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As this year is coming to an end, roughly 1 month and a few days to Christmas, few days to thanksgiving, some ups and downs, I thought it is good to write down how I feel today for future references.

As an optimist, I do not doubt my ability to find investment opportunities that will perform reasonably well over time. I do not have a track record except sporadic wins here and there.

This year had been the most emotionally excruciating year I have ever been through in my rather short investing journey, and one I do not want to forget

The early win

A $150million market cap company doing resale e-commerce. I got the idea from a famous investor 13F and immediately looked into why it is a compelling investment opportunity. Lo and behold it doesn’t take much reading to figure out that it is within my comfortable area of investing. They recently replaced the CEO, who focuses on EBITDA and cash flow and EBITDA projection has been trending in the right direction. The stock is battered too much that it became an interesting opportunity. I took a 2% of NAV bet in the company, which later I doubled down few months later leading up to an earning report that shows positive EBITDA.

Stock doubled and I sold out of the position, realizing almost 4-5%.

What a great start I thought. I even started to think about how to save on tax, more on this later.

In the run up, I kept thinking about how the stock would triple, quadruple, those were days of heavy trading volume, and as soon as the trading volume starts subsiding, I started selling out of the position. I rate my execution 7/10, that I didn’t sell too early, or too late, the stock later normalized but still elevated compared to my average buying price. The stock was meant to be at double the price I bought it at, if the condition stays the same.

The treasury

If there’s one thing that defines 2024, it is the treasury yield. What starts out as a very optimistic start of the year, everyone thought that the Fed will cut so many times and inflation will go to target 2% immediately, proven to be a VERY bumpy ride. Inflation stays persistent longer than usual and the market swung to the other end of the spectrum, estimating no cut.

It only took a few very weak reading to swing the market all the way to other end, from flying high to soft landing, hard landing, no landing, etc. It took Warren Buffett getting out of 25% of his holding of Apple, a Fed that didn’t cut rate followed by a weak economy reading. Everyone immediately thought the Fed was wrong, equity plunged 10%, and now we’d have recession.

There were a few weak reading after that, and in the next chance, Fed cut 50 bps. The market swung from no cut, to now expecting few 50 bps cut in the remainder of the year, and this was September, almost 3/4 of the year has passed.

Lo and behold, economy stayed strong, few more readings after showed inflation is going lower but not as fast, Trump won the presidency and treasury yield which was about 3.5% in September, is now at 4.5%.

I signed up for a roller coaster ride.

I am a believer in de-worsification. I run very concentrated and leveraged portfolio, which amplifies the gain and the losses. Howard Marks had a very good article mid this year, that says that how good you are as a manager doesn’t depend on your return solely but your risk. If you make a very good return in the up year, but also very bad return in a down year, you are just taking more risk. I belong in this camp.

A HUGE bet that I am making is on the treasury yield, in particular through a very defensive, high quality REIT of a beaten down, almost hated by now, vibrant city in Asia. The REIT has been a big part of my holding and has gotten bigger this year due to my risk-reward calculation. The REIT has managed to increase its revenue, income, despite all the gloom and doom about the city, it has low leverage of about 20%, safe amount of the loan are fixed rate, yet punished by the swings in treasury yield.

I can find no safer bet than this one, which I am willing to put a significant chunk of my capital, and with leverage with it.

The result, is the roller coaster ride I am on right now. My portfolio was up almost 60% only to see ALL of that gain disappear today, 1 month to Christmas.

Not that Christmas or yearly result matters to me, but I had imagined sipping my glogg and enjoying the Christmas market knowing I’m up 60-70% for the year. While we still have one month to that target, I don’t have much hope.

On China

A staple of self-proclaimed value investors in the world today is China. Great companies are trading for bargain, and have been for the past 3 years. This year, and part of the reason for the September euphoria in my portfolio is that the Chinese Government stepping up support for financial market. David Tepper came out on TV and said he was buying “EVERYTHING”. That is a huge confidence, especially if you are on record, on national television making such statement.

Only 1 months after the euphoria, you can get the same shares for 25-50% off!

It is also odd I feel, that somehow the treasury yield also have correlation with China stock prices, therefore I now believe that my portfolio is basically a bet against the treasury yield.

