Saturday, July 11, 2020

Q2 2020 Portfolio Update

Q2 2020 has been a wild ride. The COVID-19 pandemic and its accompanying stock market crash has left many bewildered and fearful. There have been reports of job losses and some people have suffered tremendously from this blackswan. Governments all over the world have responded to this crisis, ameliorating some pain points here and there.

This whole crisis underscores the importance of preparedness. Not just from a health perspective, but from a social and financial perspective as well. One has to make a conscious effort to keep healthy, in order to keep sicknesses and diseases at bay. Sure, it is not a foolproof plan, but what needs to be done, is done. The same applies for maintaining strong social ties and a financial buffer as well. There are things that are in one's control and there are things that are outside one's control. Focus on the former and avoid ruminating on the latter.

Let's move on with the portfolio review.

Dividend Income


Q2 2020 SGD Dividend Income

SGD-denominated dividends received in Q2 2020 fell compared to the same quarter last year. This could be attributed to lower dividends declared during this period as well as some divestments I've made (discussed in transactions section below).


Q2 2020 USD Dividend Income

On the other hand, my USD counters are looking good as dividend growth is starting to compound.

Transactions
In this quarter, I took partial profits off SGX when it ran up to its 5-year high. Still holding the remaining for dividend yield.

Next, I cut loss and closed my position in First REIT. A back of the envelope calculation revealed that I have lost 4% per annum since initiating my position in year 2015 (after including dividends). The incongruency between their company announcement and their parent company's announcement is yet another red flag that highlighted that there might be further issues down the road. Thanks to my blogger friends who notified me of this. I still have some odd lots of First REIT remaining that are a hassle to sell.

Third, I took partial profits off Riverstone due to the crazy run-up in prices. I was questioning myself whether the run-up in price is an accurate reflection of future earnings. At that juncture, my answer was a negative and that earnings are temporarily fueled by the COVID-19 pandemic. In retrospect, I was wrong. With this transaction, I've recouped > 80% of my initial investment principal. In a few years' time, my investment in Riverstone would become "free" through the dividends received. I remember reading AK's and Dividend Warrior's blogs and thinking to myself how long I would have to wait until any one of my investment becomes free. Well, I more or less joined the club with my Riverstone position. Woot! (Remaining position is at 220% profits :D)

Fourth, I initiated a position in Livongo Health. I think my Riverstone victory (albeit small) has been messing around with the dopamine levels in my brain. I was looking to find a company with strong fundamentals that could double quickly, recoup my investment principal, and let the remaining position run for "free." I have been doing a small bit of research on Livongo since January and finally pulled the trigger due to my greed? As Livongo is still not profitable (but revenue has been growing by leaps and bounds), I have kept my position size small in case the trade blows up in my face. I think I did decently as a dividend investor, but growth investing is another game altogether which requires a different mindset and skillset compared to what I have been using thus far.

That's all for equities. Let's move on to cryptocurrencies, which I have more to discuss actually.

I added to my Bitcoin position. The rationale is to capture the upside of the Bitcoin halving that happened in May 2020. The halving occurs once every 4 years, where supply of new bitcoin into the market has been programmatically reduced by half. Assuming the same demand and a known-beforehand supply shock, theorists have modelled that the price of Bitcoin would shoot up in response to the halving. This was the case for past bitcoin halvings where, after a period of time after the halving event, the price of bitcoin skyrocketed.

For those interested, do refer to Plan B's, a quantitative investor, article on the matter.

The thing to note is that the lag time between the halving event and price increases has been increasing with each halving cycle. Plan B himself mentioned on twitter that the maximum lag time for price increases following the May 2020 halving would be around December 2021. The lower and upper bound of returns if the model works is 200% and 3300%, respectively (I am skeptical of the upper bound returns though). This is an asymmetrical risk/reward position I am willing to take; a lower probability and consequence of 100% loss (100% loss based on anti-crypto individuals) versus a higher probability and consequence of minimum 200% returns.

If the model breaks and bitcoin either stays flat or drops in price, I am still okay with this outcome as a portion of my bitcoin has been loaned out for interest income.

