Wednesday, July 17, 2019

Legendary Investor Howard Marks and the Market Cycle

“The outstanding investor makes money in the good years with the risk under control.” - Howard Marks 

Hey guys, I hope y’all are being prudent in your investments. I just got back from Rome about a week ago. It was great just walking around the Roman Forum where giants like Scipio Africanus and Cicero used to walk. Limonata gelato and oxtail pasta was pretty fucking awesome too, and came in a close second in my list of favorite experiences in Rome. In the spirit of the ancient Roman Republic and its pursuit of excellence, I will resume my journey to grow by getting a re-up in investment knowledge. To this end, I will be studying some of the greats in asset management whose ideas I have yet to explore.

In this article, I would like to talk about some of the insights from Howard Marks, co-founder of Oaktree Capital and one of the most brilliant players in the high yield credit space. I recently read a memo of his on the market cycle titled The Seven Worst Words in the World (too much money chasing too few deals), which I found absolutely fascinating. I think his memos should be required reading for value investors alongside Buffett’s letters to shareholders.

In essence, optimism and benign credit markets lead to high risk tolerance (low yield demanded and loose credit terms), and fucked up things like a financial crisis tends to happen when assholes throw caution to the wind and take on an excessive amount of risk. After a market crash people tend to be risk averse (as they should) which result in high yields. People start to get attracted to the yummy delicious high returns and invest/lend more. Risk aversion eventually gives way to indecent risk tolerance, and the cycle repeats itself because investors have the memory of an avocado.

By lowering interest rates and injecting liquidity into the system, central banks also drive unwarranted optimism and dangerous risk-seeking behavior. Inept idiots, as one of my favorite YouTubers like to say, every last one of them central bankers.

Anyway, while we may not be able to predict when a downturn will occur nor its severity, we can benefit by correctly interpreting where we currently are in the market cycle and adjusting our portfolios accordingly.

For instance, Oaktree Capital sold a lot of assets before the Great Financial Crisis (GFC), and raised the standards for securities that they would invest in. And in what I thought was a masterful stroke, Oaktree established a fund to be held in reserve until a special buying opportunity materialized (committed capital for the fund reached nearly 11 billion dollars). This resulted in Oaktree having a significant amount of capital to deploy during the crisis (bottom of the market cycle) when attractive opportunities were abundant. This no doubt made their investors very happy. It wasn’t even like Oaktree predicted the GFC or nothing, they just saw that the rate cuts by the Federal Reserve had caused people to invest in risky assets in pursuit of higher returns.

For individual investors, it may be prudent to trim or sell stocks of heavily indebted companies near the top of the market cycle as they may have trouble refinancing their debt when credit conditions tighten in the eventual downturn. Investors may also want to avoid companies with poor fundamentals near the top of the cycle as these companies are at risk of incurring significant operating losses once a recession hits (investors should avoid companies with poor fundamentals in general anyway unless they are pursuing a cigar butt strategy as part of an overall diversified approach).

Of course, it is important to have cash in reserve to deploy when there is blood on the streets and investors are panic selling to raise a couple bucks to buy a shovel so they can dig a hole in the ground where they can bury their motherfucking heads in shame at their irrational greed (greed is a good thing so long as it is rational).

I also learned the hard way to maintain a diversified portfolio with significant liquidity. By having a large exposure to shale oil and gas companies, my ability to raise cash is impaired as the sector is currently being sold off. Had I invested more broadly across sectors, there may be segments of my portfolio that may be overvalued now which I can sell to raise cash.

Look, I’m still a proponent of buying great companies at reasonable prices (or preferably on the cheap) and holding them for the long-term. But great companies tend to be overvalued at times due to the sheep mentality of fund managers, institutional investors, retail investors, pretty much everyone really. There are also instances where there might be attractive opportunities in significantly undervalued but not so great companies (just don’t be a fucking moron lacking self-discipline like myself, and expose too much of your portfolio to these types of investments).