My first merger arbitrage bet

This year, I read a book about Warren Buffett’s early investment partnership. I discovered that on top of the regular buy-and-hold investing, the oracle also did merger arbitrage opportunities.

The idea is to find companies that are engaged in an M&A deal, that for whatever reason the market is pricing incorrectly

I found my first deal as such in Capri Holdings. I was flipping over my ValueLine where I found about this company which was to merge with Tapestry for $57/shares and was trading at $30 because FTC sue for preliminary injunction on the deal. It proves to be a very expensive lesson.

The story is about two holdings company that holds handbag and accessories brands in “affordable luxury” market. I didn’t even know that such market exists and whether it makes sense to have such market segmentation. That raised an eye brow. Michael Kors/Versace/Jimmy Choo was going to merge with Coach/Kate Spade/Stuart Weizmann. I started my reading on the subject and an initial position of about 3% of my portfolio, I thought that the current price represent the price if the deal didn’t go through – so heads I win, tail I don’t lose much.

Time slows down when you are waiting, indeed this is the case with this story, starting from subpoenas, findings, trials, FTC’s inhouse experts miscalculation, I thought the odd of the deal going through is very high and that this case is just politicized and has no merit. The market seem to have thought that way when the trial was over and the hearing was pending. I was up 20% on the position which I had tripled from the initial sizing and now was considering if I should play it safe.

My average price was $34 and stock was trading at $42, those who read the court filings, hearings, etc will find that the FTC basis was a bit off and that the merger was going to happen. I was going to have my ideal christmas, sipping glogg while watching at how well my portfolio was doing this year. Few days before the election, result was out – the judge granted the FTC the preliminary injunction, stock was down 50%.

There was a lot to learn from this experience:

1. The FTC was suing for preliminary injunction, was the bar lower?
2. Should I have taken the profit, switch it into a call option on the agreement termination date?
3. Should I have taken the profit and buy some put option against the position to protect the downside at the cost of a portion of the profit?
4. Should I have just taken the profit and go away, I was 1/3 of the way in terms of the potential profit

Regardless, I was lucky that I didn’t make my living based on this because some portfolio managers got fired because of this.

The world is unfair

I think value investing is investing, there’s no other type of investing. You invest based on fundamentals of the company. As an aspiring good investor, I try to learn from the world’s best and that means reading newspapers, trade periodicals, annual reports, earning transcript, quarterly report.

Yet, folks who are up bigly this year are those who bet on Trump winning the election, bitcoin ruling the world, and TSLA call options.

The path I follow gives a ground to any decision I am making, the hope is I don’t lose much, but it is still hard if the world keeps on giving you lemonade. There’s only so much sourness you can accept.

Hope

I think what keeps me going, is hope. I might not be a smart investor or a great investor, but I have hope. I try to get better everyday, even though sometimes it means taking few steps back. I have taken a lot of steps back in the past and will do so in the future, but I have hope, and that is what is keeping me going, with the hope that I will thrive eventually, and proven right.

There have been plenty of advice on when to buy stocks, deciding what stocks to buy. One can look at fundamentals, business of the company, momentum, insights, fair value with plenty margin of safety and so on. However, not much has been said on when to sell. One that’s probably most remembered is the following:

“Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling” – Peter Lynch

This thought come to mind when I was moving into my new rental apartment. The worst part of renting is that you may not fit your old furniture in the new place, hence the need of selling and buying.

In this occasion, I am a buyer. I needed to furnish my new apartment, I know I will be moving out in a few years, so I don’t want to buy new or fancy furniture that won’t fit my next place.

I browsed on second-hand items marketplace for furniture in great condition that are >50% off retail, sometimes delivered to your door steps, assembled. Yes, I am a big fan of IKEA furniture, but I’m not a fan of having to assemble them myself, or paying >20% of the furniture price for professional assembly service.