I added to my Ether position in this quarter. To reuse a phrase I have used in my previous blog posts, Ethereum has been improving by leaps and bounds, with new developments every few days. However, there are still fundamental issues that remain unsolved (e.g. Ethereum clogging up, increasing transaction cost, low transaction speed). Ethereum 2 is supposedly designed to solve these problems, but there have been delays again, lol (Ethereum 2 delaying has become a running joke in crypto).

I added to my position in Chainlink (refer to my Q1 2020 post on Chainlink here). Compared to other cryptocurrencies, Chainlink is relatively obscure (until the recent price surge). Behind the scenes, their team has been quietly building and forging partnerships with large multinational companies and governments. Building "infrastructure" isn't sexy stuff. This is similar to people not appreciating their internet connection and taking it for granted until.......their internet service provider suffers an outage. Another possible reason for their relative obscurity is that they are more B2B-facing than B2C-facing. As a result, most of their work goes undetected by people. Unfortunately, I have not accumulated enough Chainlink; I intend it to be an upper-middle position size instead of a middle position size that I currently have. Looks like I have to slowly average up my position while still being mindful to maintain a low average price.

I added to my position in Synthetix Network Token (refer to my Q4 2019 post on SNX here). Same thing as the others; the Synthetix team has been delivering week after week. Management is proactive and readily engages the community in their discord chat. The community is made up of equally strong and savvy investors who know their stuff well. The recent surge in SNX made me reconsider the following: On one hand, it is indeed comfortable to have large percentage gains, but small absolute gains. On the other hand, smaller percentage gains, but larger absolute gains are the real game changer. Hence, I added to SNX while still maintaining my average price at a low level. Currently sitting on 214% capital gains and have collected ~30% yield of dividend income after averaging up. Unlike equities, I would not be willing to take profit as the Synthetix team still has a long runway of growth. Currently comfortable with a mid size position in SNX.

I have initiated a new medium-size position in Thorchain (ticker: RUNE) in order to learn more about them. Blogger Got Money Got Honey has been promoting it on his twitter account and, like what I did for Synthetix, I finally got round to analyze it. Blockchains, as they are, operate in silos. Bitcoin exists on the Bitcoin blockchain. Ether exists on the Ethereum blockchain. They do not interact with each other. Thorchain provides interoperability and enables one blockchain to "communicate" with another blockchain. Thorchain also functions as a decentralized exchange. There is execution risk with Thorchain as they have yet to "officially launch." If/when they manage to pull it off, price would naturally follow the project's fundamentals. Another interesting titbit is that Thorchain publishes their treasury report on a monthly basis.

(Lol. After that wall of text, I'm still not done yet.)

And yes, you did not read wrongly when I mention about the project's fundamentals. Slowly but surely, the cryptocurrency sphere has developed to the point that there is nascent usage of valuation models from traditional finance. Hence, it is no surprise to see coins/tokens being evaluated by P/E ratio and DCF models. This is particularly relevant for tokens that underpin decentralized exchanges, where holders accept varying levels of risk to earn fees that users pay them for usage of said exchanges. With these developments, current volume, future volume growth, the underlying economics of the given exchange, and security are some examples of where analysis could be conducted. Sure, valuation models are imperfect and irresponsible speculators abound, but these are constraints that we have to live with, even in traditional stocks investing.

I have also opened my warchest to take advantage of the increase in interest rates across crypto money market funds and decentralized exchanges.

I have bought more crypto gaming assets.

I have also learned about the existence of a vibrant art market on Ethereum and have started investing in a few pieces of artwork as well. This requires another full post to flesh out the details.

I have also introduced a non-custodial crypto wallet to my mum and have seeded her account with some stable coins to earn some interest income.

Networth Breakdown
Now, I'm not even sure whether the Networth Breakdown is accurate. To manage risk, I have kept my cryptocurrencies across multiple platforms, so it starts to get difficult to account for them properly.

