Sold: a bunch of smaller positions

I started to reduce the number of shares in my portfolio, as described in my last blog. First, I decided which 4% positions to top up to 5% and which 1% positions to double to 2%. To finance these top-ups, I sold all the remaining positions where I did not feel comfortable to top them up. I already described a bunch of earlier sells. Here are some more shares that didn't make the cut.

Sold: Tong Ren Tang Technologies Co Ltd (HKEX:1666), Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd (SGX:T14), Guangzhou Baiyunshan Pharmaceutical (HKSE:00874)

These companies are Chinese state-owned enterprises (SOE) that make and sell traditional Chinese medicine (TCM) products. I bought all three simultaneously to diversify the risks because I do not have the sector knowledge to select specific companies. I do not speak Chinese, and I don't have access to sales channels like WeChat and Taobao. I can't evaluate which of the three companies is doing best. I changed my vision on portfolio management since these buys. I abandoned this basket-type strategy and started focusing on companies I can study in detail. It was time to sell off this TCM basket to make room for this new approach. I booked a good overall profit thanks to Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd.'s significant share price increase. It was more luck than wisdom. 

Sold: Natural Food International Holding Ltd (HKEX:1837)

This company sells healthy food and snacks, mainly breakfast cereals. This food category is still a small and fragmented market in mainland China. The sector holds a promising future with an increased focus on health by consumers. Natural Food International is backed by PepsiCo Inc., with all its knowledge and experience, as a minority shareholder. Yet, Natural Food's revenues and earnings have not grown much during the last few years. The stock has been a value stock all this time with a P/B below 1 and a P/E of currently 6. Dividends were cancelled in 2022 and 2023, although the company had and still has plenty of cash in the bank. 

The company's market cap of 129M USD violates my minimal market cap rule for Chinese companies. At the time, I decided to allow this rule violation because of PepsiCo's involvement. However, it is possible that I obtained too much trust from that involvement. The value of the participation is small potatoes for a global corporation like PepsiCo. It could be a venture capital type of investment for them. 

All considered, I did not dare to top up Natural Food from 1% to 2% in my portfolio reorganization. I see some red flags, and I do not have much information to ease those worries. 

Sold: PT Uni-Charm Indonesia Tbk (ISX:UCID)

Uni-Charm sells paper diapers under the name MamyPoko. One year ago, I bought this share as a long-term bet on a rising Indonesian population. A rising middle class should create a growing demand for higher-quality household products like diapers. The diapers that Uni-Charm Indonesia sells have been developed by Japanese multi-national Unicharm Corp. Pulp and paper are the main commodities used for the production of diapers. The market prices of these commodities are much more volatile than I had realized when buying the share. As a result, the margins of Uni-Charm fluctuate a lot too. The company is not as financially boring as a typical consumer staples producer. In addition, the stock price keeps going down.

Uni-Charm Indonesia is a joint venture between Unicharm Corp and  PT APP Purinusa Ekapersada, an Indonesian paper & pulp manufacturer owned by Sinarmas Group, a vehicle of the Widjaja family. A combination of a multi-national company and a local family enterprise is perhaps not ideal. Both joint-venture partners are also suppliers to Uni-Charm Indonesia. This creates an opportunity to siphon off Uni-Charm's profits by charging supply prices higher than market prices. Should this ever happen, it will be almost impossible to detect. In summary, I did not have the confidence to top-up this share and sold it off. 

Sold: Kotra Industries Bhd (0002.KL)

I recently bought this share, also known as Kotra Pharma. As you can read in the blog post, I already wondered whether I truly understood their prescribed medicine division. The pharmaceutical business can not be analysed in the same manner as the over-the-counter Appeton product division. I lack insights into factors such as pharmaceutical development pipelines and regulations. I did not have the conviction to top up Kotra, so I decided to sell it.  

Disclosure: No more positions in the shares mentioned. 

My position sizing system

• 5% initial position for a company incorporated in a developed market
• 2% initial position for a company incorporated in an emerging market

My old position sizing system was a two percent initial buy plus an additional two percent later for companies incorporated in a developed market. I usually did this second buy after a few months of holding the first portion. The purpose of this lag was to get comfortable with the company in the meantime. Sometimes, I did not get such comfort and sold the share. Similarly, I bought half percent positions plus a half percent later on in emerging market companies. It was a careful start because I started a whole new portfolio. However, I ended up holding 75 shares. There is no way to follow 75 companies as a part-time private investor. 

