Blog Capsule 5: Bought ICAP @ $1.22-$1.23

Not the best price.

ICAP actually closed lower at $1.20, after touching a low $1.18 intra-day. :-(

Nevertheless, was extremely relieved this morning, since just saw US markets closed hugely positive , with the Dow posting +10.88% overnight gain, S&P500 posting +10.8% overnight gain and Nasdaq posting +9.53% overnight gain. I had expected US markets to be green this morning, but never expected it this strong. *phew*

Why yesterday, why ICAP?

To be honest, good luck probably played a bigger part than I would have liked to admit.

Most of you will know that I will be away for nearly 2 weeks on a holiday starting this weekend.

I am especially sensitive on this absence because as I have stated this before in the chatbox, even though I was not yet buying for investing since my outlook was still long-term bearish (e.g. see here - http://fusioninvestor.blogspot.com/2008/10/huaan-some-rumblings.html), one of the risks in staying in cash for too long is that when the markets rise, history has taught us that they tend to rise very fast. Worse, sometimes, we don't catch the upswing timely enough. Such points was also repeated by "V" in this article here - http://fusioninvestor.blogspot.com/2008/10/dont-dig-bigger-hole-2.html.

So, even though I have stayed largely in cash (except the small intra-day trades recently and also the occasional contra and short term-trades), I've also been thinking about positioning my stocks since the KLCI have broken below 850 and nearly touching 800 yesterday. Make no mistake, the markets have become deeply oversold when it fell more than 30% in less than 3 months. Another technical reason to consider buying around the 800 level is that I have been advising the chatbox my technical expectation that the market will test 800 (and not 850) last week, when the KLCI was trading near 900 last week and others were predicting 850 to be breached. The strong recovery intra-day yesterday after hitting a low of 801 prompted me to take position, and also prompted me to take profits in one other stock (TENAGA).

Furthermore, there is the saying "Sell in May, buy back in November", and we are now near the start of November. In a sense, the timing of my holidays is poor because it coincides with this November period where stock markets traditionally rise. Even though I personally attach less weight to this saying, at the back of my mind, the idea stuck. So, it's a matter of buying something during this timely period, certainly before the end of this week.

So, amongst the stocks that I thought might be good ideas to hold during this 2-3 week period would be ICAP. Actually, the attraction of ICAP is that it is "managed", as opposed to buying a stock like TENAGA (where it is not managed). Also, blogger "turtle" recently indicated in his blog that he purchased ICAP at $1.49 recently. Fellow blogger bullbear of course is a staunch supporter of ICAP, when the price fell from its peak of $2.81, down to $1.7x before his sabatical last couple of months. Fellow blogger Moolah is of course instrumental in alerting me the inconsistent behaviour of ICAP fund manager earlier this year. Of course, ICAP is a stock that I have invested before, as well as a stock that is followed by the chatbox from time to time. To me, ICAP is a stock to buy when the price becomes compellingly low. The only problem is when to buy, because what appears cheap almost always become cheaper during bear markets, if not next week, then, next month or next few months.

Ok, but why ICAP?

The "cheapness" struck me quite strongly yesterday. According to its latest weekly NAV report, on 23 Oct, ICAP NAV was $1.54. At the time when I saw the price, it had touched a low of $1.18, and $1.22 and $1.23 were available for sale.

I did some quick maths in my head. On 23 Oct, the KLCI closed 891.3. At the time when I bought it, the KLCI has recovered off its low of 801, and was around 820-825 iirc. A quick estimate suggests that I don't expect its latest NAV to drop below $1.42 since 23 Oct, by simple pro-ratio.

So, $1.22-$1.23 is equivalent to nearly 14%-15% discount from NAV. Historically, ICAP trades at a premium, and occasionally at a discount (say 3%), although I have never seen such a large discount before. Hence, it was very tempting strategically, and the only issue is always a tactical one, i.e. when to buy.

At the time, I felt this seems enough safety margin (even though what is cheap can get cheaper), hence, I took everything that Mr Market had to offer at $1.22 and $1.23 then, and left it there since this is a long-term investment.

This morning, I took a closer look, and realized that ICAP have approximately $57 million in cash as at 31/8/08, which translates to approximately 41 sen. So, its NAV of $1.54 on 23/10/08 comprised of say $0.41 cash and $1.13 equities. I expect this equity portion to fall since 23/10/08, and not the entire NAV. A revised estimate suggest that the NAV could well be higher than $1.42, say $1.46. A prudent estimate of the revised NAV may be say $1.40 to $1.45 say. In other words, the discount should still be around 15% say, when I bought at $1.22-$1.23.

I should sound a cautionary statement that buying on a discount is not necessarily always wise. Why? Simply because the discount can dissappear eventually if markets keep heading lower. However, if one manage to buy at close to the bottom and at a discount, then, this is ideal, because if the bottom is indeed reached and if it does bounce back up, then, this discount is a wonderful buffer and price to buy. So, whilst I'm generally to buy stocks at discounted prices (than at a premium), I would very much prefer to buy when the price has reached bottom, and is on its way up.

So, has the price reached bottom yet? No one knows for sure. Technically, it is still a long-term bear from the charts, although charts only shows the past clearly and the future is still uncertain. Fundamentally, the outlook is still bearish, even though in bear markets, we will have bear market rallies which can sometimes be quite strong and fast on the upside during these volatile periods - fortunes change hands very quickly too. My buy at $1.22-$1.23 is not the entire long term strategic position, but just say 1/5th of what I intended to accumulate by the time this bear market is over, which may well last until mid to end of next year (I could be wrong here very easily). So, think of this as just the first out of a few possible long term instalments, although I reserve the right to trade without informing anyone until after-the-fact.

Should long term investors buy now?

Again, traders should always follow their own timing rules, but what about investors? Well, at 800, the KLCI appears "cheap", although, as I have mentioned here and elsewhere many times, what we mustn't forget at the back of our minds is that what appears fundamentally cheap can always become cheaper later if/when markets eventually become more depressed.

So, since long term investors generally don't try to time the markets, a program of slowly accumulating at successively low prices would make sense. As I indicated above, I have spent 1/5th of what I intend to accumulate yesterday on ICAP. It is a bit bigger than what I would have liked for a long term investment, so, I may take some profits later if Mr Market is too bullish for my liking.

Has this changed my views of Mr Tan the fund manager?

No. I still think his track record and past results as a fund manager is still good, even in this current bear market. For example, when he started ICAP at end 2005, KLCI was above 900 and despite the market now being at least a good 10% below today, the NAV has grown from $1 to $1.4x. In other words, even though market is say 10% below, the NAV has grown at least 40%, suggesting an outperformance of at least 50% during the last 3 years. This would certainly beat - as a rough guess - 90%-99% of professionally managed monies in my humble opinion, so, there is no doubt in my mind that Mr Tan Teng Boo certainly has a superior investment track record. His integrity on the other hand remains the same to me, whether I own ICAP or not. As always, it is critical to always apply one's own independent and critical mind and not blindly believing in what anyone says, otherwise, you just simply expose yourself to possible manipulation by others.

Disclaimer: At the time of writing this, I now own ICAP. Do be aware that I can dispose ICAP at any time in future, without telling you so.