A Purposeful Life - 2023 in review

2023 has been a much better year than 2022 for me. 2022 was a year of waiting and limbo with house hunting/renovation, portfolios crashing and 2 older kids going thru NS. But in 2023 many of these things came to an end or resolved themselves and life got going well again.

Year started with a new addition to family- Kody our black dog adopted from SPCA. He has really changed our family life. Now Ning and I have to walk him daily for 1 hr each time, kids have to do the evening one. Nights now include saying goodnight to him and lots of time spent consoling him during thunderstorms!

We also resumed travel a lot more. Managed our first post Covid full family vacation to Taiwan. And year end managed to bring Dad and mother in law to  Australia for a pretty long drive. Also discovered Ning and I really love nature in Iceland. In total we traveled about 76 days this year which is more than in 2022 but less than the usual 80-90 days pre Covid

Main reason is we are a lot busier with angel work, volunteer work and also want to be around for the 4 boys. Number 1 finished NS and entered NUS. Number 2 finishing NS probably going to do law next year, number 3 took up badminton as a key sport and Number 4  continues to surprise us with his willingness to twist what we say and assert his personal reality distortion field.

To recap no change in life purposes, i have centered myself on the 3 purposes below.

Purpose 1 - Help and be there for family. Extend to friends if i can.

Purpose 2 - Be as healthy as I can

Purpose 3 - Be a good custodian of wealth and knowledge. help grow startup ecosystem via angel investing & AngelCentral.  Contribute to broader society as a volunteer.

Purpose 1: Be there for family. Share and guide kids more. Maintain friendships.

Overall rate this purpose a 7.5.

It’s tough being parents to 4 kids aged 9 to 21. Every day we need to switch mindsets as we help each of them navigate school, sports, NS, university etc. What works well is to discuss with Ning and come to joint decisions on key strategic items and operational issues. Dad wise, he now comes to stay with us every alternate weekend but in time, he may want/need to stay with us more. Arrangement seems to work fine. He had a scare with his eye and it was quite worrying. Lucky it resolved itself and he was even able to resume traveling - to Iceland no less!

The most important relationship with wife is mostly good as we both practice being mindful of each others priorities and desires. She too is learning more each day about ourselves and the world we live in.  I must say I am very proud of all the 4 boys and my dearest wife. 

Friends harder to keep in regular touch. Still the same catch up over dinner or drinks every few mths. But it’s nice to see mostly everyone grow older happily.

It was a good move to move into current place as our older boys appreciate the privacy of having own room. We also at least now have a study of our own and dad has a room too.

Purpose 2 : Be as healthy as I can mind and body

Rate this 8.5

I lost weight more as walking the dog daily made Ning and I lose weight. Now weight range is 64-65 consistently. Diet wise is still eat anything I want but can’t eat too much and definitely can’t eat post 10pm. Also manage to tone down on wine consumption to about 3-4 bottles per month between 2 of us. Sleep is fine and have added magnesium pills before sleep as it helps sleep better. Fell sick only twice or thrice of which once was repeat Covid a few mths back. 

If I am honest, I do get mentally bored at times esp when everyone is up and about and I am alone at home. But filling up all the time with work just to keep busy also feels like a cop out and lack of imagination to me. So I try to exercise and meditate and entertain myself. Am toying with online courses in history or literature as a good use of spare time.

Purpose 3 : Preserve & Grow Wealth - 10% annualized net IRR on networth+ Quality startup angel work for 100 startups+ build AngelCentral + good volunteer 

I would rate this 7.5 this year. Much improved from 2022 as markets all rebounded and even our startup portfolio  thawed from the funding winter and started getting some investments in 4Q2023. But we made a major allocation mistake by keeping 30% of stock portfolio in sg and China stocks. This drag pulled down our overall stock performance to 20+% in sgd terms which is about acwi but below SPY. But it’s still a great rebound and we are almost fully allocated into equities all the time which is very important for long term investors. Cash is a drag, bonds marginally better and market timing is very very hard.

Will write more on startup side in a separate post as always but in summary - overall its down for PE side as the VC/PE funds we invested in write down their NAVs over the year. 

We also crossed 50 startup investments this year with clear green shoots appearing 4Q2023. Not just new uprounds for our startups but also some exits from our PE and VC funds.  Not a lot but at least this year it’s more cash in from PE than out to our startups investments. 

Couldn’t hit the 10% investment/networth IRR this year with PE not contributing and in fact negative. But we believe over time, PE will kick in strong again. Long term IRR since 2012 is now down to 9% or so if we mark to market all the PE.

AngelCentral also saw the same decline with our angels funding easily 25% less than year before. Membership is stable, though not growing. The good news is final quarter had 4 startups going into up rounds so it’s good vindication of our clubs selection ability. 

For startups, we also had 3 startups go into distress and still undergoing liquidation. What’s painful in these cases is when the founder doesn’t want to let go and close down and when the founder starts to plan only for themselves and obviously doesn’t care about investor fairness anymore. It’s mentally not fun to have to deal with the uglier side of human natures. Easy thing to do is write off and ignore them but Ning and I believe in fairness and things being done properly. So we push back sometimes if we feel treated unfairly even if there is no economic rationale. 

Anyway have made a in depth post on startup portfolio here.

Finally on volunteer work, I finally retired from my District councilor role with SWCDC after 14 years of volunteering. Reason is because the HwaChong volunteer role is quite involved. So to do a good job, something has to give. Rest of volunteer work with PEP, ITE, IPOS, NRF remain.