So, where in the market cycle does Marks think we are in? Well, based on what I read in the memo he seems to think investors are very optimistic and willing to bear significant risk. He points to high debt and looser credit terms, leveraged debt being double of what it was in 2007, high debt/EBITDA ratios, private equity and venture capital funds seeking to raise huge amounts of money, and deals with questionably high valuations. I’m not even scratching the surface of the amount of valuable information Marks provided, and I really advise you to take a look at the memo.

Anyway, I believe Marks thinks that the market cycle is close to the top, and I would agree. There is overwhelming evidence that many market participants have devolved to risk junkies. Just to be clear, Marks does not think that current conditions are as bad as they were in 2007, therefore he is not predicting a crash. He is also not saying that people should stop investing and revert to 100% cash portfolios, just that they should be cautious and favor an investment approach that emphasizes limiting losses when markets decline.

The memo was dated 26 September 2018, so I don’t think much has changed. In fact, the market continues to give minimal fucks about risk with Italy’s 2-year bond yield temporarily turning negative recently, a country with government debt to GDP of over 130%. Beyond Meat, which makes plant-based burger patties and forecasts to achieve a whooping adjusted EBITDA of break-even in 2019, has a market cap of 10 billion fucking dollars (granted the company is growing very fast). Then again I might be biased against Beyond Meat. I mean our ancestors had to compete with them sabre tooth tigers to claw the human race to the top of the food chain so that we can enjoy beef, chicken, pork, and other delicious animals. I feel that replacing meat with vegetables masquerading as meat is a mockery to the memory of our ancestors, but maybe that’s just me.

Anyway, Marks has a book called Mastering the Market Cycle, which I hope to read sometime soon. Maybe it will teach me not to be an emotionally driven simpleton that mindlessly double down on investments without taking the market cycle into account. As always, thank you for reading. Take care and stay rational.

Sunday, June 23, 2019

Quick Analysis of ZOZO

Please read the disclaimer here: Enjoy the article, bitches!


Hey yo, it’s been a while. Since my last blog post, I have left my job as an investor relations consultant to focus on the final level of the CFA exam, play some PS4, and do some traveling. I also aim to set up my limited partnership similar to how OGs like Warren Buffett and David Einhorn did when they were starting out. 

I got into the corporate game to get some experience on how to run a firm, and to be in the shoes of an employee to learn how to better motivate people in the future. Overall, I gained a lot from the 2 years at my previous job, but the rat race just isn’t for me. I am a motherfucking dragon, and I need the autonomy that is not afforded by most early stage jobs to do my best work.

On my goal to become a CFA charterholder, I got my hustle on preparing for the level 3 exam for the past few months, annnnnd… I fucked up the essay portion again this year. But at least I did my best this time around instead of just taking a nap like the last time, so yay for effort?

Anyway, in this article I will be doing a quick analysis of ZOZO, Inc.  I purchased 100 shares in ZOZO a couple months ago at 1,859 Yen per share. For the financial year ended 31 March 2019, the bulk or 96.3% of the company’s gross merchandise value came from its ZOZOTOWN fashion e-commerce site.

Update on the Greedy Dragon portfolio: Since my last blog post, apart from my investment in ZOZO, I sold all my shares in Cloudpeak Energy at USD0.19 per share (fucking dumpster fire investment that one turned out to be). I also sold all my shares in Magni-tech at RM4.50 per share because I needed to fund something on the side, and of course the moment I sold it the stock kept going up to RM5.10 now. Sometimes I feel I'm destined to lose, but fuck fate.

The main reason I like ZOZO is its strong growth rate and its ridiculously good return on equity. Net sales grew by 20.3% to 118,405 million Yen in the financial year ended 31 March 2019. Despite the higher revenue, net profit declined 20.7% to 15,985 million Yen from 20,156 million Yen in the previous financial year. The decrease in net profit was due to higher advertising expenses related to free of charge distribution of the ZOZOSUIT, delivery fee hike by their carrier, higher payroll costs to hire staff for their private brand, and an increase in other expenses.

