Random Musings: On Wilson Global (WGB) and the genius of bonus options

 

One of the long term holdings in my portfolio is Wilson Global (WGB) which is an LIC (listed investment company) run by Geoff Wilson, the legendary CEO of Wilson Asset Management. Prior to the big crash in Feb 2020, I had a small holding which I had gradually bought into as it went down and through the recovery. 

It has since become my best performing investment, vastly outperforming the Australian market and recent developments have made it into one of the more interesting ones too. 

On the 10th of February, an announcement went out which gave every WGB holder an option to purchase an additional WGB share without brokerage fee, to be exercised at any time until expiry on 12 September 2022. Early exercise of these options also comes with the benefit of dividends as they become due.

Compared to the standard capital raising process of issuing new shares, there are a lot of reasons why this is far more favourable. In the standard issue of new shares, they would need to be offered to the broader public at a price that is lower than their current value, otherwise there would be no incentive for new purchases. This in turn dilutes the current shareholders by reducing the price of their holding. On the other hand, the option issue that WGB has introduced provides less certainty about the quantum of capital to be sourced, however it keeps shareholders happy as only they are the ones who hold the power to dilute their own shareholdings.

As someone who has spent a bit of time dabbling in the theory of options trading, but never bought any personally, it provides me with a nice introduction into the derivative. Simply speaking, once the options have been issued to me, there are three choices I can make:

• Purchase further shares at $2.54 per share
• Sell the option to purchase
• Do nothing and let the options expire worthless.

As I write this post, WGB is currently trading at $2.63. It would be expected that when the option does get issued, there would be a reduction in share price to the value of the option, however just for educational purposes, I found an online options pricing calculator which utilises the Barone-Adesi And Whaley pricing model for American options gives an indication as to what each option would be worth:

The issue of these options provides me with a first taste at hands on experience in decision making with call options at no upfront cost to myself. In all likelihood, I will probably end up selling the options rather than exercising them, but picking the right time will be paramount and the tax implications will also be interesting. Exciting times ahead.

By 小福

Maths: On maintaining or increasing dollar cost average

Have taken a short hiatus since my last post. With the February March crash well and truly behind us, the last two months in the market have been extremely flat. Long gone are the days of extreme volatility and since mid June, not much has really happened. This is clearly evidenced in the below chart:

As I write this, the ASX stands at 6126 points, a good 15% below the all time high of 7199. Although the S&P 500 has since reached all time highs and NASDAQ has long surpassed it, the ASX remains steady at around the 6000 to 6100 mark.

Given what had happened in February and March, ボーイフレンド had been a strong advocate for investing more and more the greater the deviation from all time high. At the bottom of the market, he was putting in 16 times his usual investment amount on a monthly basis, and then gradually scaling back as the market recovered. Where we are now, he is still putting in 4 times the usual, which has obviously impacted on cash reserves. With my limited resources, I am also putting in double what I would normally invest into the market. This has obviously resulted in fairly good returns for the both of us, he has long recouped all losses whereas I am roughly breaking even, even though the local market is still significantly lower than it was.

This brings me to current day, where we have fluctuated around this mark for about two months and I had been pondering whether or not to reduce our contributions given it had been eating into our cash reserves and that some developed countries had opted to go into lockdown again given second wave covid.

Essentially the dilemma I was facing was as follows:

• If I keep contributing a greater amount than usual and the market crashes or suffers a correction due to second round lockdowns or other unforeseen circumstances, the funds I had invested in the market would be hit and I would also have a significantly lower cash reserve to throw into the market to get the benefit of better value shares.
• If I reduced my contribution to my original standard amount, even though the market stands at 15% lower than all time high, and a crash does not occur, the cash I hold in the bank will be making negligible returns and whatever I do not invest now will have to be invested at a later date where the prices may have inflated considerably.

In pondering what to do with this conundrum, he mentioned the utility in working it out via outcome matrix given the range of potential situations and our three variables:

• Increased or standard contribution
• Depth of crash
• Potential of crash

We worked this out using the following simulation. Whilst the current Australian CAPE stands at 19, there was no consideration for us to cash out any of our holdings, which meant at least one less factor. Assumptions we made in the following examples are as follows:

• Standard contribution is $5,000 per month, increased contribution is $10,000 per month
• Where the market doesn't crash, it goes up by the annual amount of 10%
• Starting portfolio is $0 as what is already in the market is irrelevant.

Outcomes of our simulations are as follows:

Allowing for a 40% crash in 3 months

Allowing for a 30% crash in 3 months

Allowing for a 20% crash in 3 months

From the results, it can be easily distilled that the lower the chance of a crash, the better it is to go in with a higher contribution so as to maximize returns on cash. By putting these numbers into the matrices provides a quantifiable outcome for either scenario, thereby allowing me to consider which course of action I ought to take.