So overall, 2023 has been a good year. Kids all growing older and we think we are managing ok as parents. Spousal relationship is better than ever as we both settle into more synched expectations of life. Still get lots of mental and emotional challenge with the portfolio and startups so that’s good. But the interactions that expose the ugliness of human nature is quite draining.

I do think 2024 will be more of the same where our key challenge is parenting well. Startup side should rebound more and I expect more exits from the PE/Vc fund with later stage startups and maturity coming up. Valuations will be the issue. It seems like public markets no longer buy a story of high multiples because revenue growing well or market potential good. They also want profits or near profits and cashflow. See latest 17live, moneyhero spacs as examples. And rightly so.  As for listed portfolio, I don’t think there will be another 20% gain on equities or bonds…will be lucky if eke out a 7-10% return. Maybe China will surprise us all…

Sea testing new low?

Update for 4Q2023. Solid rebound in revenue growth for Shopee. Overall much more positive 2024 guidance from sea. Main point is TikTok and lazada aren’t taking market share from them. Garena stabilizing and I see much opportunity to grow MariBank further profitability. Glad I did not sell anything and in fact bought call options at 45 since last earnings. Blended breakeven now 72. Sold a put at 48 to express mild bullishness but recognizing already big position so won’t add more. Let’s see the quarters ahead. If they pull off 2024 with improved profit and revenues in 15-25% growth, back to 80 -100 won’t be a problem. 

Update for 3Q2023 earnings where SE reported flat DE, 18% growth in ecommerce and 36% growth in financial services. Revenue at 3.3b beat expectations but unfortunately they fell into a 140m loss when expectations were for small or no profit. To me this is telling of competition they are facing on Shopee side and is a big issue. My thesis for sea is that they will be top winner in the e-commerce marketplace battle in ASEAN. If TikTok or Lazada can overtake them then sea is not a no brainer long term multibagger bet anymore.

Reading the transcript, what Forrest identifies as the 3 main levers and metrics makes sense. And he is saying sea wants to entrench themselves deep for the long term and since cash flow allows for it, he would focus on that rather than focus on delivering more profits. What market did not expect is that 330m profits would turn into 140m of losses.

Personally, we had a full sized SEA position accumulated since 2022 to now at average price of about 88. It’s now 60% down again revisiting the low formed after 2Q results where Forrest also spoke about being in investing mode again. For readers, so you get right context, our full size for single stocks is at most just 4-5% of total equity positions. Bulk of our positions are in ETFs always. So this year is still up mid teens due to indexes rebounding.

So what’s our plan? Can sell, add or hold as always. Sell is out for now. I don’t think mgmt has lost the plot. They are certainly facing strong competition. Otherwise how can grow revenue 18% and still move into losses? Must be spending more on marketing, vouchers, incentives etc.

Hold is my answer for now just like after 2Q. Can trade some options to play the volatility but not adding more cash to main holding. It’s ok to be underallocated from max. We need 2-3 more quarters at least to see if they are indeed holding and growing against competitors.

We will only want to add if it hits ridiculously cheap values. Right now at 20b valuation less 2b net cash, sea is trading at 1.4-1.6 times annualized sales. If it ever falls to 1 time or between 25-30, I think risk reward is excellent and will double down in large amount. Amzn is trading at 3 times, meli at 5 times, baba at 1.6 times. So SE at 1 will be hard to ignore.

In terms of what it means for startups, using sea and grab as apex startups from ASEAN, the picture is not too good actually. Our 2 biggest asean tech players are worth $32b usd combined. Smaller than any of SG 3 local banks.  What does that say of the value created last 10 years? 

Sea and grab impact on consumers is clear and large. Between the extremes of current pessimism and past bullishness for these tech companies, I think the final fair valuation answer is probably in-between and it all depends on their execution, growth and profits next few years.

 

Tech in Asia exit - new norm lens

Nice ending to an entrepreneurial journey. Kudos to team for working at this business for 13 years and securing what looks to be an ok outcome for early investors and founder.  We need many more such exits for our ecosystem to be considered successful!

TIA last raised 6.6m usd in 2017 led by Hanwah on a post money of about $25m usd if I remember right. In total, raised about 17.7m sgd and founder end up about 16+%

TIA did about 7.6m sgd in 2022 and reverted to loss making of about 600k. Profitable in 2021 with 900k profit on 7m. 2022 subscription weakened and they grew poorer margin production business. 

It’s also important to note that revenue growth from 2017 to 2022 is barely 6-7% per annum from 5.5 to 7.6m.  So it has plateau and is not a growth company any more. So selling is probably a good move. Remember my last post about growth being worth something only if profits are good too? TIA got the memo.. slow down growth but move from very loss making on 5.5m to nearer profits on 7.6m. 

I do think SPH media won’t overpay as a non profit funded by taxpayers but TIA shareholders also won’t sell unless in distress (I don’t think so). The number will come out in due time but my guess is between 30ish-50ish million sgd. Revenue multiple between 4-8 seems fair. Probably no meaningful PE to use. 

If use midpoint of estimate at 40m sgd, then everyone ok and it’s a decent story in terms of capital efficiency vs outcome. Management team I would expect them to be incentivized further via some form of earn out.