There is a lot of research addressing the proper diversification of a stock portfolio. I believe the picture below illustrates somewhat of a consensus conclusion.

We can see that a portfolio with only one stock results in a huge standard deviation of its annual returns. Adding one stock reduces this standard deviation considerably. Assuming that the added stocks are equally weighted, the variability of the total portfolio goes down as we add more stocks. At some point, let's say at 25 stocks where the arrow is placed in the graph, adding stocks does not reduce variability in any significant way. 

The graph is compiled by looking at a large number of portfolios. We are looking at reality, not a theory. Nevertheless, this perspective on diversification is debated. Many value investors argue that variability does not represent risk; only permanent loss of capital does. The number of shares does not matter either, but rather how confident you are about the business prospects of the underlying companies after intense research. Charlie Munger was not afraid to hold only three shares. However, I do not have the quality of information, insight, experience, and advisors that Charlie Munger had access to. For now, I will go with the traditional concept of risk as expressed by the diversification graph above. 

In any case, I was severely over-diversified, holding 75 shares. It will be nearly impossible to beat an index fund with so many shares. I already experienced that a very successful 0.5% position, such as my triple return with Luckin Coffee, will barely affect my overall portfolio performance. I concluded that my 1% positions in emerging markets China, Thailand, Malaysia and Indonesia did not make sense. I decided to take 5% positions in Malaysian companies from now on. For China, Thailand, Indonesia, and other emerging markets I will allocate 2% per company. That is still a small allocation, but I currently do not have the confidence to take a 5% position per company in these markets.

The reorganization

After deciding on my new position sizing rules, it was time to take action. I sold off a bunch of shares where I did not have the conviction to top them up to 5% or to 2% for a range of different reasons. This was a useful exercise in itself. I increased the allocations of all the remaining holdings, except for Greggs, ABF, Reckitt and Haleon, which already got too expensive. In the case of turn-around situation LG H&H, I want to wait for the Q4 2023 results. With the reorganization mostly done, I own 25 shares now. 

Further concentration?

Looking at the chart above, I could reduce my 25 positions further to 10 positions. The variability of the portfolio as a whole would not increase that much. I could start with taking 5% positions to 10% where I feel confident that a company is extremely undervalued, such as Boustead Singapore and Ibersol. However, from my past experiences as an investor, I have learned that my ex-ante level of confidence is often misplaced and irrelevant. There is no correlation between my level of confidence in a share pick and the subsequent performance of that share. 

As an example, my current best performers are Exotic Food PCL, Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd and Associated British Foods PLC. I would never have guessed these picks as being my winners two years ago. I would probably have guessed Alibaba or Tencent then. Without a mechanical allocation system, I would have doubled down on these two stocks. This doubling-down behaviour is known as Get‐Evenitis or, more officially, loss-aversion bias. A mechanical sizing system is an antidote to this bias. It saved me from a bigger disaster in the Chinese tech space. 

Hence, I will stick to my mechanical allocation system. Should I ever change the current 5% and 2% sizing numbers, it will be wise to apply the new rules to all my shares, not to a selection.  

Disclosure: long position in all the shares mentioned, except Alibaba, Tencent, Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd and Luckin Coffee, which I sold off

Sold: a bunch of consumer staples stocks

 I sell a stock for one of the following reasons:

•  I discovered a mistake or omission in my earlier analysis of the business. The issue is so serious that I do not want to own the share any longer. See below for the cases of TVO, SPI, BATS, IMB, JDEP, 00506 and 00288. 
• The valuation of the share looks very high. I prefer to take my profit. See below for 01475 and Luckin Coffee earlier.
• Management changes the direction of the company. I disagree with the new plans.  
• The business circumstances for the company changed. This could be a macroeconomic change or political developments as described in the cases of 4137, 01475, 00220, and 00506 below. 
• I found a better risk/reward opportunity with another stock. I need to free up cash to buy it.

For some shares, it could be more than one factor. Let me go through my recent consumer staples sells.