With the Australian Market pricing in zero profits across the board for the future year and a half (using CAPM and DCF models given risk free rates), it is fairly safe to say that the odds of a significant correction in the market is lower than usual, provided a Republican win in the Presidential Election in USA. Given the above modelling definitively shows that there is a strong reason to continue to contribute aggressively to the market whilst prices are still at their current rates.

by 小福

Random Musings : "The market is detached from fundamentals!"

It has been a while since my last post. The reason for that is a change in pace of my work and also the fact that this post has taken considerable rumination and consideration on my part prior to committing it into writing.

As I write, we are already currently nearing the end of July with the last six months of the ASX looking like this:

The market has taken a fairly remarkable rebound and we are sitting at a mere 15% from peak, whilst the S&P 500 is 3% from peak and NASDAQ is already 900 points above its February highs.

Since our initial lockdown in March, we have seen a gradual reopening in June and a subsequent re locking down of Melbourne due to an uptick in cases. Allegedly NSW is one month behind them and we may yet see numbers spike again across the country. America still hasn't seen much by way of respite in infection numbers and Hong Kong has also been locked down yet again.

Given what is happening around the world, I have seen numerous articles and also friends alleging that the market is detached from the fundamentals (i.e. global recession, unemployment, insolvencies, social unrest), a second crash is forthcoming and that this is the biggest bull trap in history.

I have spent the last month pondering this and trying to come up with an explanation as to why the market is still going up. Having done considerable reading and research of past historical events, I can only come to the conclusion that the stock market has almost always always ignored the economy.

In essence, the role of the stock market is to accurately quantify investors' views on the future prospects of publicly traded companies. During any of the catastrophic or more turbulent times of the past, stock market returns have largely been uncorrelated to these events.

Whether or not the market is considered overvalued (refer to my previous post) or not depends on what investors' appetite for risk and return are. Given the fact that everything else is offering meager returns, investors may be willing to pay a higher price for stocks on the promise of a higher yield. In January, the cash rate was considerably higher than it was now and having adjusted the discount rate for the massive drop in interest rates, it could be said that equity pricing is fairly reasonable.

In fact, whether or not the market is currently overvalued is merely a function of expected return and the expected return of other asset classes. Given that people are still pushing up the prices of equities simply means that they are still content with the projected return, given the current value. As such, although some people may say that the market is expensive, which is in itself a subjective measure, it would hardly seem overvalued. For those who allege that the market is detached from fundamentals, I daresay that there is hardly a time in history where the market reflected the political and social environment, all it needs to do is provide an accurate reflection investor's perspectives on future prospects, and to this point, I would think that it does its job fairly well.

by 小福

Random Musings : "Overvalued" vs "Expensive"

A fairly short post, which to some may pose a fairly obvious point, but it didn't occur to me as apparently as it should have until quite recently during one of ボーイフレンド and my more robust discussions about the current state of affairs. With some light prodding, I was finally enlightened by the clear distinction between the difference between the concept of being "overvalued" as opposed to being "expensive", which is fairly important and hence worth dedicating an entry to.

To the untrained (or maybe just me), the two words can be considered somewhat interchangeable when applied to daily life references, there are in fact significant differences when applying these terms in a financial investment context. Expensive simply means that the investment vehicle is outside the purchasing power of the individual. Overvalued implies that said asset is priced above its intrinsic value, that is a function of its return and risk.

In an investment context a clear analogy would be an annuity promising to pay $10m to the holder every year indefinitely, sold for the price of $50m. Unless hyperinflation was a legitimate concern, there are very few who would consider the annuity to be an overvalued asset, although it would be considered expensive and outside of their purchasing power for the majority of people.

The reason for considering this is in consideration of the more recent developments in the fairly sharp rebound of equity prices after the Feb - Mar crash, something which will probably be covered in another entry in the near future, something to look forward to once I de-muddle my mind.

by 小福

Random Musings: Hot Waitresses, Mens' Underwear and Lipstick

Since my last post just under two weeks ago, Australia has plunged into the second stage of a lock down, my work has finally handed down a work from home directive and I haven't left the house in four whole days. Whilst I have been home bound, it has given me ample opportunity to further my studies and readings on finance and the broader economy whilst this volatile situation unfolds.

One of the things that appeared as a recurring theme across books that I had read was sentiment. Essentially that it is important to have a firm understanding and ability to grasp what the market sentiment was so that we could comprehend where we currently are on the fear-greed pendulum. Among all all my technical technical readings I came across three informal measures of sentiment which I came across on Investopedia. All three are quite interesting albeit crude measures. Having taken a look back at my last several posts which have been quite sombre, I thought it would be apt to share these with you to lighten the mood a bit.