The interesting thing to see is post deal, whether the new SPH will be better at integrating acquired assets. It’s mostly new management so should give them benefit of the doubt. And it’s a good acquisition of production and media talent for the new entity. Also give them a regional subscriber base. The big question is how to integrate and how to resume the revenue growth using existing team  if that is the goal.

Valuation outlook for asean startups - what’s the public market saying?

It looks like the worst case scenario of a bad recession coupled with high inflation won't happen. Instead, the scenario playing out last year is one of decent wage growth underpinning consumption and so ensuring any resultant recession will be very mild. In the meantime, the fed has indicated it is quite happy with overnight rate at 5+% and will keep it here while waiting for core inflation to weaken further. This situation may take another 6-18mths to play out.

So while the broader economy is looking ok, the pain is being felt more and more clearly in the startup and growth space as the high IR environment drives major reallocation and behavioral change by investors.

I have multiple post Series B startups telling me investors are bearish and investors are very slow in cutting new cheques. This is a consequence of the above environment.

Bottom line is valuation metrics and multiples have changed. Some recent datapoints to share: 

1) Listed tech giants have held up pretty well. Latest quarter, they have still managed to show 10-13% top line growth and solid profits. So it’s not surprise QQQ is up 30% YTD still while the broader based SPY is up almost 10%. This attests to the FAANG pricing power in face of inflation and their ability to squeeze out more profit. QQQ is trading at 28 times profit while SPY is trading at 24.5.

On the much smaller market cap and loss making side, the picture is not good still and many usa listed tech are flat to small gain for the year. A good proxy is ARKK etf less Tesla gains which is 11% of portfolio. My estimate is ARKK barely gained 3-4% this year after a disastrous 2022 once we strip out Tesla rebound this year.

2) China tech giants have fallen a lot due to a combination of actual slowing growth/profits/weak Chinese economy and western/developed world sentiment on China. Baba and tencent are trading in their teens. A good 30%-50% cheaper than USA tech giants. 

3) from ASEAN perspective, our listed tech companies are not doing well. SEA, Grab, Buka, Goto, PGRU are all down YTD anything from 10-50%! in spite of their USA counterparts staying flattish. The main reasons are partly rerating for asean tech stocks along with China stocks and partly due to unimpressive financials and outlook.

4) More specifically,  here are some listed valuations which have many unlisted startup counterparts in asean.

a)  Financial comparison space. There is a giant in uk called moneysupermart trading at 3.5x sales and 19 times profit. Our asean moneyhero just ipo via spac and even after 60-70% plunge in stock price is trading at <1 times revenue or barely 50m usd because it’s grossly loss making. But even if they turn profitable, at most they do a 5-10m profit. That’s a valuation of $200m at best. Moneyhero reached unicorn status last private round so later round investors should be quite concerned. Likewise moneysmart which is Singapore’s best player would need to get solidly profitable if it wants to ipo and be valued well like moneysupermart instead of like moneyhero.

b) Coworking. Wework is about to go bankrupt. But even a profitable IWC - Regus which should benefit from wework closure is trading at just 0.4 times revenue. So all the coworking space players should assume much weaker valuations until they prove out solid profits.

Closer to home, there is a rollup trying to spac and I suspect wework bankruptcy is going to give big problem.

c) Car disruption space. Carvana is trading at 0.4 times revenue and is loss making still. This is just 10% of peak in 2021. Perhaps a better comparison is carsales.com.au trading at 18-19 times profit or about 10.9b market cap! Now that’s a solid business. If you are loss making car player, you want Carsales type of steadier financial metrics rather than be valued at 0.4 of gmv which again will be huge downrounds for later round investors of carro or carsome.

d) Property tech space. The benchmark here is propguru locally and rea group in Australia. PGRU Ipo via spac and stock price has been rerated to 1/3 of ipo price. Now valuation is an undemanding 5-6 times revenue. To get a better valuation need to be profitable and dominant in good size market. The benchmark here is Rea group is worth 20b aud and is valued at 17 times ttm sales. 

The above explains why ohmyhome has been crashing. Market cap of 50m usd on 4-5m sgd revenue and loss making points to it being overvalued even now. Why buy ohmyhome when Pgru is cheaper and much better. Now what does this bode for still private startups? I would not want to be classified unless very profitable. Perhaps being a tech enabled property agent is better.

e) Logistics. This space is more advanced and more positive with J&T, lalamove, cainiao all ipo or ready to IPO on Hk exchange. Valuations are significantly below last round highs but at least public markets validating their ipo and J&T has managed to ipo at 3x revenue. This bodes well for ninja van actually.

List goes on. It seems like among loss making ipo or listco, only saas businesses have held up decently with valuations cut by 30-50% only. 

My advice to founders of larger startups who are nearer trade sale or ipo stage?

Nothing overcomes a bearish climate and sentiment better than clear net profits, strong positive cash flow and some growth. If you used to put a 20% emphasis on profit and 80% on growth, perhaps flipping it would be wiser in the near to medium term unless your area is very special and blue ocean like openAI and you are growing 2-3x or more annually.

For the rest of the more normal tech/growth companies - I remember before 2012, later stage valuations were never about just multiple on sales or future potential. It was always more weighted towards multiple on net profit. Not operating profit, not adjusted level profit but GAAP standard net profit. 

So if you can, build out both profit and growth where profit is now more important than growth. It is very disturbing to scan our series c, d companies and see them very loss making even on 50m or 100m revenues. Makes one doubt the quality of their gross profits and margins.

