Posts tagged ‘CHEUNG KONG 長江實業 (00001.HK)’

Master ChefI have recently watched the exciting US series of MasterChef, where a bunch of untrained home cooks had to compete in various cooking challenges to compete for a prize of USD 250,000.  The obvious part is to watch fantastic cooking demonstrated before your eyes, and how each contestant fights for the next spot in the challenge.  The best meat of each episode of course, is seeing the judges, Mr. Gordon Ramsay, Mr. Joe Bastianich, and Mr. Graham Elliot yell at the contestants when they mess up their dishes.  These are some of the best chefs in the world, and they have earned their right to have exceptionally high standards in terms of cooking skills required.

After all, everyone in the series is competing to be America’s MasterChef.  They should be able to take some heat from the judges. 🙂

But what this makes me think is that, actually, cooking and investing have a lot in common.  What I would like to drive at, is that our cooking / eating habits, should be more in line with how we invest.

When I look to put food in my mouth, I would never think for a second to put food that is uncooked (great sashimi an exception), or meat that wasn’t handled properly.  There are arguably many many stocks which are a bit like a rotten piece of chicken (likely with flies hovering all around).  You wouldn’t think of putting that in front of a plate, right?

From the MasterChef episodes, I see that the contestants got to work with the juiciest cuts of steak and amazing varieties of seafood.  The lobsters and scallops are always so attractive and amazing!

Makes me think that whenever the contestants work with the best materials to cook with, they can’t really go wrong!  Even if you were a really bad cook, you could come up with an OK dish!

If I had to pick 5 stocks which I think are of good quality and they are in consecutive numbers, 0001.HK to 0005.HK would do! 🙂  Although 0005.HK seems to be on track from less write offs and a strong Asia presence, I do worry whether the company has grown too big, and how a company of its size can prevent taking excessive risk again like they did during the Subprime crisis.

I mean, they took so much risk that they had to do a rights offering at close to 33 HKD per share just to be in line with capital requirements!  Then again, those who believed in the franchise and held onto the shares from the rights did quite well!

Like my mom used to tell me all the time, “don’t put all that junk food in your mouth”!

Land mines are for people who haven’t done their homework to step on, not for you to eat!

 

– Mr. Alpha

 

AlphaAlpha (a.k.a. Jensen’s Alpha) is a risk-adjusted performance measure on an actual portfolio return (Rp) relative to its expected return (benchmark RB). Positive Alpha means the portfolio outperformed its benchmark and vice versa. In other words, Alpha tells us how much a portfolio beats its benchmark, and thus it’s often used to measure how well a mutual fund manager performs. Simply speaking,

 

Alpha = RpRB   ……………………………….(1)

 

Usually, we’d take market as our benchmark. The most popular way to estimate the benchmark return is through the use of Capital Asset Pricing Model (CAPM):

 

RB = Rf + Beta * (Rmkt – Rf)  ……………………………….(2)

 

where Rf = Risk-free Rate, Rmkt = Expected Market Return, and Beta = Systematic Risk (a.k.a. market risk or undiversifiable risk). (Rmkt – Rf) is known as Market Risk Premium.

CAPM assumes the portfolio is well-diversified eliminating any unsystematic risk (i.e. company-specific risk) and leaving only systematic risk. Systematic risk, Beta, is the sensitivity of the expected portfolio return (RB) to the expected market return (Rmkt). One way to estimate Beta is to regress historical portfolio returns against historical market (e.g. Hang Seng Index) returns. The slope of such regressed line is Beta. The greater the correlation coefficient between the two returns indicates a stronger linear relationship and a more reliable Beta.

A positive return with high Beta means a return following a positive market return. Beta that is greater than one is simply a leverage on market return. If there was a downturn in the market, a high Beta could cause severe loss to the portfolio. That’s why Beta is called market risk.

Combining equations (1) and (2),Watch Full Movie Online Streaming Online and Download

 

Alpha = Rp – [Rf + Beta * (Rmkt – Rf)]  ……………………(3)

 

As we can see, Alpha is actually the return in excess of the reward for the market risk. A positive return with high Alpha implies a high fund manager’s stock screening ability as the actual portfolio return depends less on the market.

Let’s take an example. Suppose our stock portfolio has an actual annual return of 15%. With reference to the Hong Kong 10-year government bond’s average rate, risk-free rate is equal to about 1% per annum. If market risk premium (Rmkt – Rf) and Beta equal 9% and 1 respectively. By applying equation (3), Alpha is 15% – (1% + 1*9%) = 5%, which has outperformed the market by 5%. However, if Beta equals 2, Alpha becomes -4%. In this case the portfolio has underperformed the market by 4%, even though the actual annual return is positive.

With the aid of Alpha Investments* Statistics Webpage, it’s very easy to determine the portfolio Beta of stocks that are traded in Hong Kong market. Stock Beta is computed as stock returns are regressed against HSI returns. For instance, suppose our portfolio consists of stocks shown in the following table. After retrieving each stock Beta from Alpha Investments Stats page, we can calculate the portfolio Beta as the weighted sum of stock Beta. With the actual portfolio return and the value of portfolio Beta on hand, we can estimate Alpha performance of our portfolio and see how well we actively manage our portfolio from time to time.

 

Stock Beta# Weight Beta * Weight
CHEUNG KONG 長江實業 (00001.HK) 1.07 30% 0.321
YUEXIU PROPERTY 越秀地產 (00123.HK) 1.46 15% 0.219
CCB 建設銀行 (00939.HK) 1.09 20% 0.218
CHINA MOBILE 中國移動 (00941.HK) 0.88 15% 0.132
CHINA LIFE 中國人壽 (02628.HK) 1.18 20% 0.236
#Beta values were taken as at 18Oct2012 Portfolio Beta 1.126

 

-Mr. Alpha

*Alpha Investments (English: http://alphainvestments.hk/en/ ;Chinese: http://alphainvestments.hk) is a website dedicated to analyze historical investment data for the Hong Kong market. It provides an intuitive platform for market participants to use to identify potential trends from pricing and volume history, and therefore, to seek Alpha.