Even with the lower net profit, the company generated return on average equity (ROAE) of 50.4% which is A5 Wagyu beef  teppanyaki level of awesome. ROAE would be even higher had the company not record extraordinary losses of 3,394 million Yen (4,323 million Yen extraordinary loss in the previous financial year).

At net income per share of 52.20 Yen, and at my purchase price of 1,859 Yen per share, the price/earnings ratio at which I acquired the stock would be 35.6 times which I think is aight given its growth and insane ROAE.

The company forecasts that it will register a 14.9% increase in net sales to 136,000 million Yen for the financial year ending 31 March 2020, with net profit rising 40.8% to 22,500 million Yen. Of course, actual results may differ from forecasts.

I would also like to give a shout out to ZOZO’s management team for their decision to withdraw from its overseas private brand operations. This should reduce the cost structure and allow ZOZO to focus on building its private brand in Japan to a substantial source of revenue and profits before bringing its private brand overseas. It seems that ZOZO is being run like an actual business, which is becoming something rare these days, especially amongst tech companies that care more about being “woke” and other dumb shit like that.

There is a possibility that ZOZO’s private brand business that seeks to provide custom made clothes for each person’s unique body shape could turn out to be something big. I’m investing for their e-commerce site, but this could be a nice little extra if it works out.

Aight my value investing homies, this concludes my quick analysis of ZOZO. Right now I’m waiting on my oil investments to stage a recovery so I can sell down those positions (I pretty much have been for the past 5 years, and I'm looking like a real mark-ass bitch), as there are some really interesting things that I want to do with the Greedy Dragon portfolio. Till then, I will be playing some Sekiro and just chillin. Thanks y'all for reading. Take care and stay rational.

Saturday, March 16, 2019

Another coal investment, another potential bankruptcy

Sup, value investing hombres. Welcome back to another article on how the Greedy Dragon gets bent over and fucked by Mr. Market. So, Cloud Peak Energy (CLD) released their annual report, which revealed that it now has “substantial doubt about its ability to continue as a going concern” a.k.a we might be filing for bankruptcy.

This especially hurts because I already saw my holdings in Alpha Natural Resources go to zero a few years back when it filed for bankruptcy back then. I just didn’t see bankruptcy happening for CLD. No doubt things were pretty rough, but I didn’t expect things to get so dire just after a few bad quarters.

Update on the Greedy Dragon Portfolio: Since my last article on January 6, I sold all 150 of my shares in Skechers at USD32.23 per share. I also bought 770 shares in Northern Oil & Gas at USD2.47 per share, as well as 350 shares in Oasis Petroleum at USD5.65 per share.

Now, I don’t know if CLD will definitely file for chapter 11 bankruptcy, they might get bought out or get new financing or something. But I have no intention of sticking around to find out. On Monday, I will try to sell my entire position in the stock and save what meager capital I can from this position. The company has been bleeding cash and may face a liquidity crisis forcing it to resort to bankruptcy and wiping out existing shareholders.

I will probably look back at this fuck up one day and analyze where it all turned to fucking ash. But here are some of the probable contributing factors to this clusterfuck:

Arrogance: I have held on to a number of investments that plunged precariously, only for them to rebound and for me to profit from dollar-cost averaging (including CLD a few years back). I was too optimistic in believing that things would always work out in the end, perhaps this optimism and complacency hampered my ability to see the situation for what it really was.

It is also likely I didn’t want to admit I made a mistake, and therefore dismissed CLD’s symptoms as a cold when it was actually stage 4 penis cancer.

Shitty Industry: The shutting down of significant coal-based power plants in the US has turned coal mining into a very challenging industry, especially considering the high fixed-costs of coal miners. I should have taken Warren Buffett’s advice to steer clear from industries with poor economics. It don’t matter how much I learn about investing if I don’t digest and apply the knowledge. I guess I’m still a moron after all these years.