I cannot stress how much freedom and options you have once you make your own profit. You can use it to further invest, buy out impatient shareholders, pay yourself better etc. Don’t  forget many many successful entrepreneurs have not taken Vc money. And outcome can still be great. There are 2800 gcb in sg, I believe Vc funded tech founder owners account for less than 1% of them.

How about founders running early stage startups and early investors? Actually this space hasn’t been affected that much. Valuations have gone down somewhat but because it’s very far from exit, investors are still cutting cheques but maybe 20-30% less. To me, founders in seed and series A should still do the same thing of building great product, proving product market fit and then scaling it further. Early investors are also fine. If you invest below $6-7m post round, an exit at 30-50m is still not bad. For example, the early investors of a recent exit techinasia or affable are still fine. But I think their last stage one esp for TIA will not have done well.

Doing much better now - Carousell

Readers will know I did an analysis  back in 2016 and updated it in 2018. In 2016, I was quite disturbed because they have not switched on revenue tap after 4-5 years.   My reason is that the organization cannot learn what works and build the right sized complement of capabilities internally if it does not start charging. Also I think very much from founder pov and I felt the amount of dilution the founders took was not optimal for their own life outcome.

Then in 2018, I commented again as they finally switched on the revenue and the initial revenue was very low at 1+m compared to expenses and valuation. 

Then things got better for them. They used their high valuation to acquire some solid revenues from SPH and OLX. I thought this was a very good move. Much like grab buying Jaya and now transcab.  These moves helped a lot. They also learned how to sell and are trying to earn a cut from all the activity happening.

Now 5 years later, I think carousell is a changed animal for the better. Mgmt has matured, usage is still strong at 35m visits per mth. Still loss making but with 100+m revenues but it should be sustainable if they run lean to ensure low overheads and pick high gross margin verticals to enter. And very important, the direction seems clear as Siu rui articulated a clear positioning for the company as the dominant asean classifieds that focuses on sustainability. 

So moving forward, I see 2 key challenges. First, pick and grow the right verticals that are very large and the company can grow into. At same time these verticals cannot be cash intensive and/or too low margin. I would avoid jobs, property if I can. Incumbents way too strong and synergies not great. Used cars maybe as there are profitable models whether it is listings or transactional. And if growth is by acquisition, the internal capability to integrate is critical. Second, the environment has changed at later stage investor and listed side. Listed side investors now want to see both profit and growth esp if niche areas. So mgmt have to walk that balance to show both are happening. And all this time, they must make sure have enough cash. 

These 2 challenges are not easy. Verticals usually have incumbents. And they can be very strong. See seek and propguru, sgcarmart/motorist etc. Other verticals may be weaker but their gross margins are poor and fraught with execution risk. See theRealReal and redbonz in the 2nd hand fashion space. 

So assuming mgmt navigate well, what will success look like in medium term? 

To me good execution will be to succeed in 1-2 verticals that are large and growing well. Eg fashion, watches, used cars etc. Financially, breakeven or very small loss on revenue of usd200m in 3 years. Then the valuation will  likely go back >$1b.  I am assuming interest rates stay high which means growth stocks no longer have a crazy premium. 

Case in point, job classifieds can make $30m net profit on 100m sales. Company will be valued at 1B even if growing just 10-15%. So if carousell can blend out a gross profit of 35-40%, then its revenue needs to double to $200m to have a gross profit of $70m. And if  lean like a job classified on overheads, it will be worth the 1b or so. 

Or if we want to compare against currently listed entities, propguru does about 110m usd revenue, growing in low to mid teens and is valued at 5 times revenue less cash on hand. So that triangulates with the 200m revenue number. And this assumes the GP  both are same. I suspect propguru will always be higher margin but carousell may be growing faster if they pick big solid underserved verticals.

So what do with SEA- a losing core stock?

Quick thoughts on how to handle a losing stock like sea.  It’s the biggest loser in our portfolio this year (almost everything else is up) and we have a good chunk of it as it’s one of the few stocks that we stock pick and own. 

Latest quarter, growth rates just mid single digits at 5.2%. Grew profits to 330m but stock plunged. reason is: 

- sea is facing competition by Lazada and possibly TikTok.  No new big game on the horizon to replace the declining free fire.

- mgmt (rightly) wants to reinvest more into growth and so the 300+m quarterly profit may reduce or even go negative. So investors get jittery.

So how to view a stock that has lost 60% of value from our buy price? We obviously believe in the mgmt otherwise we would have cut loss at 20-30%.  But we have not added much as the logic is down can go down more. Lucky for us. And we also kept to our overall limit per stock of 5% of portfolio.

Now of course sea is down to 1.5-2% of portfolio esp since rest of equities did very well beating SPY this year. 

So the question is what to do now that it looks like sea has capitulated with the huge drop to 38.

Long story short, have used options to double down. Sell put buy long dated call to an effect of doubling holding. This will put my average price down to 60ish or so. 

Main reason is conviction this mgmt knows what they are doing. Let’s see next 1-2 years if we are right. 

Side note: psychology plays a big role. 3 points

- It’s much easier doing this double down this year than adding to FB or SPY, QQQ last year oct. Reason is last year everything and overall already down. So its very hard to add in a falling market. Had to force myself and in the end skipped one major chance though caught most of it.

- Overall, sea is our biggest stock gain ever. So it’s easier to have conviction when the 60% loss is 20% of the old gain. However, I am mindful this can end up being a blindspot to be too generous in our assessment of sea. Have to remember.