Sold: Chlitina Holding Ltd (TPE:4137)

I mentioned this Taiwanese company as a buy in a recent blog. After posting that blog, I came across a few in-depth media articles about the upcoming Taiwanese elections and the political tensions with Mainland China. I am not sure whether Chlitina is considered a Taiwanese brand within Mainland China, where most of its revenues are generated. If so, it might face a consumer boycott at some point. Businesswise, the prospects of Chlitina seem good. However, I am unable to assess the political risks.

Sold: Nissin Foods Co Ltd (HKEX:01475)

Nissin Foods sells instant noodles, beverages and other food products in Hong Kong and China. The brand names it uses are originally from Japan. The majority shareholder Nissin Foods Holdings Co Ltd is located in Japan. Like Chlitina, Nissin could be prone to a consumer boycott following political tensions. Apart from this concern, the Nissin Foods share price seems to be quite high, both in terms of P/E and according to my value estimate based on a DCF calculation. I had a good run with this share, with +24% gains in price appreciation and dividends. I lean more towards value investing since buying this share two years ago. In addition, I started to focus on family-owned companies. Neither Nissin Foods Co Ltd nor Nissin Foods Holdings in Japan are family-owned. Nevertheless, I put both shares on my watch list. I may buy in again at a very low valuation.

Sold: Uni-President China Holdings Ltd (HKEX:00220)

Uni-President is a competitor of Nissin Foods in the instant noodles and beverages markets. The company is about 70% owned by its parent company, Uni-President Enterprises Corp, a major conglomerate based in Taiwan. Alas, there are political concerns again. Otherwise, the business is stable, albeit with low ROIC averages of 5% and not much growth. Dividend yield is high at 7.5%. However, the payout ratio has been above 1 for a few years already. It may not be sustainable to keep this up. Eventually, funds will be needed to re-invest in the maintenance of the manufacturing and distribution infrastructure. All things considered, there are not enough reasons to hold on to this share. 

Sold: China Foods Ltd. (HKEX:00506)

This company is the bottler of Coca Cola in 19 Chinese provincial markets that cover 81% geographically of the land mass and 51% of the population of Mainland China. It is a joint venture of state-owned enterprise (SOE) COFCO Corporation and The Coca-Cola Company, USA. Besides Coca Cola, China Foods sells other brands of The Coca-Cola Company, such as Minute Maid, Powerade, Fuze Tea, and Monster. Most of these drinks contain high levels of sugar, which has attracted the attention of certain Chinese authorities. The Shanghai Municipal Center for Disease Control & Prevention started a labelling system in supermarkets to alert consumers to the health risks of sugary drinks. 

You may conclude that the Chinese government intervenes in every aspect of its citizen's life and that China is uninvestable. This may be true, but the labelling system is based on a similar campaign in Singapore. As another example, the Malaysian Health Ministry introduced an extra tax on sugar-sweetened drinks in 2019. I agree with attempts to reduce the consumption of sugar. I am mindful of my own sugar intake, too. However, as an investor in China Foods, I can sense the foreboding of extra taxation. 

On another note, the margin numbers and return-on-investment ratios for China Foods are consistently low compared to other Coca-Cola bottlers, such as Coca-Cola Consolidated, Cocal-Cola HBC AG, and Coca-Cola Femsa SAB. Possibly because China Foods transports their beverages into a large number of very remote areas that have low populations with little spending power. As a SOE, China Foods may not be the most efficient company in the first place, although the profitability numbers are improving somewhat. 

In summary, it is not the best company to hold unless the share becomes extremely cheap. I put it on my watch list for that reason. 

Sold: Thai Vegetable Oil PCL (BKK:TVO)

As investors in high-quality shares, we should seek out companies with high return-on-investment numbers, such as Thai Vegetable Oil. However, there is a catch. High ROIC has no purpose when a company does not re-invest in expansion. It looks like the Thai vegetable oil market is saturated. The company may actually be correct to avoid investing in growth when there are no good prospects. It also means there is little upside to the share price. Thai Vegetable Oil may interest a dividend investor. Mature companies like these can also be interesting at a very low share price. I placed Thai Vegetable Oil back on my watch list for this reason.

