significantly in the past two years because of its attractive price to book ratio.  In other words, this is the classic 50 cent dollar.

During the market crash this spring, the market braced for a wave of corporate defaults. Life insurance companies were considered really vulnerable because of their large corporate bond holdings. KCLI had $2.1B of investment grade corporate bonds out of $3.9B in investments on its balance sheet. The stock cratered to $23 and I feared the company was going under. The yield on investment grade corporate bonds was usually a little over 2%, but it doubled to almost 5% at the worst time of the crisis. Thankfully, though, the Fed pulled out all the stops and declared it was going to purchase investment grade bonds to prop up the market.

Since that announcement in march and the massive market trough and peak, the company's book value now is at its highest ever. The tangible book value per share is $88, but the stock price is $37.65. Go figure!

The following chart shows the relationship of the book value per share and the share price for the last 15 years. Note that right now the spread between the book value and the price is the biggest ever. I am simply hoping (or better yet praying) that this spread will return more to "normal".

But how is it possible for a company  to be this cheap in such a raging bull market? There are some obvious explanations. This is a value stock which is very much out of favor.  The company is a private smallcap in a very boring industry. It is also very much a value stock in a time when value is out of favour.

But I think the most convincing reason for the depressed valuating on KCLI is its poor earnings performance. The company consistently earns no more than 4% on equity in the past decade. I feel this is in part the result of a very conservative investment strategy. The investments in turn earn ever lower returns due to ever lower interest rates.  To illustrate, the following chart shows the total annual insurance revenues and the dividend and interest income.  Note the underwriting is fine but income has steadily declined. Note also that when company's book value appreciates due to the big unrealized gains on investments. However, such appreciation is not counted as regular earnings but as comprehensive income. Therefore, it doesn't count as part of earnings per share.

So what to do with KCLI? Recently, I have leaned more towards diversification and taking a more long term view of my holdings. I can afford to be patient with safe companies like KCLI because the company's dividend payout is about the same as my borrowing costs. So, for now, I will just sit and wait for some company surprise or market sentiment to change.

Lastly, before I conclude, I want to give a shot out to the provider of tikr.com. The website is the best fundamental research tool for the retail investor that I've come across. It provides very detailed financial data for every market worldwide going back 15 years.  The above two charts was made possible with data from the website. The site is beta and I am a trial user. If you want to be a beta customer like me you can search around or contact the website.

A Look at Senvest Capital

Senvest Capital is a company that I've discussed many times but not recently. Many things have happened since I lost wrote about it. So, I am going to review the company here.

Senvest Capital is well-known for being home to the Senvest Master Fund and the Senvest Technology Partner fund. The Mashaal family are majority owners of the company and these two funds are hedge funds managed by Richard Mashaal. This means that Richard Mashaal (through a company he owns) is the general partner. Senvest Capital is a limited partner in this enterprise. And there are also many LPs who are outside investors. The company also owns a lot of illiquid stuff like real estate, REITs, and private companies.

So by owning Senvest Capital, a shareholder actually downs several hedge funds and investments that the public don't normally cannot access.

So the pros and cons of buying this stock is, in principle, very simple. The stock trades at a tremendous discount to equity value — more about this later. And the investment management has an exceptional track record. However, on the negative side, the employee salaries and fees are very high, and they have never paid out dividends.

Another characteristic, which can be good or bad depending how you look at it, is that Senvest Capital's financial fortunes can be wild! The company earned CDN$(51.72) and CDN$39.16 per share in 2018 and 2019, respectively. And the first quarter 2020 has been a disaster, shareholders lost CDN$(129.38) per share! These are all due to the drop in market values of equities, be it realized or unrealized.

For the reset of this document I will refer to all amounts as Canadian dollars.

Senvest Capital promptly posts its monthly hedge fund resulte online. This gives us some idea of the company's performance. The Master fund lost 53% in Q1! No wonder its earnings were so bad. However, it has come back for Q2 and gained back half of the losses by August 1. The Senvest Technology fund was up 25% in Q2 and is positive for the year.

Just like Berkshire Hathaway, the main gauge of Senvest's stock value is the company's equity.

The company's stock should rise and fall proportionally with its equity. Senvest has traditionally traded at 60%-70% of equity. But the recent market drop has increased the discount significantly.

To illustrate the company's value, I have broken down the balance sheet into five components. The first is working capital. This is the safest part of the equity. Market conditions should not affect the value. The second component is the hedge fund portion of the company. The company consolidates the entire hedge fund value onto its balance sheet. So, it must also consolidate the amounts owed to the funds other partners as liability, as well as short positions. The third component comprises the illiquid assets including a lot of real estate, investments in private REITs and private companies. The company tends to put the illiquid investments onto its own books and more liquid investments into its hedge funds. The fourth component of the balance sheet includes assets and liabilities that don't fit in the above three categories. And the last componenent is the amount owed to Richard Mashaal as minority interest.

The following table shows the equity values of the five components at the end of 2019 and Q1 2020, the most recent balance sheet data. All values are thousands of CDN dollars.

	Aug 2020	Q1 2020	2019
Working Capital		29873.00	14284.00
+ Equity investments and other holdings		496424.00	818797.00
+ Real Estate and Illiquid Assets		125701.00	113107.00
+ Other assets minus liabilities		3750.00	-3533.00
- Non-controlling interests		16374.00	23265.00
= Shareholder Equity	780000 (est)	639374.00	919390.00
Shares	2630.00 (est)	2634.00	2652.00
BVPS	296.58	242.74	346.68
Price	135	110.00	172.25
PTBV	0.46	0.45	0.50

So the bulk of the Q1 loss appears to be from the second components which is mostly the hedge funds. The equity value went from $818M to $496M. And we already saw that Q2 hedge fund numbers are much better. The other assets are either liquid and safe, or are illiquid assets which I just assume didn't change in value. So then, the company has a lot of equity that are not tied to hedge funds. Therefore, the company did not do nearly as badly as the hedge funds.