While hunting for these furniture, it struck me:

1. Sellers are most responsive when the item is recently posted, and that the seller indicates that he/she needs to sell it by certain date
2. Sellers are most willing to negotiate the price down when the seller is obligated to sell (He/she moving out of the country or moving out of a place in very short time, so these items are must sell)

Note the word, obligated – or to certain extent, must sell due to the constraint that are in place. In most cases, this is due to rental expiring or having to move out of town. Sellers of these kinds have very high intention of selling, and willing to bring the price down to ridiculous levels (sometimes >90% off the retail)

I put some thoughts about this experience and realized that, while there are plenty of debate about when to sell a stock, one can look at the inverse and it becomes more deterministic, i.e, how to NOT have to sell a stock:

1. You don’t want to put yourself in a situation that you MUST sell (margin calls, having needed emergency money, having to meet redemption)
2. You don’t want to put yourself in a situation that makes you have high intention of selling – which is going to make you very responsive to Mr. Market
   • You don’t want to buy speculative issues that at some point, you need to sell as it doesn’t really fit your portfolio
   • You don’t want to buy issues that you are not comfortable holding for a long time (i.e, you feel itchy to sell)

This rhymes with one of the book I read, which says statistically, it is better to buy all in one go, and sell piece by piece. In other words, DCA when selling, not when buying. By definition, the situations I described above prohibits you from DCA-ing when selling.

Obviously, it is easier said than done, or one may say that this is very obvious. I found myself a good hunter for bargain, but not necessarily smart about putting myself in a position not to have sell a stock.

During a late-night random chat, a wise person in our group raised an important point, which I thought is applicable not only to the situation it is describing but also generally in our lives, and in investing.

“Good warlords win most battles he fight. Great warlords fight the battles he is certain to win”

It a simple sentence, almost sounds like a riddle but it has deep or even almost profound meaning.

In our lives, battles are almost certain, we are not talking about fights, it could be competition, it could be an important meeting, it could be an interview.

“Seize every opportunity” – they say

Most of us these days are taught to take all the opportunities that are presented, no matter how big of the chance we can seize it. Inevitably and by definition, this leads to, sometimes, failure. This also stretches our physical and mental resources on opportunities, that might not even be worth taking, despite the success chance being high (or low) – at this point doesn’t matter anymore as the outcome is not worth fighting for.

In other words, when presented with opportunity, we forget to ask two important questions:

1. How good is the positive outcome?
2. How likely I can achieve the positive outcome?

Instead, we march on when we see an enemy coming. In today’s society, people are crazy about seizing every opportunities that they are presented with, that they get into stress, constant grinding, regular drug prescriptions, some even lose their lives because of it. The society rewards and glamorize hard work, being the hardest worker in the room, that often translates to “OT” instagram stories and “plz fix” pictures from clubs or motorbikes. Advances in medicine translates to drugs that can make people endure grueling work hours, stress, overcome depression (temporarily), in pursuit of machine-like endurance to physical and mental limitation

This sentence, also have very stark resemblance with what Warren Buffett says on the game of baseball or the punch card.

“The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling, ‘Swing, you bum!’“

“You only have an opinion on a few things. In fact, I’ve told students if when they got out of school, they got a punch card with 20 punches on it, and that’s all the investment decisions they got to make in their entire life, they would get very rich because they would think very hard about each one.”

In investing, just like picking our battles in life, learning from the great warlords, we don’t have to seize every opportunity. We only “fight” when we know we are going to win.

Turns out, while human civilization have greatly improved from the time back in the day where people would be fighting with swords and traitors get beheaded, (and you can also get beheaded for just being innocent peasants), to iPhone, and satelite internet, space exploration, robo taxis and genome editing, the general rule of seizing opportunities have been the same. It’s the society that have changed, for the worse.

Be great warlords.

Warren Buffett famously said (not an exact quote):

Rule #1: Don’t lose money. Rule #2: Don’t forget Rule #1.

I only recently came to understand the wisdom behind these rules, a realization that came with changes in my own life circumstances.

Previously, I had a six-figure salary, with a steady monthly income from a stable, large corporation that was unlikely to go under anytime soon. Now, my situation has drastically changed; my monthly income is no longer guaranteed.

My approach to investing has shifted significantly. In the past, I considered an investment with a potential 50% return and an equal chance of a 50% loss to be viable. Today, I would only consider investments that offer the potential for 3-5x returns in the long term, with a minimal risk of losing up to 10% of the invested amount.

On social media platforms like TikTok or Instagram, we often see “finfluencers” promoting various strategies. However, these recommendations may not align with everyone’s personal circumstances or natural inclinations.