Sold: Saha Pathana Inter-Holding PCL (BKK:SPI)

This is a conglomerate that invests in Thai consumer products, often in joint ventures with Japanese partners. It also develops industrial parks. There is not much growth, but the company seems to be well-run. Hence, I tried to double my investment from 0.5% to 1.0% of my portfolio. However, the liquidity of this share is extremely low, at least for non-Thai investors. I failed to buy any shares for a reasonable price. After some further digging, I learned that the already low liquidity is even decreasing more. I don't mind buying shares with limited liquidity. I have several of those in my portfolio. However, in this case, I could get stuck forever without any opportunity to get out of the share if necessary. Therefore, I made a 180-degree turn and sold off Saha Pathana. While selling, I also faced the low liquidity issue, but I managed to get rid of the stock without any overall losses. I recommend staying away from this share until the liquidity issue has been fixed.  

Sold: British American Tobacco PLC (LSE:BATS), Imperial Brands PLC (LSE:IMB)

Warren Buffett has three baskets for investment proposals: yes, no and too-hard-to-understand. Lately, I have come to realize that tobacco shares should be in my too-hard-to-understand basket. Governments seem increasingly concerned about the effect of tobacco on public health. In 2022, New Zealand passed a law forbidding those born after January 2009 to ever buy cigarettes. British PM Rishi Sunak suggested a similar law for the UK, as well as the Malaysian Health Ministry for Malaysian youths. While all three proposals have been withdrawn, the writing is on the wall. 

Tobacco giants like British American Tobacco PLC are working on non-cigarette products like vaping. However, we are learning that these alternatives are not healthier at all. They are increasingly becoming a target of strict regulation too. 

I concluded that the future of tobacco companies is too hard to predict with any confidence. I like to invest in consumer staples for the relative predictability of their business. That argument does not fly for tobacco companies. I will not buy any shares in the tobacco industry again.

Sold: WH Group Ltd. (HKEX:00288)

I also put WH Group on the too-hard-to-understand pile. WH Group is a meat processing company with operations in China, the US and Europe. It has brands like Nathan's Famous and Smithfields. However, meat sales is not really a brand-based business. It is very cyclical, driven by factors such as cattle diseases and droughts, which require specific expertise to analyze. Recently, I invested in cultivated meat through Agronomics, partially for ethical reasons. In that light, it feels right to forgo this bet on traditional meat production.

Sold: JDE Peet's (AMS:JDEP)

JDE Peet's is a worldwide seller of coffee to consumers using a range of brands. OldTown and Super are its regional brands in Southeast Asia. The share price has been stable, as we can expect from this type of business. The dividend yield is a modest 2.65% because the company is still paying off debt and making acquisitions. I had a 2% portfolio position for over a year in JDE Peet's. Following my mechanical allocation rules, I considered adding another 2%. However, I found myself lacking the confidence. At a P/E ratio of 18, the shares look somewhat expensive. A quick discounted cash flow valuation confirms this impression. I decided not to add to this position.

Next, I found myself questioning my original purchase of JDE Peet's. I might have overpaid for my initial position and decided to sell off my existing JDE Peet's position. I still like the company. It just was - and still is - too expensive. I will look at this share again should the price drop -25%, for example, during a general market collapse.

Sold: United Plantation Berhad (KLSE:2089), Spritzer Bhd (KLSE:7103), Ajinomoto (Malaysia) Bhd (KLSE:2658), Apex Healthcare Bhd (KLSE:7090), Oriental Holdings Bhd (KLSE:4006)

These are all well-run companies. I only sold them off because I reorganized my Malaysian portfolio. After careful consideration, I decided that I have sufficient confidence in the Malaysian business environment to take 5% positions in Malaysian shares instead of 1% positions. I already take 5% positions for all my European, British and Singaporean shares. For Malaysia, I decided to top up InNature Berhad and DKSH Holdings Malaysia Berhad to 5%. Both shares seem undervalued. 

I sold all my other Malaysian 1% positions. Apex Healthcare, United Plantation and Oriental Holdings did not really fit in my consumer staples strategy in the first place. Healthcare, palm oil and automotive are not within my circle of competence. I find Spritzer (bottled water) and Ajinomoto (condiments) easier to analyze. However, both stocks seem fairly valued at the moment. I placed them on my watch list. 

Disclosure: Currently no positions in any of the companies mentioned, except for Agronomics Ltd, InNature Bhd, and DKSH Holdings Malaysia Bhd, which I still hold.