- note I used far out of money long dated call options to double down. So i am also limiting my losses to the call premiums while riding most of the upside esp if sea rebounds big. But for options side of things, I will take profit if it rallies big. Then switch into actual long holdings if we want to own more sea.

Learnings from key losses over last 12 years

About S$3.5M from the more memorable badly made investments. That's since Jul 2011 when we actively started to track and run our portfolio of bonds, equities, forex and private equity. I am sharing because there are too few articles that discuss about investment losses and learnings. And I believe there is as much to learn from losses as there are from winners.  And a good investor needs to take into account both in order to succeed over time. 

Losses have always been on my mind esp since 2014 when we completely exited our business and switched from an entrepreneur mindset to an investor one. Prior to that, losses mattered less as our invested capital was always a small portion of our total net worth since most of our monetary net worth was tied up in human capital in the form of future salaries and in the company we owned. But once our invested capital becomes the main cash generator, tracking and analyzing losses and wins in investments becomes critical. 

Of course, as active investors, it’s not realistic to expect to make a gain in every investment. In fact, it is normal to have many bad calls/decisions and to lose money on some investments every year. What is desirable is to have strategies and policies that end up with more winners and maximize those winners while minimizing quantity and quantum of losses. And the big goal overall is to eke out a good return over the long term across entire portfolio value.

In the points that follow, I will attempt to group the key losses by asset type and reasons for the loss. Then I will share the learnings we gathered from that loss.  Also, to set the context, our investing experience has been good but not great (own yardstick) over the last 12 years to end June 2023.

1) Equity returns better than ACWI ETF 8+% total annual returns.

2) Fixed Income returns better than JNK ETF 3.5% total annual returns.  

3) PE investments (which are majority VC and startups) at  25-30% IRR which is strong but a lot of unrealized gains. 

So we feel we are doing fine because our returns more than pay for our annual expenses and are also above the financial planning targets we set 12 years ago. And the main internal controllable reason we achieved this is due to consistent asset allocation discipline. We are almost always fully allocated or even overallocated using leverage. So we never have cash dragging down returns. And almost always >>50% equity allocation. Second reason is a few decent single stock (eg. SEA, SHinvest, FB, GOOG etc)  & ETF selections with consistent & appropriate bite sizing . Would love to add a third on being able to cut loss quickly but cutting loss is not yet our strength as readers can see below.

Bearing all that in mind, here are our bigger memorable losses (in SGD). I exclude direct startup losses because the considerations and learnings are quite different but include PE or VC fund losses because fund manager selection mistakes can be pattern recognized more easily.

1) 500k - Bad fund manager selection on famous FMCG PE and a brand name European hedge fund. The 2 funds above were bought thru a private bank and they promptly went on to grossly underperform compared to peers and benchmark. So they had grossly negative alpha. 

The PE fund is still ongoing- sitting on 380K or about 50+% loss after 9 years of investing.  The fund did so much that don't make sense. Supposed to pick more stories like Charles & Keith, more china plays... instead they picked 2nd tier brands in australia, europe, SG , Middle east. And they reported greatly improved TVPI and IRR just when raising next fund a few years later - only to write portfolio back down once fund 3 was raised. And then later mgmt exited to a new buyer. Lesson here is fund managers are aligned to AUM which pays 2% annually much more than aligned to our returns. And be very skeptical of mark to market if it is not realized. Esp don't trust the numbers when fund is using it to raise new fund. Their incentive is to window dress their old fund numbers. 

Also one vintage does not prove anything. Go for fund managers that really have long track record. It implies a lot in terms of internal bench strength, professionalism etc.

The famous European hedge fund lost 20+% within 6 mths and closed down. Even the private bank that sold it had to say sorry. Lesson here? Beats me! for some reason the manager didn't even want to continue it. 

2) 900K - From 5 single bond & 1 recent fund losses. Back in 2013-2017, we were happily borrowing USD at 0.7% and then buying IG bonds at 3.5-4+%. This was a winning strategy until we decided to go after a bit more yield and went in Brazilian USD denominated IG credit and regional BB junk bonds. Unfortunately operation car wash hit,  there was the oil & gas crash worldwide and the regional single issuers had internal cash flow problems.

The first bond was the worst as we thought bonds can rebound and price action may behave like stocks. One huge learning is that bonds plunge at the slightest whiff of insolvency. And the risk reward is very poor for holding on or doubling down. At least for novice investors like us.  We watched the bond go down from 90+ to 70+ to 50+ to 30 and no buyer.  Could have sold along the way but did not. Big learning here.

Next few bond failures came over next 1-2 years. This time we learned to cut loss and got out at 70, 50 and one at 30+. 

Bigger lesson is individual bond failures sting badly and its better to get lower yield but be in really safe names. And safe means names we really know well in terms of their finances and jurisdiction.  So no EM bonds for us anymore even if IG grade. Bond professional investors are smart and they price risk reward carefully. So don't get too carried away by the absolute high yield of junk bonds.

Then after 5 years of careful bond investments that did well, we got greedy and listened to a CIO from a Swiss PB and got attracted to good YTM in Asian junk credit this year and bought early without conviction and multiple bites. We even levered for it as expected return over leverage was 7%. Just cut loss as it was never our intention to own more FI. Didn’t feel comfortable to deviate from plan esp once the fund fell by >5%.