Imagine living paycheck to paycheck with less than $10,000 in assets under management (AUM). You might be tempted to gamble it all on an opportunity that could either quintuple your money or result in a total loss, simply because you could potentially recover from the loss within a few months.

This mindset changes drastically with $100,000 in savings. After working hard to accumulate this amount, you’re less willing to take high risks. Losing even a portion of this amount feels significant, especially if it would take you 12-24 months to save that much again. However, when money is still flowing, you are inclined to think that – it’s okay to lose X because I know I can pay back X in 1-2 months.

Another perspective to consider is this: With $100,000, a 10% gain yields $10,000. However, if you lose $50,000, a 10% return on the remaining $50,000 only adds $5,000. To recover from a 50% loss, you need to double your remaining funds. If doubling your money were easy, everyone would be wealthy—clearly, it’s not.

As an investor, you must assume that there’s no regular cash flow coming in. Investing is your primary focus, and the money you have is all you can work with. Therefore, it’s crucial to avoid losses and not rely on the idea of making up for them in the near future. A commitment of 12-24 months is substantial and should be taken into account when assessing risk.

Consider this: with $100,000, a 10% return yields $10,000. However, if you lose $50,000, you’d need to double your remaining money just to get back to where you started. Doubling your money is far from easy, or everyone would be wealthy by now.

As a full-time investor, your greatest asset is time. You have the time to analyze, research, and identify opportunities. It’s easier to find investments with a 90-10 chance of a 3x return or a 10% loss than those with a 50-50 chance of either a 50% gain or loss. Fewer opportunities meet the former criteria, and finding them requires thorough research, including reading 10-Ks, 10-Qs, and earnings transcripts.

Another advantage of being an investor is the flexibility in holding assets. You can sell at any time—whether it’s tomorrow, immediately after purchase, or hold for several years—assuming you can cover your living expenses. This is different from professional money managers who might be forced out of their positions if their investments underperform relative to benchmarks within a year.

As Jack Ma once said: “Today is hard, tomorrow will be worse, but the day after tomorrow will be sunshine. Most people die tomorrow evening.”

I came to a realization as I was reading Altria’s most recent quarterly earnings report and call transcript: Altria is such a wonderful company, I thought.

While my understanding of what it does is limited, as I have yet to read its annual report, I have some idea of its operations. It sells cigarettes and is venturing into the vape or so-called smokeless products. In a nutshell, they are selling nicotine in various shapes and forms.

I thought to myself, what a beautiful business: it generates a lot of profit and cash flow and returns a relatively good amount of its capital to shareholders. You have a product that contains a chemical known to develop addiction, but at the same time, it is legal. It is frowned upon in society, but it’s legal, and I have many friends who smoke packs of them every day. Yes, I think I am a second-hand smoker. A lot of fund managers are likely to avoid it as well, as I don’t think it falls on the favorable side of the ESG spectrum.

Then it struck me: good businesses are not those that give me a 20-30% return overnight but those that compound for a very, very long time. For a business to be able to compound for a long time, it must have a sustainable business model with a large moat. By definition, the sustainable business model needs to incorporate some aspects of ESG (Environmental, Social, and Governance) principles in order to be able to realize its economic sustainability. It needs to be sustainable for the environment, society, and its corporate governance.

I think ESG matters, just like a lot of other things, and just like a lot of other things, people tend to go overboard with them. With ESG, it’s gotten to a point where companies implement ridiculous policies just to show that they’re ESG or DEI (Diversity, Equity, and Inclusion) compliant, often just raising eyebrows and, on some occasions, being detrimental to their business.

When I was still working in IT at a financial services firm, our CIO sent out an email about how to be inclusive in the terms we use, which included avoiding terms like whitelisting/blacklisting, master/slave, and man-days. It was also unspoken but happened that people were requested to hire a specific gender, racial group, or person with a disability to fulfill the “DEI” quota. That is just ridiculous. It went so far that during an interview session for new hires, there was a row of women university students sitting in the waiting room. One of them asked me during the interview, “Are we hired for diversity because all of the applicants are women?” which is uncommon in the IT field.

To conclude, this is to remind myself that ESG matters, not because you need to tick a box, but because it directs you to the economic sustainability of the business. Great businesses are those that can compound value to shareholders for a long time.