But note the extreme low stock value when compared with the equity. This is not a reasonable valuation. And I don't know the reason for it considering that this was the case at the start of 2020 before the coronavirus impacted the markets. But there is a long-held perception that the company insiders do not treat the minority shareholders fairly. Company insiders are excessively compensated. The company has just 32 employees and they were paid $35 M. That is an average of over $1M per employee!

On top of this, Richard Mashaal, the vice-president of the company, is also paid his fees for running the GP of the hedge funds. The hedge fund charges 1.5% of assets plus a 20% share of profits as management fees. Senvest Capital gets 60% of that fee for providing the infrastructure and employee resources for the hedge funds. But still, 40% goes to Richard Mashaal's company.

The company does not disclose how much it owns in the hedge funds. Instead it lumps all the hedge fund holdings together with its own holdings. The company does show the the external portion of the hedge funds as "Liability for redeemable units" Based on this, I can calculate that the Senvest Capital portion of the hedge funds is about 35%.

The accounting for the hedge funds' fees can be quite confusing, so I've broken it down into a table for clarity. The following table shows who pays the fees and who receives it.

Recipient	External Partners Fees (65%)	Senvest Capital Fees (35%)
Senvest Capital Shareholder Equity (60%)	From: income, liabilities 39%
Minority Interest (40%)	From: income, liabilities 21%	From: income, shareholder equity 14%

So the Senvest Capital receives 39% from external partners and pays Richard Mashaal 14%. This means the company get a net 25% to pay employees salaries. In a down year where the only fee is the 1.5% of assets, one can see it is ony a few million, and that is only a tiny fraction of employee payroll. And even this amount is an overestimation of fees because $189M of assets owned by "employees" are exempt from fees.

On the other hand, Richard Mashaal gets 40% of the fees as minority interest, which was $5.2M in 2019!

Richard Mashaal has certainly been an incredible hedge fund manager. In his more than twenty years managing the funds, funds have grown from $5M to more than a billion under management. But Richard Mashaal and his father Victor already own more than 50% of Senvest Capital, and yet Richard still gets $1.7 M compensation from Senvest Capital, plus payments to him as minority interest.

In the end, there isn't much I can do as a tiny minority shareholder. I do not have the capital nor the time to be an activist. My cold calculation says that no matter the employee compensation, the company is a profitable enterprise in the long run. As such its assets, which are all investments, should not trade at 46% of equity, which is what it is trading at today. The current valuation is 55% off its peak a few years ago. To simply go back to 60% of equity, the shares will gain 33%. And I am confident it will happen sooner than later.

Why I Bought Altria, Again

My most old and familiar holding is Philip Morris. Altria (MO) is the US version and Philip Morris International (PMI) is the international version. They are the famous makers of the Marlboro brand.

In a way these two companies are the simplest businesses to understand. They spit out copious amounts of cash. And the majority of the cash goes to the government coffers. At the same time these governments want to ostensibly regulate the tobacco industry out of business. And finally, people are generally smoking less than before. Today in the US only 16% of the population smoke and the per capita consumption is 1/4 the number at the peak in 1960.

First, I'll discuss Altria. In the US the best selling cigarette by far is Marlboro. It is 43% of the market!

	MO
Price	$39.1
Marketcap (M)	$72726
PE	2019: (loss) 2018: 10.49
Div Yield (%)	8.18

In my table, I have omitted the equity metrics because they have negative tangible book value. That is not to say that these companies are not valuable. It is just that their value is almost entirely in their brand. Moreover, these companies have enormous debt that is more than tangible assets they have. So their investment utility is solely based on their dividends. And they are very generous with dividends. Their pay ratios approach 100%. But everyone knows the future looks bleak for tobacco. But this has been the case for more than 20 years. In the last 10 years after Altria and PMI split into two companies, Altria has increased dividends at a 9.5% rate! And today it yields 8.2%. Somehow Altria has managed to increase profits when cigarette sales have steadily declined consistently. Just last year US cigarette volume decreased 5.5%.

Because of Altria's simplicity, we can deduce its value simply from its cash flow to shareholders. Imagine this plausible situation. Tobacco consumption and regulation will drive companies like Altria to bankruptcy in 30 years. But right now it is doing ok, and say it continues to pay generous dividends and grow at 9.5% as the recent past for the next five years. Then growth will taper. So for simplicity say dividend growth becomes zero for five years. And after that the dividend falls until zero 20 years later. So what I described can be shown by the following chart. The return from just the dividends is 8.3%!

Evaluating Altria using discounted cash flow (DCF) analysis would require the cash return in this scenario to be greater than the risk-free return plus the risk premium. In my analysis, I'd like to replace the risk-free rate with the cost to borrow money to buy the stock. In today's low interest environment, this can be as low as 2%. And a common risk premium is 6%. So therefore, I have a 8% hurdle for this investment, which Altria just passed. And this is a very negative case scenario. So Altria's cash flow can be worth the price today.

So putting the worse case aside, there are positive factors in Altria's future. Cigarette consumption has declined consistently, but I think there is a limit. Society has clamped down on minors smoking and smoking in public places. But for the hard-core smokers, nothing will deter them. And taxation is already 45% of the current cigarette price. It is primarily a business for the government! It is not in the government's interest to kill cigarettes. This also means that companies like Altria have big hidden pricing power. Altria gets less than 20% of each cigarette sold, so when it increases the selling price by 10% the consumer only feels a 2% increase.

Also, some of the decline is due to the switch to new and old alternative products such as e-cigarettes, smokeless tobacco and marijuana. It is easy to see the appeal of a nicotine fix without the social stigma. And marijuana does less damage to health than tobacco products.