3) 300K forex losses. Mainly due to long positions in the underlying asset which is overseas. For us it was mainly MYR, AUD, BRL. The first 2 were unavoidable as we owned a property in KL, have a malaysian startup stake in RM. We also invested in ASX stocks.  For the MYR, we already tried to hedge it by borrowing 70% but for AUD we did not as borrowing cost felt high compared to USD. But these 2 not so bad as our capital gain on the underlying assets more than offset the currency losses. But for BRL, it was a disaster as we used it to invest in IG credit from 2 Brazilian issuers. So while the issuer did not have any problems, the Brazilian real fell 30% or so. Ouch. 

Big lesson here is other than SGD and USD, we now don't want to own other currency as currency risk is totally unpredictable and foreign to us. Unlike equity risk. I would also add owning some JPY or EUR or GBP or AUD is a world apart from EM market currencies. The latter i will avoid at all costs. But the former, i am looking at JPY assets now as leverage is very cheap. Though I am reminding the tail must not wag the dog. Meaning leverage cheap is one plus but it is secondary to choosing the right asset, entry price and bite. 

4) 400K Option losses. We sell puts on stocks we want to own. We also buy calls on esp bullish positions. The losses come mainly from selling puts without enough research and using Private Bank ELNs. ELNs need min 100-200K. So we can't implement our multiple bites and average down strategy. This is very damaging if the ELN gets triggered as if we average down, the position gets very large for us. And if we lack conviction/get thesis wrong, the losses can be big. The other option losses come from averaging down on call options. Its the gambler mindset to want to average down and see a huge win if one gets its right. However, we have learned that call options must be used very carefully.  We now use the full value of the call as our position size and not just the option value. This prevents us from building too large positions in options that have time decay.  

5) 1.2M Equity Losses. This segment is largest but it’s put last as these losses come from 12 trades. So it’s $100K loss per trade. Smaller compared to bond or fund errors. And the reasons for the loss almost all boil down to 1 reason - 

Bought without enough research leading to a lack of conviction on the company. Insufficient research also means no strong opinion on fair value and momentum of company. This leads to us buying in too high and frequently too early and too many times. The above when combined with option losses is what accounts for most equity losses. And number 1 reason for lack of research is listening to  experts or friends. Most of the ideas that come from our internal synthesis and analysis tend to be good. Eg, our own call on QQQ/SPY last  year, call on SEA back in 2018, call on Shinvest, ifast, FB, lulu... etc etc. The ones where a smart professional does a smooth presentation and shares what they recommend tend to be disasters. The latest being the call on asian high yield early this year. 

6) 100k - crypto hedge fund invested in late 2021. Felt rich, joined too late, follow friend and without conviction. After 2 years, it’s also clear the managers aren’t good at generating alpha… riding the Alt coins market down in 2022 and failing to ride even eth and btc up this year.

So that's the sharing we have. The learnings from them can be summarize into

- Don't listen to experts or friends. Never buy because someone else said so and without deep knowledge. Buy because we formed a strong thesis on our own. Interestingly this is different from startup investing where following professional investors tend to be ok..

- Then research and think more until have conviction of where asset is going in near and longer term. 

- Have an entry and exit points for the asset

- Make sure ultimately correct bite sizing for that asset so we can stomach the ups and downs.

- Coldly execute and monitor. Don't ever panic sell or buy. Exception is single bonds, cut loss quick if have chance of insolvency. 

- If using fund managers, esp PE/VC,  go for tried and tested managers with long histories. Not just 1-2 vintage managers who may not have conviction and/or were just lucky to have big winner in one vintage. Also, don't blindly believe what they say esp on mark to market unrealized returns. Real distributions count not unrealized gains.

- Learn to cut loss faster. Applies to all assets except PE funds which cannot exit. This is one of our greatest weaknesses and we are trying hard to always clean house annually and keep to set rules on allocation. For single stocks, constantly review the stocks to reaffirm conviction to hold or add.

- Always stick to overall portfolio allocation which is planned and rebalanced every few mths. Don’t be tempted to move out of it if it’s working as expected.

- don’t borrow to go after smallish or mid size gains. Only leverage if returns are potentially huge to justify the fixed cost of leverage. Gains are not fixed, but interest payments are. 

-for cutting losses, treat each loss in isolation. $50-100k is still a lot of money to lose even if you made 2+m in gains this year. Don’t fall into the bad habit of saying overall made money, feel rich so it’s ok to hold out for rebound on a losing investment. Cut loss quickly once no conviction to hold. This is key to cutting loss well and right now, we are mulling over our China holdings thru this lens….

I hope the above sharing is useful to readers in that it exposes how much can go wrong when one is investing across multiple asset classes. Of course, we have many more profitable investments than losses last 12 years too. And we also have many more learnings from these winning trades/assets. The key is to combine the lessons from the winners and losers to get a sustainable long term investing strategy. 

Budget 2023 and the real elephant in the room

Have been asked what’s my opinion on the budget. General sense is that it’s a more labour and average resident friendly budget than one to spur investment and enterprise. I spent some time reading the full statement and also the various appendixes. I selected some key screenshots of interest to share.

Interesting to know govt is now spending an increasing sum on early childhood. Was asked before during a tea session if I think we need to nationalize this space and my instinctive answer was a YES. Level the field from early childhood so that all Singaporeans have a chance to succeed in life.

The 51b loss is Covid spending mainly. So it’s great we did not need to get into debt and used reserves to pay for it. If it was debt; we would be servicing 1-2b in interest payment yearly. Thats half of the projected gst increase in revenues!

