A Horrible Year. 2011 YTD end of Q3.

Written by

Jae Jun

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Let me start off by saying that 2011 has been a horrible year. Under performance is a understatement, but I am learning many lessons which is vital to each investment year that goes by. It would be easy to brush this year as a bad year and look forward to a new start, but that’s what mutual funds do.

By the end of Q3, my portfolio was -30.5% compared to the benchmark of -8.3%.

Since inception, my portfolio is up 122% on a cumulative basis which also comes out to a compounded basis of 22%. I started off the year at a compound rate of 47.7% which has since declined dramatically, but to think that I could have sustained such high levels would have been a dream.

Here is another view of the graphical performance. The volatility in my portfolio is extremely high as I tend to focus on illiquid and small caps. I’ve also invested in bankrupt stocks which tends to shoot up or down by huge amounts in a single day.

-19% in 1 Month?!

At the beginning of the year, I made a bet that the economy would continue to struggle, and despite the fact that the US is a fiat currency system, I was willing to make a bet on gold. Had I invested in the physical metal, my portfolio would look vastly different. Instead, I went with junior gold miners. With gold hitting record levels I anticipated that the miners were extraordinarily undervalued. The ones I were looking for were the ones that had cash flowing production, assets to back up and support the business if things got difficult and a low chance of dilution.

However, what was cheap got cheaper. Junior miners are synonymous with volatility and as gold and silver margin calls came into play, juniors were hit hard.

My investment in YNGFF, TREVF and ORVMF were among those victims.

Then there is Dacha Strategic Metals (DCHAF). At the moment, I’m extremely heavy in Dacha as I find it to be a no brainer investment. More on that later but the 3rq quarter in any year is the quietest for REE. prices of light REE also came down, and although DCHAF has no exposure to light REE, it came crashing down at 3-4x the speed of the market.

Add HHC to the mix and you’ll see that having a very concentrated portfolio leads to extreme volatility. Definitely not for everyone.

I have 50% of my portfolio in my top 3 positions. None of the losses have been realized and I’m content to wait it out.

A Word on Performance

Here is what Buffett has said about judging performance.

While I much prefer a five year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the Dow. If any three year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.

a. Our investment will be chosen on the basis of value, not popularity.
b. That we will attempt to bring risk of permanent capital loss (not short term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments; and
c. my wife and I will have virtually our entire network invested in the partnership

I believe that  I’ve met each of the above objectives and although this year is a bad one, over my 4 year period, results are satisfactory.

Trust me when I say that watching  your portfolio drown 30% is not fun, nor is it easy. It makes you want to do something about it, luckily I knew that I was getting upset and resorted to reading a book on behavioral finance to remind myself of what not to do. Definitely helped.

Biggest Position Update #1 Dacha Strategic Metals (DCHAF)

Investment thesis is still intact. A company selling for less than cash and inventory of rare earth metals. Strategically purchases select rare earth metals with positive trends and high demand. If you read up on rare earth metals, you will come to understand that a lot of the metals are traded illegally. The low supply and high demand has created the situation where Chinese miners will illegally mine over their quota and export it discreetly. Now that the Chines government is cracking down on such activity and enforcing an adherence to the quota, this will only increase the demand. Dacha is set to take full advantage of this with it’s inventory held in South Korea and capable of liquidating inventory very easily.

In fact, with such a large discrepancy between the stock price and NAV of $1.40 on a fully diluted basis, management is buying on the open market, shares are being repurchased and management has stated that they plan to liquidate some of their inventory which help should the stock price to catch up to the business.

Biggest Position Update #2 Howard Hughes (HHC)

Now at levels from when it was spun off from GGP. Investment thesis is still straightforwad. The value of the properties on its books are undervalued to the market price. It has taken markdowns and insiders own a large percentage. Bill Ackman is eating his own cooking along with other insiders.

GGP too has taken a big hit in the recent market decline but I feel the quality of HHC properties is what the market will eventually catch onto.

Biggest Position Update #3 Retail Holdings (RHDGF)

Based on the $2.50 special dividend at $17.75, I received a hefty 14% dividend. Company operations are fantastic. They continue to make money and management has a large stake and acts for shareholders. I’m expecting another special dividend next year and until the intrinsic value of approx $26 ~ $29 is realized, I’ll continue to hold and collect the juicy dividends.

Biggest Position Update #4 Gravity Co (GRVY)

One thing I really dislike about ADR’s is how you have to pay for their listing fee. Although it may only come out to 1c per share, when you hold several thousand shares, the fees add up.