Altria, has dabbled in all these areas. Altria is the leading US supplier of smokeless tobacco products such as Copenhagen. They bought a $13 B stake in JUUL Labs, a e-cigarette maker. However, this deal was a disaster for the Altria and the company has written off 2/3 of the investment. And finally, the company has also tried to invest in marijuana through its 45% ownership of Cronos, a Canadian cannabis company. That hasn't worked out well either as Cronos stock has dropped by 2/3 also!

Aside for tobacco and marijuana, Altria is also big into their sin companion: alcohol. Altria owns a small wine maker, and most importantly, a 10% stake in Anheuser-Busch InBev, which is worth $18B.

The human race may get more and more health conscious, on average, but I think there will always be a place for sin. We are living better and longer, then we should also live it up more! So, over the long term, I think that Altria may very well be able to hit on a killer product that will replace cigarettes, if and when cigarettes are regulated to oblivion.

All these factors support my view that Altria and other tobacco companies are underestimated companies with a large margin of safety and are well worth the risk to invest. They are the quintessential value stocks.

Update on My Insurance Holdings

Kansas City Life Insurance (OTC:KCLI) is a smallcap life and health insurance company with a long and stable history. In the company's Q1 earnings report their investments were down $38 M due to the market downturn. Consequently the company equity dropped $3 per share but book value is still $81 per share.

	KCLI	EUPIC
Price	$29.4	€ 3.69
Marketcap M	$282.24	€ 101.47 ($ 114.97)
ROE %	2.6	11.8
PE	14.11	6.55
PTBV	0.36	0.78
Div Yield %	3.67	6.5

KCLI makes 30% of its revenue from investments, therefore investment income is critical to be profitable. But in this low interest environment the company must sacrifice safety to get decent yield. The company has more than half of its assets in corporate bonds. Virtually all of its bonds are investment grade, but there is still a lot at the bottom tier of investment grade. When the downturn happened, there was a big fear that we would see a wave of corporate downgrades and defaults. Fortunately, the Fed pulled out the bazooka and said it was willing to buy up corporate debt to shore up the market.

In the report, the company still has $779 M of equity, even after factoring in Q1 losses. That may seem like plenty but the company's capital and surplus (equity) for statutory regulation purposes is only $260 M at 2019 year end. This $260 M amount is used by regulators determine if the company is solvent and can do more business. So a deep downturn in the bond market can be very scary for the company. But they dodged a bullet, maybe, as the bond market has been quite bullish recently.

KCLI is a really conservative old insurance company. The Bixby family has run it for four generations! Philip Bixby CEO has run the company for the last two decades. Because the company is so stable, past data can be very useful to understand the company and its management intentions.

In the last 15 years, their overall book value has gone from $692 M to $779 M. Over the same period, their shares outstanding have gone from 11.9 M to 9.6 M, as they have consistently tried to buy their shares back, mostly in the $40-$50 range. So the net result is that their book value per share has gone from $51 to $81 in 15 years. That's a paltry 3.13% return.

Along with equity growth, shareholders also get a steady dividend. Sadly, since the current CEO has taken over the company twenty years ago, they have never increased the dividend, although one year, they did distribute a special dividend of $2 per share.

The stock is right now at $29.40 after the recent market drop, but at this level it still hasn't recovered like the favoured US large caps. If the company could return to around $36, that is a 3% dividend. Add the dividend to the 3.13% equity growth and overall, shareholders can expect around a 6.13% return.

This isn't a great return, but I just live with KCLI as a steady source of income. If I have spare cash, I can put it to work at KCLI. Or if I want to get adventurous, I could borrow money to buy KCLI. With interest rates so low, I can pocket the spread between the dividend and the interest cost.

My second insurance holding is European Reliance (ATH:EUPIC). This company is similar to KCLI. It does life, health and auto insurance for the Greek market. EUPIC had a great 2019, the company earned € 17.5 M, and € 22.4 M pre-tax. Of the pre-tax profit, € 7.3 M was from underwriting, and all other was € 15.1 M. As expected however, Q1 2020 was bad news. The company's book value dropped by € 13 M. Again, it was better than I feared, because I saw that they have downside exposure to € 30 M of Greek mutual funds. The ratios in the table are as of Q1 2020, so they still aren't bad. If that is the worst of it, EUPIC is a good company selling for really cheap. And it is very generous with the dividends. I added to my position during this downturn.

That's the second update of my holdings. Next post I will update my cigarette stocks.

Adding More Japanese Value Stocks

In the last entry I described my view that the way to win in this market is to arbitrage across time and markets.

I've described here that right now the US largecap market is the most overpriced ever. But many overseas markets are reasonable. I am quite heavily invested in Japan and South Africa. I feel quite strongly the coming decade is going to be all about emerging markets and value stocks.

Japan is a value country. It is a very developed country that has been heavily discounted for a generation. But, whereas in previous times Japanese companies mainly disregarded the minority shareholders, now they are much more generous. One can find dozens and dozens of companies that pay more than 3% dividends, and are growing dividends around 10%.

Yes, the persistent explanation for stocks being so cheap is the aging population and their ballooning debt. But look at the US. Their debt is getting up there, and the dollar is stronger than ever. And the same goes for the euro.

In March this year, the US market fell 35% off the peak. And I took the opportunity to add to my Japanese holdings. The table here shows the four stocks I currently own. The latter two I have had for 7 years. Both are up more than 3x when factoring in dividends.