I felt that it was just on time for this one. I have heard about Liberty Media previously, though I have never looked into it in more detail. I got interested in LSXMK/SIRI and started deep diving into it to find out that this could be a good opportunity.

The Opportunity:

Tracking stock trading at a discount to the underlying, which is going through a (relatively certain) merger with the underlying, converging the two stocks tracking the same entity into one, with potential gain due to:

• The underlying may have been shorted, hence the price is artificially depressed.
• Thus, there is a higher chance that the tracking stock may then converge to the underlying price, which is trading at a 40%+ premium.
• The pending merger caused the underlying stock to halt stock buybacks, which have supported their price in the past.
• Potential index inclusion post-merger.
• The underlying stock represents a very good business (monopoly) with more tailwinds than headwinds going forward.
• The underlying business is well-positioned as an acquisition target by tech platforms looking to acquire a loyal subscriber base and directly tap 30M+ customers.

About the Opportunity

Liberty Media owns about 80%+ of SIRI. Unlike Berkshire Hathaway, it has made its holdings in the form of tracking stock that anyone can purchase. In this particular example, Liberty’s holding of Sirius XM is traded under the tickers LSXMA, LSXMB, and LSXMK. This has become an interesting opportunity because, unlike their other holdings, in December 2023, Liberty Media and Sirius XM announced that they would merge the two into a combined “New Sirius XM” trading under the current Sirius XM ticker. It is also announced that the conversion rate will be about 8.4 SIRI per LSXMx stock.

As of the time of this writing, the tracking stock is trading at a relatively high 30%+ discount to the underlying stock. You might also see it the other way: that the underlying is trading at a 40%+ premium. We don’t know at what price the new entity will trade. The company plans to vote on 23 Aug 2024, and if everything goes smoothly, as we expect it will, the new entity will start trading on 9 Sep 2024.

The Arbitrage Opportunity:

The arbitrage opportunity is to buy tracking stock and short the underlying stock, pocketing a risk-free profit. However, the underlying stock has been trading in a more volatile manner, with shortable stocks not available and borrowing costs that could fluctuate and become very high.

The Long SIRI Opportunity:

To look into half of the arbitrage opportunity—that is, long tracking stock—we need to understand what the underlying company is about, as we may need to hold it longer term.

But, What Is Sirius XM?

Sirius XM, in a nutshell, operates a monopoly in satellite radio service in the US. It is a merger of Sirius and XM from pre-2010, and Liberty Media came in to provide debt to them. It has since grown its subscriber base rapidly until recently, where the number of subscribers is tapering and going down. The business is very good with roughly 50% ROIC; however, its net book value is negative due to the high load of debt it has. The company itself has been using its free cash flow to pay dividends and conduct share buybacks. Therefore, the debt here acts more like leverage than necessity.

Headwinds and Tailwinds

• The company’s subscriber count growth is tapering off. While we think the company will be able to grow the subscriber count, our base case is that the subscriber count will stay stagnant, due to the increment of new subscribers being offset by those who are churning.
• The company is currently going through a capex cycle to renew its satellites, which, once completed, can result in low maintenance capex, resulting in higher free cash flow, ultimately enhancing shareholder return.
• The company has very high debt compared to its assets, but as mentioned, more as leverage instead of necessity. It is planning to utilize its FCF to pay down the debt. Another tailwind to this is the Fed rate hike cycle is ending and going into the reduction cycle.
• The company has a monopoly in satellite radio, which, while facing competition from the likes of Spotify and YouTube, has its own niche audience, mainly those who commute within areas with poor coverage of internet service.
• As a bonus, there could be potential for a Sirius XM acquisition, supported by Liberty Media and Sirius XM simplifying the structure, unlike in the case of other Liberty holdings.

Concluding Thoughts

I have gone long SIRI through LSXMK, which hopefully provides me access to a stock with some tailwinds (artificially depressed due to execution of arbitrage opportunity, temporarily suspended buyback, potential index inclusion) that represents a business that has more tailwinds than (manageable) headwinds at a hopefully instantly collapsing discount.

It’s amazing how things have changed over the years. In 2019, while I was traveling to a few countries, I got tired of traveling each year at year-end and told myself, “This is getting tiring.”