Termination of credit facilities: I should have recognized it as a warning sign when CLD terminated its credit facility a few months back, and not replaced it with a new one. Either no one was willing to lend them money, or the facility would come with very high interest rates and covenants.

Use the fucking technology: While unrelated to CLD, I always just tell my remisier what I wanna buy and sell and he helps me make the trade. I therefore have no power to buy or sell once office hours is over in Malaysia. I wanted to sell all my CLD shares when I read their annual report Friday night Kuala Lumpur time (aka morning New York time), maybe I would have salvaged some capital if I sold early in the trading day. Now I’m afraid that I might get back close to nothing. I gotta sign up for an Interactive Brokers or something in future that lets me trade foreign markets anytime.

I guess I’m gonna go get some food now to try and make myself feel a little less like a pendejo. Thank you

Sunday, January 6, 2019

Quick Portfolio Update and Musings on Positioning for Tough Markets

Whaddup guys, this will be a short post on what I have been doing for the Greedy Dragon portfolio. 2019 seems to have started on good footing huh? I for one hope the market recovery continues as I am almost out of ammo. But then again this could be Mr. Market taking us out to dinner before giving us another fucking.

Anyway, the following are the stocks I bought/sold for the Greedy Dragon Portfolio since my last article:

Sold 200 or all the portfolio’s shares in Natural Resource Partners at USD37.92 per share. Didn’t want to sell it but I needed the cash to buy other stocks.

Bought 1,000 shares in Cloud Peak Energy at USD0.74 per share.

Bought 530 shares in Northern Oil & Gas at USD2.37 per share (only a part of my original order was filled).

Bought 500 shares in Oasis Petroleum, 200 shares at USD6.22 per share and 300 shares at USD4.95 per share.

If I had a sizable cash position, then I would be rooting for the market selloff to continue. But alas I don’t, and I’m forced to mostly sit out what could potentially be an attractive money-making opportunity.

Cash may seem like trash in the good times, but it could potentially be put to work in opportunities that could double, triple in value, maybe even more during market selloffs. Let this be a lesson to me to maintain at least 10% of my portfolio in cash at all times, except maybe in the depths of a crisis when I have invested all my cash. Preferably, I hope that I would have the fucking foresight to build a cash position of more than 20% of my portfolio when the market starts to get optimistic.

I exclude emergency cash reserves from the equation; that would be separate from my portfolio and maintained at all times just in case.

Of course before an investor slams his dick or her tits on the table and bet big during a downturn, he or she needs to make sure that they have a sound financial base. If you feel uncomfortable with your current debt situation then maybe you should reduce debt before buying more stocks. Sometimes the market just sells off because people are pussies, but it could also be because the economy is slowing. If that’s the case, income from your employment could be at risk and a high debt burden can really fuck you up.

I also think that investors, once they have built their portfolio up to a certain size, should allocate some of their portfolio to cash-producing assets such as dividend-paying stocks, bonds and rental properties. In the good times the cash flows build up you war chest, and in prolonged economic contractions it allows you to keep on investing even when your cash holdings run low.

Anyway this is just my take. But what the fuck do I know? I’m just an asshole who gets a hard-on for investing. Have a good 2019 y’all, or at least try to. Thank you for reading. Take care and stay rational.

Saturday, December 1, 2018

5-year performance or getting bitched out by Mr. Market

Disclaimer: There may be errors in my calculations. The purpose of this article is to present the performance of my portfolio. This article does not represent advice to buy or sell any stocks. I may, at any time, sell some or all of the stocks that were presented or appeared in this article.

Hey guys, how have y’all been? Things got really fucked up, huh? And if you think that the selloff in the general market from fearful motherfuckers who can’t hold on to their 4 inch dicks (when fully erected) were bad, the oil sector is in the fucking toilet. I felt a bit pleased with myself when I finished calculating the returns on the Greedy Dragon portfolio as at 30 September 2018*, I mean an annual internal rate of return of approximately 8.2% over 5-years isn’t great or nothing as it still trailed behind the 12.2% return of the S&P 500. However,t it still was decent considering all my screw ups and painful lessons learned. As at 30 November 2018, the portfolio's 5-year annual internal rate of return plunged to around 4.4%. 