	San	Takamatsu	Tachibana	Riken
Price	¥ 1234	¥617	¥ 1760	¥2402
Marketcap (M)	¥ 13820.80 ($ 127.38)	¥ 6663.60 ($ 61.42)	¥ 45760.00 ($ 421.75)	¥ 56687.20 ($ 522.46)
ROE %	6.8	9	6.3	8.7
PE	7.45	4.71	10.42	13.78
PTBV	0.51	0.42	0.66	1.27
Div Yield %	2.59	4.05	2.73	1.67
P/NCAV	‐	0.6	0.71	‐

I also added two new stocks. My main criteria are

• little or no debt
• high dividend yield
• growing dividends
• low PE

The first, is San Holdings (TSE:9628) a smallcap funeral home operator. One might think I bought it because of the recent coronavirus death toll. But not so. The funeral business is hardly a growing business. Coronavirus or no coronavirus, the death toll hardly changes from year to year meaningfully. There is one negative that concerns me. Management said that attendance is lower at funerals because of the dwindling population and cultural trends, This may result in less spending on funerals. I will be paying attention to the number of funerals and the total revenues in the future. But right now San Holdings is the kind of stock that I am looking for: stability during the market turmoil. Yet San Holdings is down 25% off the peak! That 25% is my margin of safey.

The other stock is Takamatsu (TSE:6155) , which is a small niche manufacturer of sophisticated lathes. Now I know very little about lathes in the same way I know little about funeral homes. But their products look very complicated and expensive, as seen below. And they must be very expensive. If there is anything we learned from the current crisis, it is that the coming decades we need to rely more on automation. We need automation to serve the sick and to reduce overcrowding in factories. When you have this kind of a backdrop and the company sells for less than 5x earnings and pays 4% dividends. That's all I need to know to decide to buy.

A reader may think my analysis is very simplistic. But I make no apologies! My analysis will never mention fancy terms like enterprise value (EV), bullshit earnings (EBITDA) or sharpe ratio. My investment theme is based on simplicity, as explained best by this video. I highly recommend watching it.

That's it for Japanese stocks. In my next post I will go into some other new stocks that I acquired during the recent crash. Right now is an exciting time to invest, and I've been busy!

How Do We Beat the Market?

It's been two months since my last post when the coronavirus really became the world's biggest problem. Back then, people were saying life will never be same, the world will hit a recession worse than the great depression, and on and on. To me what people are saying is not necessarily wrong, but it is the peoples tone that I focus on. The media is having a field day with this. Their job is to maximize their views or sell their papers and magazines. They will emphasize the worst news over and over because it gets people's attention and hence sells. After a long period of this blanket coverage, it cloud peoples judgement.

And the key to successful investment is good judgement, even though investment has a huge luck component. When an investor's judgement is clouded they can seriously lose. An investor whose judgement is not affected can win. Or to put it more bluntly, the latter can take advantage of the former. And the latter group consists of the great investors. They are coming out of the woodwork to make some serious money. Among them are Paul Ichan and Bill Ackman. These people made bets against the market, against the coronavirus. And they succeeded not because they were lucky but because they noticed their bets had huge risk/reward ratios and they had the guts to act on it. One can easily google their names and see their recent interviews on Youtube. I found them highly informative and recommend others to watch.

Back in the 50s in Buffett's heyday when Buffett made 30 plus percent every year, his secret was find individual cheap stocks from the Moody's Manual. That was an edge back then because it is hard to read through several thousand pages of three-column text and numbers. And he did it twice! Today that doesn't work, because all such information is digitized. So one can simply use screeners or write their own code to do what Buffett did much faster and for much more stocks. Plus Buffett has already spread the gospel of value investing, so his secret is out. Because of these two factors, I heard many people suggest that the stock market is more efficient today than before.

I vehemently disagree.

Take a look at the following log graph of the S&P 500 (at top). The economy and market grow exponentially, so the trendline should be a straight line. When gods are the only participants in the market I guess the S&P500 should also be a straight line, because gods have perfect information. But since the stock market participants are mortals with limited information, the graph is not smooth. That doesn't mean the market is not efficient.

Next, we can look at two different time periods, one contemporary and one from the past. The second graph show the index over the last 40 years. And the third graph show the index in the period covering the two world wars, including the great depression. If the market is more efficient today than earlier times then it should show in differences between the second and third graph. But looking at graph two and three it isn't clear that one is more volatile than the other. We have had massive peak to trough moves around 1989, 2000 and 2008. Just as we had them in the 1910 panic and the great depression.



So I can argue the market is not any less volatile than earlier years! So the market has been and still is inefficient. But how can we take advantage of this inefficiency. I already stated that stock picking is harder today than in Buffett's early years. Well, the market is inefficiency today simply because all good American companies are expensive.

Take Microsoft for example. In the last 7 years the stock price has gone up by approximately 7x. Meanwhile its earnings has only doubled! Compare this with Tachibana Electech (TSE:8159), in the 7 years that I have held it the stock has gone up 2.5x but its earnings also doubled. And while Microsoft is selling at 30x earnings, Tachibana is selling at 10x earnings. And I know different people will say that this anomaly is justified in different ways. I can guess some of the reasons:

• the investors don't care about earnings and value
• the investors believe in America but don't believe in foreign currencies and foreign economies
• the cheaper company is more likely to be a fraud
• future growth will justify it.

But in my opinion all these arguments do not justify the anomaly, and there are many counter arguments against it. Therefore, in my opinion, these two stocks reflect the current market inefficiency. But they are not the exceptions right now. Many many companies like Microsoft are just as expensive. And in the Japanese market many many smallcap companies are as cheap as Tachibana.

So, following this train of thought, it is natural to wonder how to take advantage. The solution, as with all investing strategies is by arbitrage. But whereas Buffett arbitraged across the different companies in the Moody's manual. I believe successful arbitrage today must be across entire markets and across different periods. For example, in the US, the market has swung between value and growth over long periods. In the 90's it was all tech growth. But the 2000s it was value, and now 2010 is the decade of growth again. Well, you can guess what I am betting on today. I am convinced the coming decade is going to be a roaring decade for value. If there was ever a time to invest in value stocks, it is now! This also means that different sectors of the market are treated very differently at the same time; for example, Japan versus US stocks.