The major change compared to the last quarter (see here) is the huge increase in asset allocation to cryptocurrencies (12% to 24%). I have included stable coins under the banner of cryptocurrencies.

Networth Breakdown

Debt Levels
Interest Coverage Ratio: 27
Debt-to-Equity Ratio: 0.008

Leverage has decreased considerably compared to the previous quarter. The only contributor to leverage is the use of my credit card to purchase cryptocurrencies.

Current Holdings
After converting all my USD and HKD holdings to SGD at the end of the quarter, the following table shows the percentage of each stock from only the equities allocation of my net worth (arranged in descending order).

Stock Name
Percentage
AIMS APAC REIT
7.49
Parkway Life REIT
7.13
Hongkong Land
7.13
Frasers Centrepoint Trust
6.52
OCBC
6.12
Mapletree Industrial Trust
5.65
Hong Kong Tracker Fund
5.12
BlackRock
4.89
DBS
4.58
SPH REIT
3.72
Mapletree Commercial Trust
3.32
Livongo Health
3.11
Thai Beverage
2.98
Frasers L&C Trust
2.88
Capitaland Mall Trust
2.14
Medtronic
2.14
ST Engineering
2.13
Singtel
2.12
Riverstone
2.07
Raffles Medical
2.01
JM Smucker
1.86
Capitaland
1.85
SATS
1.83
SGX
1.77
Sheng Siong
1.72
Dairy Farm
1.43
Japan Foods
1.4
Frasers Property
1.3
Kraft Heinz
0.95
General Mills
0.93
Welltower
0.74
Hormel Foods
0.71
Abbott Laboratories
0.27
First REIT
0.02

Just a few shuffle in the positions of the top 10. Nothing much to see here.

Strategy moving forward
I will be allocating more of my networth towards cryptocurrencies. At this juncture, I could come up with at least 4 ways to generate alpha in the crypto market. 

Even if the crypto market crashes, I am okay with it. I am able to take the ups and downs as the coins/tokens I am invested in have strong teams behind them.

To give an example, somewhere in Q4 2019, I got a double bagger (100% returns) on SNX. Following which, I suffered a 50% loss based on my average price (or, to put it in another way, 75% loss from peak) in Q1 2019. Now? It is up 214%. Would I be okay if I go through the same rollercoaster ride again? Yup. 

Meanwhile, cash (not including emergency funds) continues to serve as the base layer of my networth, enabling me to promptly react to any external events. Next up, cash flow from employment and dividend stocks (and dividend crypto?) could be used to pare down debt or be used as funds for additional investment while precious metals (and crypto?) serve as a hedge against a market crash.

Finally, interest income and dividend income from crypto looks set to overtake SGD-denominated dividend income in the next couple of months. However, it will not make much sense to convert between crypto (specifically, stable coins) and SGD due to the hassle and transaction fees unless one really has an obscene amount of money in them.

Disclaimer
This is not the first time I am blogging about cryptocurrencies. I have been blogging about them for quite a while. I believe I have laid out both the risks and the rewards with minimal hype. If you do not understand what you are doing, stay away from cryptocurrencies. In the past 2 weeks alone, newbie speculators on crypto twitter have lost USD 20k and USD 400k because they do not know what they are doing. Critics would be quick to point out that throwing the baby out together with the bathwater is acceptable. This mindset is also correct, as each individual has different financial goals and would use different financial instruments that they are comfortable with to help them achieve those goals.

However, this does not mean that I will tolerate combative, guai lan, intellectually dishonest, or supercilious responses towards cryptocurrencies, which I have been receiving of late. Such comments would be ignored.

That's a long post.

Thanks for reading!

P.S. I am more active on Crypto Twitter now. You can find me on Twitter here

4 comments:

  1. Bro nice to see your long blog article and the build up of confidence and wisdom over the years.

    I really like Riverstone as a company and I miss the boat when it was $1.

    ReplyDelete
  2. Success comes only with conviction and grit to stay the course, and I can see that you are accumulating enough knowledge to stay the course well in your crypto venture.
    Fighting! :)

    ReplyDelete