Hot Waitresses

So the idea with this measure is that next time you have a meal out, you take a look at your waitress to see if they are relatively good looking or not, because according to the index, the higher the number of good looking waitresses there are, the weaker the state of the economy. The idea behind this is that during times of plenty, attractive people will be able to find and abundance of employment in other jobs. As these jobs become less available during times of crisis, by the laws of supply and demand, they will find themselves in hospitality jobs like waitressing (or waitering).

Mens' Underwear

Prior to Alan Greenspan's research in the 1970s, mens' underewear was largely viewed as a necessity rather than a luxury, which would mean that sales would largely be static despite a change in the economic climate. However what the research in fact proved was that during times of economic decline, men tended to wear their underwear until it was threadbare rather than get new ones, an interesting contrast to womens' underwear purchase habits. Complimentary to this study, similar results were shown for things like clothing alterations and haircuts. Having said that, I am only privy to the condition of two mens' underwear, being my father and my ボーイフレンド. If you looked at their underwear as a basis to assess the economic climate we are in, you would think we are in a perpetual never ending depression, so my personal anecdotes seem to refute this research.

Lipstick

Our last informal indicator is lipstick. So rather than having an abundance of fresh crisp new underwear when the economy is booming, women tend to indulge in other luxuries such as designer handbags or outfits. The idea is that when the economy is faltering, women still want to indulge themselves and instead purchase smaller luxury goods as a sign of comfort such as lipstick, which would mean that the higher the lipstick purchases, the worse the economy. Again, if I applied this indicator to my own purchases of lipstick, you would think we never got out of the depression. Either way, it is an interesting way to consider indicators of market sentiment.

By 小福

Trials and Tribulations: Coronavirus Market Correction

With the drama that I had experienced most recently with my only two hot picks in individual stocks, CLH being on its continued trading halt which has now extended until mid March and UNV being subject to a hostile takeover bid from TER, I really thought that I had seen enough drama to last a year. (ᗒᗩᗕ)

That is, until the markets this week undertook one of the biggest corrections in recent times with the index going down 9.8%, taking $210bn from the markets   ᕕʕ •ₒ• ʔ୨. As someone who doesn't buy shorts or puts, obviously I took on a fair amount of collateral damage.

As someone who tried to go into this journey with a certain amount of mental preparation, I too was caught off guard as to my personal responses to this black swan event. Early on in the week, my ボーイフレンド and I spent most of it indulging ourselves in schadenfreude when we watched everyone around us and in online forums lose their minds over the daily 3% drops Σ(･ω･ﾉ)ﾉ！ . It had gotten so bad that even my colleague Mr D was finally pushed over the edge and cashed out his holdings on Thursday and dived in on inverted indexes (BBUS and BBOZ), cashing out at the lowest point, thereby crystallizing his losses before buying into the already relatively higher inverted index. I can only hope that he doesn't crash and burn too hard that he can no longer be redeemed.

As for myself, I had high hopes that with my mental preparation, I would be able to separate myself from the numbers as the fell. During the start of the week, I could definitely say that I managed to do so with relative capability. Having said that, by the end when it neared a 10% drop, I too succumbed to a slight bout of sadness when I realised that half a years' worth of my savings was gone on the papers. When you consider than in real terms of how many bleary eyed mornings I had to force myself out of bed to get onto the bus and deal with stupid people at work, it did make me fairly sad. Despite my disappointment in myself for having feelings when I expected none (◞ ‸ ◟ㆀ), I can still gladly say that I did not once have my finger on the "sell" button, which is testament at least to a level of discipline and rationality.

So to drown our sorrows for losing that much on the markets this week, at least we could still enjoy two minute noodles and tendies to commemorate our week of losses. As for what I will be doing next week? I will be increasing my DCA and putting my March funds into WGB. For those who are wondering, I couldn't convince Mr A to go buy in the dip, but at least he also stayed the course and is continuing his regular investment ʕ´•ᴥ•`ʔσ”.

An interesting note though, as an ironic silver lining to this week, the trading halt from CLH happened to cushion my fall a bit, cos 0% is still better than being negative. 

By 小福

Random Musings: On the GFC, Trading Cards and Maplestory

Whilst I was reading A Crisis of Beliefs, one of the things that really stuck with me was the fundamentals of what causes a financial meltdown. Reflecting on my relative inexperience in life, it occurred to me that similar situations had happened to me before but in a different context (｡T ω T｡). Speaking to my ボーイフレンド , he too provided a story pertaining to his similar experiences which basically summarizes the GFC perfectly (｡•́︿•̀｡) . I will try to encapsulate them below.

In my childhood, I used to be a huge fan of Sailor Moon trading cards, subsequently amassing a large collection of cards which were my pride and joy. At some point, I met up with a distant cousin over a meal, and as all young children are prone to do, I showed her my stash of cards. At this point, she told me that she had a hot tip that a certain card that she held was worth $50 (a fortune to a seven year old), which was more than enough to drastically multiply my collection, all for a discounted family rate of my best card凸( ` ﾛ ´ )凸. As all dumb seven year olds would do when presented with this offer, I jumped on it. Only several days after the fact when I asked around to find a way to sell off the card to expand my collection was I informed by my parents that what I was given was a plain piece of cardboardヽ(`⌒´メ)ノ . 