I've come to realize this simple concept slowly over the lifetime of this blog, which is around 8 years. And consequently, I can easily see the reason behind active management's poor performance. After 2009, a lot of people started their own hedge funds. And their returns were phenomenal, even better than the high performance of the market overall. I am convinced these people realized that the way to have a successful fund is to start at a time when stock picking really is useful; i.e. when the market is depressed. That is time arbitrage. But in the last few years when the market is inflated, people who ran funds cannot put their portfolios into a defensive position even if they know the market is inflated. No investor who is paying high fees wants their money in cash. So the investors are implicitly forcing money managers to go headlong into a market that is inflated. So, these money managers oblige by taking more risk, whether they realize it or not. And now, we are seeing and we will see stories of money managers who were swimming naked as the tide comes down. As an example, I saw one manager of a small hedge fund whose equities are down 50% in the first quarter! And seeing the stocks in the portfolio, I think this is going to be a permanent loss. So what is that manager to do? I think the most prudent action is to close up shop, and hope that people will forget and start another fund later.

So, for brevity I will conclude this post here. This post is really the first half of an article regarding my current views, strategies and investments. My next post will follow up with the second half of the article, where I will describe what I have done in the last three months of market turmoil.

In the meantime, stay safe!

People, Let's get a Grip!

Happy Sunday everyone. I just had to get that out of the way!

The hysteria around where I am, is almost laughable. People are hoarding toilet paper like it will give them immunity to Coronavirus! So, get a grip!

So, I am thinking that if people hoard toilet paper as a gut reaction to a virus, then certainly everyday retail investors are capable of selling way beyond what the current situation calls for.

Unfortunately for me, I own a lot of lower-tier stocks, stocks that are in emerging markets and the cheaper stocks in developed markets. So my stocks have actually dropped farther than the market as a whole.

Below are four of my holdings. Notice that they all yield dividends way above average. All four of these companies have improved earnings. All four of these companies have increasing earnings. Tachibana Electech (8159:TSE) is in fact is a netnet. This means that it is worth more dead than alive! While I do realize that the coronavirus crisis will materially impact Tachibana Electech — the company issued a profit warning for the current quarter — nothing that happens this year should take 35% off the valuation!

	Lewis	Tachibana	Riken	EUPIC
Price	R 23.81	¥ 1248.00	¥ 1770.00	€ 3.38
Shares (M)	80.3	26	23.6	27.5
Earnings TTM	398.1	4422	3857	10.9
Marketcap (M)	R 1911.94 ($ 117.30)	¥ 32448.00 ($ 306.11)	¥ 41772.00 ($ 394.08)	€ 92.95 ($ 103.17)
ROE	8.3	6.3	8.3	8.3
PE	4.8	7.3	10.8	8.5
PTBV	0.43	0.46	0.96	0.79
Div Yield	10.46	3.85	2.2	3.85
Price / NCAV	-	0.73	1.36	-

I am posting this table to share and also to remind myself that we shouldn't pay attention to the markets because the fundamentals reflect the value of shares, not the market whims.

While we always suspect the market is due to get a shock that will cause a drop, where the shock comes from is near impossible to guess with any certainty. I never thought that when the 10 year run ends, the shock would come not from geopolitical or world economic events, but from a germ!

In 2009 when the world was suffering a financial meltdown, I read up on the great depression, and tried to draw parallels. I found there weren't that many similarities.

	Fatalities	% of World
1918 Flu	50 M	3
1958 Asian Flu	2 M	0.06
1962 Hong Kong Flu	50 M	0.03
2020 Coronavirus	10,000 so far	0.0001

Now in 2020, the world seemingly is going through a cataclysmic pandemic, I think it pays to read up on similar pandemics of recent history. The table here shows the most deadly flu outbreaks during the last 150 years when we've had sophisticated financial markets. In that time, I can safely say that these worldwide health crises have not had a negative impact on world economic growth. World War I and the 1918-1919 influenza pandemic did not prevent the roaring twenties. The two pandemics in the 50's and 60's did not affect Warren Buffett's generation in the least bit.

Sure, the world economic output could be reduced significantly because of the Coronavirus, but probably only for two quarters. China, the vanguard in this crises, is already starting to stabilize its new infection rates. I wouldn't be surprised if things go back to 3-6 months there. And my feeling is the lessons learned when this crises is over will spur new economic activity in the health care and infrastructure sector to prepare for the next one. Also, lost production can be recovered when the world consumer market returns back to normal.

But many in the world will not try to rationalize the situation and instead make a sport of hoarding toilet paper and other necessities. It is in our human nature to do something active when danger is lurking and is out of our control. And really there is no harm in doing so. However, the same mentality cannot apply to retail investing, because the market will be rational in the end.

Today, the S&P 500 is down 25% from the peak because of a germ. I think this is definitely the time to be contrarian like Baron Rothschild, who famously said: "Buy when there's blood in the streets, even if the blood is your own.".

My Views on IEH Corp

Hi all, in the last year since I've been mostly silent, I've received the most inquiries about IEH Corp (OTC:IEHC). I have attended a number of the annual shareholder meetings and today I am going to give an update on how I see things. Note: the text below are my impressions and opinions and recollection of conversations, take everything in here with a grain of salt. And with that out of the way, let's dive in.

My impression from the meetings generally aligns with the market perception. The company is hitting a very good spot and things are generally on the up and up. Just look at the last seven years' revenue numbers below.