Good to know the actual manpower expenses are just about 10-11% of total govt spend.

Defence spending always high. Don’t question the need for it; but the point about making sure each dollar is well spent is key.

A few key observations on big trends and issues :

1) govt spending has increased quite a fair bit between 2017 to 2023. In 2017, we spent 55.6b  on EOM (manpower), OOE (other operating exp), grants/injections and transfers. In 2023 we expect it to be 83.6b. That’s a 50% increase! 

GDP of our nation during same period I estimate will have increased from 343b usd to 425b usd. So that’s a expansion of 24%.

Broadly this means our govt has gotten bigger as a proportion of  GDP. This in itself is not a bad thing as i can see visibly that our healthcare sector has expanded, our public education has broadened  to include preschool and that there is much broad based support and resources spent to improve wages at low end via pwm and various credit schemes.

My big concern here is that with public service spending and investing more, all the more we must ensure governance, appropriate top level targets, productivity of each ministry and statboard workforce, benchmarking etc are done at top notch level. The total budget is 104b or about 18-19% of overall sg gdp - it’s critical the entire civil service continues to perform and improve at the highest global level. To me this means aiming to run as well as top global private firms with similar headcount at least in key areas of strategy planning, scenario planning and talent recruitment/retention. 

2) We can also see govt projects a small deficit this year.  The NIRC at 23.8b is a very significant component of our govt budget. This NIRC is from our nations wealth kept with Temasek, GIC and it’s there because of the collective efforts of past generations who ran TLCs, sold land and invested budget surpluses well. 

My comment here is we again must not rest on our laurels and need to keep the reserves growing by ensuring Temasek and GIC run at the highest standards globally. This means going beyond governance and going into benchmarking against and beating or meeting top PE and balanced indexes globally.

My sense is Temasek has a much harder job as it has a portfolio of local TLCs which have a lot of history and which unfortunately is a mixed bag when it comes to their success going overseas and growing beyond their local (often case) monopoly. They don’t handle disruption well but we own a big chunk of them. One way out is superior hands-on boards and management that are incentivized to truly build and grow. And be quick to fire bad performers. It’s not wise to always think ex scholars make great tlc leaders. Or at least complement them with commercial chairmen that govt trust to really push them on delivering results.

3) My biggest comment which is not spoken about in budget speech is really about population/manpower. It has been 12 years since 2011 elections. A lot has changed and infrastructure and conditions have improved much to me.

I would ask for leadership and clarity from govt to convince fellow Singaporeans it’s time to come to a consensus on how our society can continue to grow in the years ahead. 

Our working resident population is 2.35m. Our working population is 3.7m or so. We already run an economy that is beyond our local capacity. And we need to spend more in the years ahead to look after all citizens well. 

With our TFR at 1.1, we are doomed as a nation unless we deliberately and consciously add to our ranks. And the best way to do this is to have a proper manpower strategy that adds the talent we want with a view to convert a nice pool of them each year to be PR and citizens. 

5.6m population is not a lot compared to other small nations in the developed world. A 7-8m population Singapore where about 5.5m are resident will really help us thrive as a nation. Better job opportunities, more vibrant local economy , more social variety and better tax situation for individuals too. Each resident pays less tax if our economy is larger.

So what I am asking is for a conversation to start. And we try to have a consensus on common points and see if with those common points, a clearer path can charted on our population strategy. 

As a father of 4 sons, I think it would be remiss if we keep letting electoral vagaries determine how we communicate, educate, lead and agree on this existential issue.

Startup Portfolio Review for 2022 - The pain of costly capital

I just reread my 2021 report and unfortunately a lot of the points/predictions we made one year ago came true. The growth stock rerating lasted the entire year with no reprieve in sight as the Fed raised interest rates to 4+% in an effort to combat persistent inflation. SPACs and IPO attempts mostly all failed as the markets refused to tolerate expensive listed company valuations. Carousell, Kredivo, Carsome/Carro all have to say IPO or SPAC deferred for another 1-2 years as investor appetite dried up on loss making companies. And those few ASEAN startups that did manage to exit in 2020/21 like Goto, Grab, Buka, Prenetics, Propguru all crashed anything from 50-80%. Even the largest ASEAN tech company SEA crashed 76% from 220 to 52 per share.

In spite of the tough investing environment, Ning & I stuck to our investing philosophy and continued investing into 4 new startups and did 5 follow on rounds for existing portfolio. Amount invested 20% lower than 2021 which was a record year for us with 9 follow ons.  As shared in 2021, covid and Ukraine war has caused great pain to 3 of our startups and we have chosen to write them down to zero in 2022. On a positive note, 2022 saw a decent exit from our 2012 investment in an animation startup. Also, in spite of the bad market, we had 5 series A up rounds happening for our first Vietnamese and Thai startups and 3 SG startups. So in total,  for the 41 startups we invested since 2015, the IRR is now ~28% (down from 38% last year) with a TVPI of 2.66 (down from 2.98 last year).

On the VC front, our 8 funds are at 2.6 TVPI mirroring our angel side and actually up from 2021 2.47 TVPI. IRR should be low 20%s as they took capital much faster. 

Putting both angel and VC together, we actually still eked out a small gain of 2ish% year on year for 2022. Hard to believe but there is big caveat. See point 5 below.