Lo and behold, the four years that followed were nothing short of crazy. Starting with COVID-19, which I discovered earlier than others in the world thanks to my proximity at the time to the point where the outbreak was first discovered, followed by one of the most rapid stock market crashes I’ve ever experienced in my life, and then one of the most rapid stock market rebounds ever driven by the decisive action taken by the Fed to lower the interest rate to 0%.

Since then, we had SPACs, and even SPAC Jesus going on live TV, followed by Crypto, from Bitcoin, to Ethereum, to Dogecoin, to Shiba Inu coin, followed by NFTs. Don’t forget, everyone was buying TSLA stocks back then.

The Fed then embarked on (at least) the most rapid increase of interest rates in my life, raising the rate from 0% to 5.25%, and suddenly all that madness started disappearing. I rarely hear about SPACs or NFTs anymore. Bitcoin dropped to $18k and has since bounced back up. The only use case of Bitcoin that I can think of is for evading taxes, but I won’t go there.

Then in 2022, we had GenAI.

Coming from a computer science background, I’ve heard about AI and how it has evolved from its early days as applied statistics, to artificial intelligence, machine learning, deep learning, and now Generative Artificial Intelligence. It’s quite neat; you have a tool that can basically provide you with answers as if you’re talking to some assistants in a non-programmatic way, unlike Siri – which feels pre-programmed.

At first, no one knew what it was capable of, but in the 1-2 years that followed, it was, again, nothing short of crazy.

Every tech company seems to be building its own model. VC funding goes towards AI projects. If you have a real business and are raising from VCs, the question you will get asked is, “Where’s the AI? Our IC won’t be approving it if there’s no AI angle.” AI businesses are raising tons of money at incredibly high valuations.

I always wonder what they put in the business plan. It’s probably: “I need $100 million on a $500 million valuation (because you typically give 20%) to train the model that I am building, and I need lots of NVIDIA chips and compute power for that.”

NVIDIA stock soared, followed by other stocks which has AI direct and more recently, second/third/n-th order effect, from the chip manufacturer, to the server builder, server rack provider, to even the energy provider for the data centers. Companies start mentioning AI in their quarterly report, from software provider, to probably restaurant operators, apparel companies, retailers. The stronger reason is not because they are actually benefitting from it directly (or even indirectly) in a meaningful new way since GenAI, but it is because their stock price will get punished if they don’t mention it.

Recent writings by Goldman Sachs and comments from top company leaders have shed some more light on this matter. Skeptics start asking about the ROI on these capital expenditures related to GenAI. While that remains questionable and time will tell, top company leaders start mentioning their true intention. They invest in this because the risk of under-investing in it is higher than over-investing. Which is another way of saying, I also don’t know the ROI, but if I don’t, then I have a risk of going down.

That doesn’t sound like a good thing to bet our own money on, does it?

This exact reason has driven NVIDIA to be one of the most valuable companies in the world. A simple way for me to determine whether it belongs there or not is:

Do you use it every day?

I use Apple iPhone, communicate on WhatsApp and Instagram, use Google search engine, MSFT Windows and Excel spreadsheets, watch Netflix, buy things on Amazon (and recently subscribed to Amazon Prime), and billions of others do. I believe billions of people in this world have never even seen an NVIDIA chip, yet they buy the stocks. This is very similar to where TSLA was back in 2020-2021 when people thought that everyone was going to drive multiple Tesla cars and have their homes powered by the Powerwall, and so on. Yet, nowadays, a lot of companies are going back to building gasoline cars.

I belong to the camp that truly believes that AI is going to change how we live for the better, like other inventions such as electric cars, mobile phones, the internet, gasoline cars, electricity, and oil. At the height of the internet bubble, you had hundreds of companies doing internet-something, and I don’t see them existing anymore now. Back in the day, you had hundreds of car companies; nowadays, you have only a few that are still standing.

I don’t think it is wise to bet against the excess, but for sure it feels excessive, and anything excessive will normalize.

Time will tell.

Link to the Goldman Sachs Report: https://www.goldmansachs.com/intelligence/pages/gs-research/gen-ai-too-much-spend-too-little-benefit/report.pdf

Link to the Berkshire Hathaway Shareholder Meeting 2021: https://finance.yahoo.com/video/2021-berkshire-hathaway-annual-shareholders-142101852.html

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