The CEO though, constantly reminds us that their customers are long-term customers and they are slow adopters. This means that it takes a long time to bag a new customer but when they do they stay as customers. A new customer must design in these hyperboloid connectors, and once they do they are hard to substitute.

So, sales improvement in this company take time. And one can expect more years of revenue increase. That said, there is also a limit to how much the company can sell. This is not a company making technological breakthroughs. Instead, it is a niche provider riding on society's increasing reliance on technology in more and more rough and extreme environments. Their technology is not new, in fact it is old enough to be out of patent protection.

Their main customers are the big drivers of our economy: defense, old and gas, commercial aerospace and the medical field. So long as the S&P 500 does well, so will the company, provided it can execute.

And execution is the main thing I am monitoring during my yearly visits. The company of course, has a very long history with a single family, the Offermans, as owner-operators. Recently, the fourth generation of the family has taken the helm. I am very pleased with this change. The current CEO, David Offerman, has taken the helm for three years. In that time, I just feel things look better to us shareholders. Firstly, the governance wasn't impressive, their non-executive board members did not even reside near the company and dialed into every board meeting. With some shareholder prodding, they have added more conventional and local people for board members.

The previous CEO, Michael Offerman, had also relied on a small-time accounting firm to do their books and inventory. This firm was replaced by a related accountant who was also a small operator. Last year, that accountant left. Incidentally, that second accountant attended the last shareholder meeting to tell everyone that it was all an amicable break. As I remember, he said that he liked the job but in the end he felt that he was too small to handle the task. And so, we are here today with a more traditional firm Marcum LLP as accountants.

Shareholders in past meetings have also expressed concerns when retained earning for grew several quarters as IEH had good numbers, but the value all just went to more inventory, instead of more cash. Furthermore, in the last meeting one shareholder pointed out that the company wrote off $400k in inventory for 2019, whereas was it was only $200k for 2018. So many shareholders are looking at the inventory and pressing for improvement.

On the positive side, in the last shareholder meeting I heard that the company was moving to SAP software. I also noticed the company hired a new, and much younger, controller. And the new controller just happens to specialize in SAP. I would expect that with this and the accounting changes we will see improvements in inventory controls and hence better margins.

So with the new CEO in this fourth year, I am watching for inventory levels and margins. My best scenario is that inventory stays flat and there are no significant write-offs, and margins continue to improve. The CEO used to be in charge of sales and clearly has done a great job in the sales department. By showing better control of inventory and margins he will be able to keep up the earnings growth. In the last seven years that I have owned this stock, I have seen annual EPS go from $0.63 to $2.15. Of course, as most people know, the unusual spike in sales last year was due to a single customer order. That customer had decided to switch to hyperboloid from a cheaper technology. But no single customer contributes more than 14% of revenue, so even if this customer cut off all future orders, the company is still growing at a goodly pace.

IEHC
Price	17.40
Shares (M)	2.32 (2.74 fully diluted)
Equity (M)	26.20
Earnings TTM	3.71
Marketcap (M)	40.60
ROE	14.1
PE	10.9
PTBV	1.55

The previous year spike also contributed significantly to operating margins. The operating margin for the last five years are 20%, 16%, 14%, 19% and 27% in 2019. Other than the previous year, the company has never achieved margins over 20%. If the company can be a bit more consistent and keep the margin say, at 23%. I would feel confident that things have really changed to take this company to the next level; the CEO has indicated that he wants to take the company back on to the Nasdaq someday.

And so, having weighted all these thoughts, I feel that the company at $17.40 today is about fairly priced. I know the stock was at a high of $25, reflecting the rich valuations of stocks everywhere. But I feel IEHC has to have another good year, maybe not as good as 2019, to deserve a price over $20. That said I did not sell at $25 because there is just too much upside. Like I said earlier, one really has to be patient with this stock. And if the stock drops under the $14 - $13 range, I definitely will start buying more. At $12, I would back up the truck!

My Annual Schedule of Investments

Happy New Year!

A whole year without a post! Well, it reflects my investing attitude in the year. I haven't traded much. I have added significantly to two positions: KCLI and PM. But probably for the time, I have not opened any new positions. PMI and MO - the two Philip Morrises - announced briefly that they were in talks to re-merge. But that got shot down quickly. I PMI bought just after the announcement when it was not well received. It dropped to $72 from $80 when I bought, now it is at $86.

For my holdings from a year ago, use this link.

Long Position	Category	Business	Holding Period
IEH Corp (IEHC)	US Microcap	Manufacturing	6 ½ yrs
Anthem (ANTM)	US Large cap	Health insurance	15 yrs
Kansas City Life (KCLI)	US smallcap	Life insurance	5 yrs
European Reliance (ATH:EUPIC)	Greek smallcap	Insurance	5 ½ yrs
Tachibana Eletech (TSE:8159)	Japanese smallcap	Electronic Distributor	6 ½ yrs
Seaboard Corp (SEB)	US Mid cap	Food Conglomerate	14 yrs
Senvest Capital (TSX:SEC)	Canadian smallcap	Investment Company	4 ½ yrs
Installux SA (PAR:Stal)	French microcap	Manufacturing	6 ½ yrs
Riken Keiki (TSE:7754)	Japanese smallcap	Manufacturing	6 ½ yrs
Pacific Healthcare (PFHO)	US Microcrap	Health insurance	5 yrs
Philip Morris Int. (PMI)	US Largecap	Tobacco	19 yrs
New Century Hong Kong (HK:0234)	Hong Kong smallcap	Hotel, cruise line	5 yrs
Bruce Fund (BRUFX)	Mutual fund	Mid-cap value	12 yrs
McRae Industries (MCRAA)	US Microcap	Footware	7 yrs
Lewis Group (JSE:LEW)	S Africa midcap	Furniture Retail	4 yrs
Short Position
S&P500 E-mini (CME:ES)	Index Futures		2 yr
Direxion S&P500 Bear (SPXS)	ETF	3x Inverse ETF	1 yr

Note this year I continue to hold two market short positions. They have been hemorrhaging money. I take solace in the fact that the higher they go, they more they are likely to make money.