Some comments and thoughts :

1) The drop in early stage valuations has happened. The valuations for follow on A rounds have been significantly worse than what founders thought. However, it is nowhere near the levels of how the growth stocks have fallen. ARKK fell almost 70% in 2022, it is only logical that series Seed, A, B, C, D, E valuations fall drastically too. Right now, startups are deferring fund raising if they have cash or raising from existing investors whose interest is to maintain last round valuations. Something has to give and i believe if interest rates stay above 4,5% this entire year, we will see some capitulation and failures from later stage startups which will cascade further to the earlier stages.

2) At Seed level, valuations have fallen 20-30% but its still expensive with no revenue startups valuing themselves at 4-6M SGD. If the later stage fallout happens as described in point 1, then maybe we will see valuations for seed back to the old S$2-3M range which would reflect the risk reward for angels and seed investors. 

3) One silver lining is many ASEAN VCs just raised capital for new fund and have cash to deploy. So it is entirely possible that they can maintain their winners valuations and ride out the storm until 2024/25 where they expect inflation rates to moderate back to the 2-3% range and hence interest rates to weaken and valuations to rebound somewhat. For these VCs with cash, they are in a relatively good place to slowly pick and choose  for new stories and only invest in valuations are good. For VCs who want to raise a new fund, i hear 2022 2H was very tough and i believe it will be very hard to close any meaningful sum for a few months more. Global investors need more clarity on inflation and IR and economy before deciding next steps. 

4) VCs (as of 3Q end) are still declaring good numbers. Two ways to see this. First explanation is the nice way.  Winners can still grow and command up-rounds in bad climate. Some of our VC funds invested in Ninjavan, Carsome, Grab, Buka, Kredivo etc. So its possible to swim against the tide for sure.  Second reason is that VCs have leeway in how they determine valuation. Usual rule of thumb is to keep at last round valuation. But they can also chose to up a valuation if company has no new round but business has a grown a lot. Also, they can continue to fund internal rounds at last round or even up from last round. All these moves allow them maintain valuation stickiness. The game is only up if the startup fails to perform, or lists and stock price drops or if climate stays permanently depressed and new round is down. Then write down becomes inevitable. 

While we can understand the logic of VC behavior, it does contrast with later PE funds. We also invest in some later stage PE funds and because they have many listed investments, they have had to write down 20+% mirroring at least a good chunk of tech stocks revaluation. So it’s important to take the VC numbers with a big grain of salt. 

5) On a personal front, while 30% IRR sounds good, it is mostly unrealized gains on unlisted companies.  The weakness in the ASEAN ecosystem is the lack of distributions. In current climate, I would much rather have a TVPI of 2 and 15% IRR but with 1x DPI already. 

6) This combination of high interest rate + high inflation + geopolitical issues = great uncertainty in global and ASEAN/SG economy. And when we add on our personal asset allocation shift into property, we feel a need to recalculate how much more to invest in startups. Bottom line, we want to see cash returns from earlier investments before committing much more capital into the space. So a lot depends on what happens next 2-3 years. Hitting 50 startups will probably happen but hitting 100 will require more exits. 

Bottom line, capital is now costly. Why would an investor take high risk to earn 15% returns if they can get 8% investing in a relatively safer bond portfolio? And why invest in a loss making unlisted startup if they can invest in google or baba at 12-18 PE ratio? Ning & I remember a time when startups were valued at 15 times profit and that was considered good valuation. And if you are not profitable, your business is not worth much until you show you can be soon!

7) We have actively communicated this investing climate change to many of our portfolio companies reminding them that profits matter a lot more now. I do believe many founders understand that turning profitable is the surest way to navigate 2023 successfully. Quite a few of our startups are either profitable in 2022 or have a clear path to become profitable in 2023. Those who can't are cost cutting to at least show narrowing losses and also making sure they line up equity funding to stay alive.  

It’s not a good time to run a startup now. Costs are rising due to inflation esp wages, but funding is hard to get. Debt is expensive and we expect startups that need lots of debt to suffer in the months ahead. See what's happening to Affirm and Klarna and Carvana. What will drag things down further is if USA economy goes into bad recession with its consequent impact on ASEAN. Then customers too will be hard to find as overall demand shrinks. 

8) Timelines to exit are now all extended at least 1-2 years as many startups will just stay alive and tread water in 2022 and 2023. So fellow investors, please do your own modeling and analysis and base it on a 10-15 year horizon for each startup and VC fund you invest in. With 10 years being a good scenario!  

9) One great thing that happened in 2022 is how the AngelCentral community has continued to grow. Our first investments into Vietnam and Thailand paid off well this year with significant uprounds happening as Series A rounds happened with good VCs. We also had earlier syndicated investments raising Series A in 2022 at improved valuations. So if you are keen to join us, do check out our services to help angels.

Moving forward this year, we intend to continue investing but with even more caution and discipline. This climate is not a bad thing as it removes all the crazy excesses of the 0 interest rate environment. It never did make sense that NFTs/alt coins were worth trillons or that startups are worth 10-30 times their sales even with lousy gross profits. Its a much needed reset for asset prices and forces everyone to get back to basics of profits and cash flow management. 

On a founder or investor individual level, we of course hope for the global economy to not tip into bad recession in this adjustment process and that inflation is curbed with minimal collateral pain. However, an old adage comes to mind - we can hope for the best but we should plan for the worst. Sounds like a good philosophy for 2023!

Footnote : This review focuses only on our startup and angel investments mostly in ASEAN space. if you want to know about overall philosophy in life, pls read annual review on life.