Flagship game RO2 has been delayed to 2012 but the company is profitable, selling for less than net cash and a small unknown “no prospect” Korean company which the market does not appreciate.

Looking Forward

As you can see, 3 out of my top 4 holdings are listed on the pink sheets or ADR. Looking forward, my plan is to further reduce expenses, reduce turnover and let time work out the intrinsic value.

I firmly believe that a portfolio of stocks trading below expected value will outperform the market over time.



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13 responses to “A Horrible Year. 2011 YTD end of Q3.”

  1. SmL9 says:

    Don’t worry to much, things will soon turn out better! A good quote by Benjamin Graham: “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

  2. Kevin says:


    Maybe a silly question, but how is GRVY trading at below net cash. When I check Morningstar it states 44.1 MM KRW in cash on balance sheet, but market cap is 34 MM USD?


  3. Jae: We all have bad years. It will turn. I was just barely ahead of the S&P until it was announced that HGIC was being bought out by Nationwide.

    Here’s looking forward to better days!

    Best Wishes,

  4. Zehua says:

    Don’t worry buddy. I am doing even a bit worse than you. I think in the future I would combine macro analysis with value investing. Right now Euro zone is saved, so the market will gradually go up, but in November there is another round of debt ceiling debate, so the market might go down again.
    Anyway, in the future I would only buy when macro is stabilizing or upswing, and individual company is improving and cheap.
    Where can I find the latest quarterly fillings for Dacha Metals?

  5. Derek says:

    Again, I have to ask this: are you putting aside all the cash you can for these buying opportunities? There are plenty of bargains out there, including your recommended stocks, Jae. They could go even lower, maybe another 20 or 30 per cent if Europe gets really ugly or China has a hiccup.
    It could result in a tremendous chance to get some ridiculously cheap shares.

  6. Jae Jun says:

    Thanks for the encouragement guys. Yes I’m not too concerned about short term performance as I don’t have Wall Street to report to. Long term, I’m comfortable to let the stock price meet the expected value of my holdings.

    @ Zehua,
    Would be good to incorporate macro but even macro itself is so hard to figure out. lol

    @ Derek,
    I do have some money remaining. I haven’t been buying heavily. Just waiting for the good opportunity.

  7. Zehua says:

    Jae, yes Macro is harder than value investing. That’s why Buffet and Peter Lynch said ignore macro.

    This is what I am working on right now. If you are interested, I would recommend you read the books by George Soros. His macro sense is amazing.

    I think it would be doing poorly if we completely ignore macro. When macro is against you, undervalued stocks with negative EPS but low price/FCF can easily go down much more than fairly valued stable earning companies.

    If you still plan to launch a fund, you need to be especially careful about this. Look at Bruce Berkowitz’s fairholme fund. He is a traditional value investor, and his biggest bets are C, BAC, AIG. When US financial stocks tank due to Euro zone problems, he is now forced to liquidate, and it pushes these stocks even lower, and causes more redemptions.


  8. Zehua says:

    Jae, could you please tell me a website for tracking rare earth element prices, if you happen to know one? Also for the China’s rare earth export policies, I heard of some changes in recent years, but would like to learn the whole story, and track up to date changes if possible. Do you know any website for that? Is there a rare earth association? China is undoubtedly slowing down its macro economy, so to stablize for a soft landing, it is possible that they temporarily loosen the rare earth export policy.

  9. Zehua says:

    Hey buddy, I remember a while ago you mentioned finding some super cheap company in Greece? Could you tell me the name of that one?
    I am currently doing research on how much cheap companies can get cheaper in recession. Seems like in early 2009, there are companies with 0.25 P/FCF.

  10. Zehua says:

    Jae, what’s the possibility that China would remove the export cap for rare earth metal? It is facing a massive economic slow down right now, and it will probably face 9 trillion RMB non-performing debt in the next two years. They would try several ways to dig out of the hole, and one of them would be removing the export cap for rare earth metal.

  11. Jae Jun says:

    Very little chance that China will remove export cap. They are going to further reduce the cap in 2012. There is a slow down, but it isn’t as massive as you think. Remember Dacha holds HREE inventory. Which 9 trillion RMB are you referring to? Are you talking about the China debt?
    That would just be speculating at the moment. No one can predict that’s what they would do, but my opinion is that they will not. They hold too much of a monopoly to let it go to waste. They are controlling the worlds supply, demand and pricing. Why would they want to lose their grip on that?

  12. Dont worry. Being a Value Investor is tough. Atleast in times like these. 🙂

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