To me, the US public markets are just too mature and saturated. In the coming decade or two it will only yield around 3-5%. I think people look back to the good old days when value investors prospered, like in the 50s to the 90s. This was a time when investing isn't as hot a thing as it is now. In the coming years I believe money will chase other areas, like foreign markets, developing markets, and private equity.

Despite not much activity on my part, there are still some things that I'd like to post but just didn't have the time. Things I would have like to write about are:

• Adrenna Property Group screwing the small minority shareholders like me royally.
• New Century Group HK majority shareholders extracting HK$497M (US$63M) cash from the company.
• IEH stock, revenue and profits did great. But the CEO also got a generous option package that could give shareholders 10% dilution.
• My chess sucks. But playing chess is serving it's purpose. It has distracted my overactive mind from making impulsive moves with my porfolio.

Happy new year and may 2020 be a happy and prosperous year.

My Annual Schedule of Investments

Merry Christmas and happy new year!

Another year has come to an end and again it is time to list my largest holdings. This year I also disclose the approximate time that I have held the oldest shares in these holdings. A lot of these stocks I have bought and sold repeatedly over the years. So, although you may see a chart has risen spectacularly through my holding period, I probably did not profit as much as you think because I may have reduced a position before the best times or increased a position too late to catch all the upside. Nonetheless, I find the holding period information very useful to put a perspective on my investment strategy through the years. For example, it has made me much more forgiving of my mistakes. I have been kicking myself for reducing some positions before some great gains (IEHC). But I see now that I also had the wherewithal to hold on to some stocks for over a decade, which turned out to be great calls.

For my holdings from a year ago, use this link.

Long Position	Category	Business	Holding Period
Anthem (ANTM)	US Large cap	Health insurance	14 yrs
Kansas City Life (KCLI)	US smallcap	Life insurance	4 yrs
IEH Corp (IEHC)	US Microcap	Manufacturing	5.5 yrs
European Reliance (ATH:EUPIC)	Greek smallcap	Insurance	4.5 yrs
Tachibana Eletech (TSE:8159)	Japanese smallcap	Electronic Distributor	5.5 yrs
Senvest Capital (TSX:SEC)	Canadian smallcap	Investment Company	3.5 yrs
Seaboard Corp (SEB)	US Mid cap	Food Conglomerate	13 yrs
Installux SA	French microcap	Manufacturing	5.5 yrs
New Century Hong Kong (HK:0234)	Hong Kong smallcap	Hotel, cruise line	4 yrs
Riken Keiki (TSE:7754)	Japanese smallcap	Manufacturing	5.5 yrs
Pacific Healthcare (PFHO)	US Microcrap	Health insurance	4 yrs
Karelia Tobacco (ATH:KARE)	Greek smallcap	Cigarettes	4 yrs
McRea Industries (MCRAA)	US Microcap	Footwear	6 yrs
Bruce Fund (BRUFX)	Mutual fund	Mid-cap value	11 yrs
Short Position
S&P500 E-mini (CME:ES)	Index Futures		1 yr
Direxion S&P500 Bear (SPXS)	ETF	3x Inverse ETF	1 mon

Note this year I also listed my first two significant short positions. I explained in previous posts why I am bearish on the US market, and to a lesser extent, the whole world.

And finally, I should mention that I opened a large position in Folli Follie (OTC:FLLIY) late last year. I did not do a writeup because I cut corners and didn't do enough of my own research. I was going to get around to it. But before I could, everything went south for this Greek company. The world found out that the company founders and insiders have been committing massive fraud. Nine insiders have been fined already and they are currently facing fraud and money laundering charges. I hope they go to jail and pay restitution to the innocent shareholders like me. The stocks I still own are down 85%! That's all I can say for now. The loss is probably my biggest ever and dwelling too deeply can serve no constructive purpose.

But let's hope that next year brings us all better results! cheers!

Why I Shorted the S&P500

The S&P 500 now has returned around 0% this year-to-date. This is Trump's second year in office and the euphoria from his economic policy changes has worn off. As I mentioned throughout much of the year I have had a significant short position on the S&P 500 index. So I have luckily come out slightly ahead in this position. So effectively I am running a long-short portfolio. Counting only my long positions, I am very much at less than 100% invested in stocks. And counting the short position, I am at even less exposed to the market. So, the purpose of the short is to remove my exposure to stocks since my primary market, the S&P 500, is way way overpriced. In this way I can still play the stock picking game while at the same time shield myself from the correction that I feel is just around the corner.

I have seen two major US corrections and I have come to realize, by living in the US, that the euphoria for the markets is bound to come once or even twice every generation. I am seeing another case now. The US is simply at an unsustainable level. My reason for this is grounded on the principle that a stock investment should be based on the value of the company. And this value is the present value of all future cash flows. This is a basic value investing principle.

So the S&P500 index should be priced at the present value of the cash flows from of its constituent companies. The latest TTM earnings of the S&P 500 is only 122 whereas the index is at around 2700 today. That means the entire index is trading at PE of 22! This is way over the normal traditional range of 15. And 15 is being very generous. I want to use this latter PE multiple to help get an estimate of the potential return of the S&P500 over the near future, say 10 years.

The future cash flows of a stock, which reflects the value, is somewhat reflected by the earnings of that stock. If the earnings grow by a certain percentage every year, then the value of the stock should grow by that amount also. I will be generous and say that the S&P500 will grow earnings by 5%. I will also be generous and say that the S&P500 will yield 2%. Therefore, from just this data, we can see that the S&P500 will return around 7%. Not bad but not great either considering I keep hearing returns have traditionally been around 10-12%.