Greedy Dragon Portfolio update: Since 30 September 2018, I sold 350 shares in Oasis Petroleum; 200 shares at US$14.26 and 150 shares at US$14.28. I also sold 1,200 shares in Northern Oil & Gas;  800 shares at US$4.02 and 400 shares at US$4.41. Finally, I sold 2,000 shares in Maybank at RM9.65. In terms of buys, I bought 900 shares in Cloud Peak Energy at US$1.50. I also bought 300 shares in Oasis Petroleum at US$7.30 per share.

However, just within two months everything went to shit as I saw RM40,000 in market value vanish. Anyway, please allow me to present my portfolio on 30 September 2018*, and on 30 November 2018 after some fuckery by Mr. Market (said fuckery may continue well into the future). 

*30 September 2018 marked five years and a month since inception of the Greedy Dragon portfolio; I forgot a bought my first stock for the portfolio somewhere in early September or late July instead of late September.

Greedy Dragon portfolio as at 30 September 2018
Note on tables: Capital gains exclude forex gains/losses and transaction costs.

Average purchase price
Current price
Capital gains
Current value of holdings in MYR
National Resource Partners
Alpha Natural Resources
Fuck me
Northern Oil & Gas
Cloudpeak Energy
Oasis petroleum


Net portfolio value


I used to display total returns including dividends but won’t be doing that this time around as all the letters informing me of my dividends is in my hometown. It will also take too damn long to calculate it.

Shares sold since inception of portfolio

Average purchase price
Average price sold
Shares sold
Capital gains
Banco Santander
Hua Yang
Kerry Properties
Oasis Petroleum
Cloudpeak Energy
US$ 150.61
National Bankshares
US$ 35.8
US$ 30.67
HKD 22.97
HKD 35.12 
National Bank of Greece
US 0.97
Banco De Chile
US$ 72.82 50
US$ 65.04
Sandridge Energy
US$ 0.46
Comstock Resources
Mongolia Growth Group
Hong Leong Industries
LRR Energy
First Republic Bank
Northern Oil & Gas
Natural Resource Partners

Greedy Dragon portfolio as at 30 November 2018 (when shit has hit the fan)

Average purchase price
Current price
Capital gains
Current value of holdings in MYR
National Resource Partners
US $37.00
Alpha Natural Resources
Fuck me
Northern Oil & Gas
Cloudpeak Energy
Oasis petroleum
US$ 21.55


Net portfolio value

You may have noticed a significant increase in cash. This is due to my recent purchase of a house in my attempt to appear as an adult. I'm not sure exactly how much I will be withdrawing from the portfolio though, but it will be close to RM50,000 to help pay for the down payment of my new house. I guess one good thing about having to raise cash for the down payment is that I trimmed some of my oil-related investments at close to the 52-week high. However, this has nothing to do with skill. It was a last minute decision to sell that happened at the right time. 

Yeah, taking large paper losses is tough, especially when my liquidity is currently stretched. But I have been through much worse in my investing journey, like the great financial crisis or the third or fourth time oil stocks plunged in the past few years. This current bullshit is nothing. I just gotta suck it up and hustle to scrape together capital to keep investing when fear is running rampant in the markets.

It is in these tough times where the real money is made. And although I don’t feel it right now, I know that I should be excited that I have the opportunity to tap into my analytical skills and guts to navigate this chaotic period and emerge stronger at the other end. This is the chance to prove to myself that I am legit, and not some jerk off pretending to be a value investor.  As Omar Devone Little, one of my favorite TV characters ever, once said: “How you expect to run with the wolves come night when you spend all day sparring with the puppies?”

Thank you for following me on my investing journey so far, and I hope you’ll check in from time to time. Take care and stay rational.