Sunday, July 31, 2016

Another Lesson Learnt From Deep Value Investing - Krisenergy Ltd

After reading about Investment Moats latest post on Swiber Holding Ltd and his comments on Deep Value Contrarian Investing, I made a comment:
"Hi

If an investor is using Deep Value Contrarian style (like me sometimes), he must be able to understand it is “HIGH RISK, high return” – note the capital letters.

He must also have experience, able to endure the ups and DOWNS (mostly downs) and understand financials as well as the business model.

He must also be able to exit when something goes wrong.

Only by understanding these factors, then should the person go into deep value investing.

Looking forward to your next post!

Regards,
TUB Investing"


Therefore I will emphasize again - Deep Value Contrarian Investing is a high return but also HIGH RISK style.

I have been engaging in some of this investment style since March 2016 and the results have some far been slightly better than average. But it should have been better.


Other than the factors I stated above, deep value investing requires investor to assume certain factors and if you get the assumption wrong, you lose.

Here is one of a recent example that I made losses in:

Krisenergy Ltd was another one of the deep value stocks that I purchased recently. My main purpose of purchasing this stock was its deep discount to book value and I wanted a stock that was a direct proxy to oil prices. My assumption was that I expect oil prices to rise in future.

Krisenergy Ltd was a oil rig operator and its revenue is a directly linked to oil prices.

When Swiber Holdings Ltd announced its winding up decision, I was suddenly smacked with the facts of just how bad the oil industry is in (I already knew its bad but not this bad). This winding up will cause a ripple effect within the oil and gas industry and Krisenergy Ltd will definitely be affected.


Since my purchase of Krisenergy Ltd was on the assumption that oil prices will rise in the near future, and in addition with all those news of oversupply of oil recently, I decided to give up on Krisenergy Ltd. I sold off all my holdings and made some losses.

Despite this incident, I will like to say that I still believe in Deep Value Investing style. This is a style that has been used effectively since Benjamin Graham days. The main factors to excel in this method is to understand the business deeply and have faith and belief in your catalyst assumption.

*Do note that even when Swiber Holdings Ltd withdraws its decision on winding up, I will still sell Krisenergy Ltd at a loss. This is because withdrawing the decision does not mean it is in a better position. It is just delaying its death only.

If you are interested in deep value investing methods, do come and hear about it in My 2nd Sharing Sessions with T.U.B in August!

Another contrarian method is my Triple S Scorecard investing style. If you are interested, do give my initial Triple S Scorecard a try. It's still a good tool!
 

Do note that I will only be releasing the Enhanced Triple S Scorecard for those that attend My Sharing Session with T.U.B. If you are interested to attend the next Sharing Session, do not hesitate to contact me directly.

Oh... and do remember, please like our Facebook page - T.U.B Investing.

6 comments:

  1. Hi

    Thank you for your post. I really like your honesty of admitting that you make losses sometimes. But I am sure if you believe in it, it will pay off handsomely in future. Tks!

    Oh ya. I attended your first sharing session. I really like your Triple S scorecard. I highly recommend it.

    Regards


    Augustine

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  2. Hi Augustine,

    Thanks for dropping by and commenting.

    Glad that you like the Triple S Scorecard. Hope it will bring about good gains for you in future.

    Regards,
    TUB

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  3. Personally, I feel that deep value investing is not a high risk high return strategy. If done properly it will generate good and consistent returns in the long run. Have said that, there are a few things to consider in the aftermath of this investment loss. 1) have you diversified enough into a portfolio of deep value stocks knowing that it wasnt a good period for energy stocks? 2) have you applied appropriate discounts on the value of its assets in the balance sheet? with oil prices hitting lows, certain assets could be marked down i.e receivables and fixed assets 3) does the company have enough cash reserves to outlast the tough times? Kris energy has been losing money for years even before the oil crash shouldnt this considered?

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    1. Hi Asiancontrarian,

      Thanks for dropping by. For this strategy, I actually focus heavily on P/B and also some qualitative catalyst. For Krisenergy I understand the risk behind. What I wanted was a direct proxy to oil price at that time. But Swiber issue came as a shock at that time and it gave me an enlightenment of how bad the situation is. Thus, I sold and made a small loss.

      Regard,
      TUB

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  4. Your comments on Kris Energy are interesting, but with the rally in oil prices you should perhaps take another look. When they restructured their debt Brent Crude was trading in the $40s and their model for survival required a future price of mid $50s. Now with Brent Crude closer to $70 the viability of the business appears significantly more rosy.
    The stock price has not responded significantly to the upward move in Brent prices over the last few months, and if you look at it as a long term call option on oil, your strategy to take it as a proxy to oil, which is lagging and leveraged, might not have been wrong.
    The company still has strong backers in Keppel and among its banking relationships. I believe that if the oil price stays here or rises further, the price of Kris Energy shares should increase quite significantly.

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    Replies
    1. Hi,

      Thank you commenting and reading. Was surprise this article got comments again.

      I totally understand your view. I did actually take a look at the financials of oil companies recently.

      But anyway despite me having a long term view, I restart my portfolio on a yearly basis. So I am not sure if I can wait 2 years for a stock price to return to norm.

      Anyway I will note your view and relooked at the oil counters again.

      Thanks again for reading.

      Regards,
      TUB

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