My ボーイフレンド 's experience was similar but different. Back in the early days of the highly popular MMORPG Maplestory, he was sold an enhancement scroll for $1.5m gold on the premise that he was getting a discount from the regular $2m market value. Again, as children are oft to do, he made the purchase. Luckily for him, he onsold it to another unsuspecting buyer for a profit, only to realise later that these scrolls could be purchased at an unlimited quantity from the game itself for the small sum of $34k. ¯\_(ツ)_/¯

In essence, the economy as we know it is a giant marketplace of people conducting individual trades every single day. For every transaction there is a seller, a buyer and an agreed price. For market crashes to happen, the players often get so hyped up in the perceived value of an asset completely deviates from the true value. Those who are lucky can pass it on to another buyer, those who aren't lucky when the ball drops are left with a piece of cardboard (`皿´＃).

By 小福

Random Musings: On debt and stimulus

Have just started reading Big Debt Crises by Ray Dalio two days ago. For those who aren't aware, it is a 480 page tome, (๑･▱･๑) which will take at least a number of weeks to smash through, let alone digest the insights, but reading the first part of the book gave me some time to ponder the debt crisis that I had lived through, specifically the GFC which Australia emerged out of relatively unscathed.



It was on this point that I was having a discussion with my colleague Mr A today, who remarked that when Labor passed the stimulus package of February 2009 which famously handed out $950 per person was widely criticized by the liberal party but 10 years on in the face of another potential recession, the Morrison Government passed their tax cuts which essentially did the same thing. It is however noteworthy to highlight the differences, in the two situations though. Back in 09, the world was thrust into a financial crisis of significant magnitude whereas we appear to be currently facing a slow burnout. Secondly, the stimulus package from 09 also ensured that those who were most likely to spend the money immediately (i.e. those on welfare or aren't working) had received the payment, whereas the Morrison Tax Offset only comes into play for taxpayers on $37,000 and above. There is no wonder why the tax break didn't bring the intended effects to consumer spending.

With that in mind, I have to give credit where credit is due, and although I have definite disagreements with Wayne Swan on his morals and ethics pertaining to the subsequent leadership debacle(s), one cannot deny that he was a brilliant treasurer who navigated the country out of a precarious debt situation.

I can only hope that when the next crisis does come, I will be educated enough to navigate a safe path for myself and those around me. Until then, I will keep reading. (๑•́ ω •̀๑)

By 小福

Random Musings: On character and competitiveness

Human nature is one of the few things that I have developed a life long passion for. There are few things that bring me as much joy as observing how different people respond in a variety of manners to the same stimuli.（〃・ω・〃）

Having embarked on this journey of personal investing, I have found it to be surprisingly interesting to observe how other people make their decisions an the reactions they have from the subsequent results.

As such, I consider it noteworthy to narrate a certain saga that had occurred before me quite recently, more or less in response to my ボーイフレンド's current state of affairs and the reactions of two colleagues, Mr A and Mr D. It is without a shadow of a doubt to me that Mr D is the more intelligent and accomplished of the two, but with a streak of competitiveness and a desire to outperform others, he has of late undertaken a number of risky ventures without due consideration, some of which have resulted in bad outcomes which have put him further away from where he wanted to be. Coupled with an inability to accept good counsel when offered, this has drawn him down the dark path of inevitable destruction (or at least perpetual unhappiness)（￣＾￣）. By contrast, Mr A who I consider to be less smart, but aware of his shortcomings, of good character and sincerity had been inspired to do better and undertaken several small but significant adjustments to his lifestyle with a slow and steady approach to securing his financial future without a hint of bitterness but genuine desire to further his goals ヾ(｡･ω･)ｼ. It would appear to me that even though after several decades, Mr D may still amass a greater fortune than Mr A, there is no question of who would attain a greater quality of life.  One can only hope Mr D sees the light before it is too late. ¯\_(ツ)_/¯

In closing, it cannot be overstated enough the importance of staying humble and pursuing your life and goals at your own pace, without being misguided by the green eyed monster. Seeing someone who has achieved greater than you can be used a s a source of aspiration and motivation to extend yourself and do better, but if it leads you to irrational decisions in a bid to attain superiority, then a self aware individual ought to identify and cease this behaviour, for only with self reflection can we recognise and overcome our own demons. (*•̀ᴗ•́*)و ̑̑

“Rule 4. Compare yourself to who you were yesterday, not to who someone else is today" 

- Jordan Peterson's 12 Rules for Life.

By 小福