But there is still a flip side to the investing reality: the index is at a very high PE multiple now. It must return to more normal levels. Say it returns to a more traditional, albeit still elevated, level of 15. That means for the same earnings, the stock prices will have to drop to 68% of the elevated level! If this happens in 10yrs that is an annual drop of 2.5%. That is a lot considering that the return I just derived was only 7%.

And wait, it gets worse.

All investors will constantly face three impediments: inflation, taxes and fees. So far, I have not mentioned them in calculating returns. Firstly, there is inflation. Inflation is a fact of life and is often ignored when talking about returns. The reason for this is that inflation varies from year to year and to simplify discussion, we talk in terms of nominal returns. Nominal returns are the opposite of real returns which factor in inflation. The 10-12% return commonly touted is always the nominal amount.

The second impediment is taxes. We can avoid this temporarily by investing in tax-sheltered retirement accounts, but there is a limit to how much we can put in such accounts. We can also reduce it by holding stocks for a long time, if not forever. And there must be many other creative ways of avoiding it, for example by cheating on taxes. Because of this variability, I will only look at dividends, which is forcibly taxed. Suppose the tax rate on dividends is 30% and suppose that half of one's portfolio is not tax sheltered. Then using the 2% dividend number, we will pay 0.3% of our portfolio into taxes.

Earnings growth	+5%
Dividend yield	+2%
PE shrinkage	-2.5%
Expenses	-0.2%
Taxes on dividends	-0.3%
Net return	4%
10 yr net return	48%

Thirdly, there is the fees. This is the most manageable impediment. How much one saves depends on how much effort one expends. I depend on myself for all my financial decisions, I hardly own any funds or ETFs. Therefore, the only fees I pay are transaction fees, currency exchange fees and travel costs to visit companies. All this I estimate is only 0.2% of my portfolio. And subtracting all this up gives me a net return of 4% per annum or 48% per decade. See table. I bet this will be an incredibly low number compared to the average retail investor's expectations. In the long term, stock prices will be grounded by the PE ratio. When the current euphoria subsides and reality sets in, the mood of the market will probably cause prices to fall significantly below the 4% estimate, maybe it could even turn negative at the end of ten years! In the given calculations, I said that the PE shrinkage from 22 to 15 would reduce returns by 2.5%. If the PE goes from 22 to 11.5, the nominal return would not be 4% but 0%!

It is easy to see why I shorted the S&P500.

Portfolio Update

This blog is so devoid of recent entries that I felt compelled recently to post something, anything. Fortunately I have a lot of odds and ends I can update on my portfolio and the market in general.

After riding high under Trump for a year, I am convinced the US market cannot go any higher. The Shiller PE ratio is at a mind boggling 32.3! That is higher than anytime before the great depression and is only surpassed by the dot-com bubble in 2000. On the other hand, I have holdings that are still reasonably valued overseas and even some in the US. Plus I hate paying capital gains taxes. So, instead of selling a lot I settled on hedging the US market. After all, this is a perfect time to short the US market if I am convinced it cannot go any higher.

I hedged the US market by shorting the S&P500 mini futures. Each of these futures is a contract to buy or sell a contract that will pay out $50 times the S&P 500 index on the delivery date. So suppose on the contract expiry the S&P500 is 2700. Then the contract would conceptually pay out $135,000. In reality the contract settles financially everyday, so the original purchase amount and the settlement payout do not happen but instead the delta in the value of the contract is debited or credited at the close of each trading day. So far I am turning a profit shorting the mini futures. However, I really prefer that were not the case, as each gain means an overall downward bias in my portfolio. But it only confirms my belief that the market cannot go any higher.

 A Prussian general once said that "No battle plan survives first contact with the enemy". I feel that way looking back at my first merger arbitrage situation , between Anthem and Cigna. As it turned out, all the forecasts about its chances of success were too optimistic. The merger fell apart after various state governments voiced objections and sued to block it. Despite this, I fell into the golden period for managed care organizations and both companies rose handsomely. I have since sold my Cigna shares. So the moral of this story is that with careful thought and due diligence, even if I am wrong in my predictions, I can still come out ahead. The S&P 500 hedge is another play from this same playbook.

In addition to the hedge I have also reduced my exposure to US companies whenever he opportunity arose. This was the case with IEHC and Senvest.

While the S&P 500 and my US holdings have done wonderfully since Trump's presidency. My international holdings are a mixed bag There have been laggards such as Lewis Group of South Africa. And there are some wonderful stocks, such as Installux, European Reliance, Tachibana Eletech and Riken Keiki. I have listed the basic metrics of some of my international holdings below.

	Tachibana	Riken	EUPIC	Installux	Lewis	CMH
Price	¥ 2028.00	¥ 2504.00	€ 3.47	€ 415.00	R 31.20	R 27.50
Marketcap ($Mil)	¥ 51105.60 ($ 461.66)	¥ 58092.80 ($ 524.78)	€ 95.43 ($ 110.79)	€ 125.83 ($ 146.09)	R 2602.08 ($ 190)	R 2057.00 ($ 150.2 )
ROE %	6.4	11.2	13.8	9.7	4.8	35.6
PE	13.1	14.1	6	14.5	9.9	8.3
PTBV	0.84	1.67	0.94	1.39	0.49	2.97
Div Yield %	1.97	1.2	3.46	1.93	6.41	5.85

Note that all these companies, with the exception of CMH of South Africa, all have very little debt. The companies whose stock appreciated significantly did so with a combination of increased profits and multiple expansion. I am still waiting for that to happen in my South African stocks. I have not wavered in my belief that the long term future of world economy is in the emerging markets. But in the meantime while I wait, they are yielding 6%.