I'm ready

There has been no news released by Greenstar for over a month. It has been far too long without an update and at this point I've thrown in the towel in terms of hoping for a positive resolution to this.  For what seems to be a straight forward issue to resolve it's taking way too long and with the company being so quiet like this it can only mean there's a major problem of some sort. I've assumed the worse and I'm ready to take a total loss on this. It will be devastating and I don't know if I can ever fully recover but I've done my grieving and accepted it and so there's been no more sleepless nights for me.  I'm ready for the worst. I always knew there was the risk of this happening but I just never thought it would happen like this. I suppose a lot of people in my situation will say that. I suspect news will be coming soon as the company can only stay quiet for so long. Whatever they say won't hurt me as I'm already dead.

So far so good....

Things seem to be moving forward with Greenstar. They are still not out of the woods but it was a big relief to know that the CFO, who flew over to China, confirmed the story of the CEO and that there's nothing else going on. It was my biggest fear that there was more than meets the eye with this crisis....and there still may be, but such fears have been quelled given recent news. Major hurdles have been cleared. Now that the finance chop has been replaced the audit can be completed and  it should be a matter of short time before it gets done and the financials can be filed. Management is targeting the end of the month but don't be alarmed if it ends up taking a little longer. There's a few moving parts for this thing to get done and so the company probably needs a little good fortune for all to go smoothly. One possible remaining concern is the cash in the bank. Was there any funny business going on with the cash while the controller had possession of the finance chop? It's highly unlikely as it requires both the finance and legal rep chop to make transactions. So, the only way the cash was tampered with is if the controller and CEO were conspiring and that too seems quite unlikely. If that was the case, I don't think the CEO would have been cooperating with the board the way he has as well as supporting the company with his own money (the bank accounts are frozen without the finance chop). If he was guilty of wrongdoing I think he would have behaved a lot differently and pulled the plug much like what the CEO at APX did.

If and when the financials are filed, I suspect the company will also have to provide an explanation to the regulators as to how they intend to ensure that a similar crisis will not happen again before trading gets reinstated. As mentioned in a prior news release, the company has plans, but will they be enough to satisfy the regulators? That is another remaining risk but I don't think it's one to be overly concerned about.

As I stated last post, if Greenstar can survive this crisis they could end up being stronger as a result. In completing the audit, they will have satisfied higher standards as per the mandates being enforced by CPAB which I also touched upon in my previous post.  They will have identified and corrected a major weakness to their corporate structure and I'm quite sure they will also be examining other potential weaknesses and take a proactive approach to address them as well. They will do everything they can to win back investor trust. However I'm sure some people are not going to look at this way. There will be those who will take a pessimistic view and claim Chinese companies can't be trusted no matter what.  There are bitter shareholders out there I'm sure, who will be eager to sell at some point if and when trading resumes. I will not be one of them.

This crisis as serious as it is, did not involve fraud nor has it harmed the company's operations or prospects in a material way. From what I can tell, there have been no major disruptions and the Canadian acquisition is still on the table. People make mistakes. Some mistakes are forgivable others are not; in my opinion this is the former. The CEO Guan appears to be mainly at fault here for letting the situation with the controller get too far out of hand and didn't inform the board until it was too late. I think he learned his lesson here and deserves a second chance. Let's hope he gets one.

Crisis

It's been an absolute nightmare for me since my last post given the events of Greenstar. I didn't want to talk about it until there was sufficient facts. On April 28th Greenstar announced they would not be releasing their year end financials on time because the auditors were not able to complete their audit procedures. It was later revealed that the reason for the delay was corporate governance and admin deficiencies due to an internal dispute between certain members of the company's finance department led by the controller and the CEO. They basically want more money and the controller has took possession of  the finance chop a.k.a seal to gain leverage. Without the finance chop the company is unable to access any banking and tax information which is necessary to complete the audit.  The CEO is in possession of the more important legal representative chop. He has the ability to replace the finance chop and the company is in the process of doing so. Once that's done, the company could move forward with completing the audit.

Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.

A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a  lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.

The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from.  To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.

Out of sight out of mind

First a few market comments. Since my last post we've seen a notable pullback in the NASDAQ and a more modest one for the markets in general. The frothiest sector of the market  has been unwinding somewhat as there seems to be a rotation away from the tech high flyers. Anytime the markets pullback 2-3% I continue to see quite a bit of angst out there....people talk as if the market has crated 15-20%. It once again shows the wall of worry psychology that's still out there. This makes the prospect of shorting the market in the hopes of captializing on a correction quite unappealing to me because it's difficult to get downside traction when you see worry rather than complacency on just a minor dip.

 If you pull up a 1 year chart, there's 2 ways you can look at the market - you either see a top forming or a consolidation. From the ways things are unfolding, I believe we are seeing the latter although there could very well be a downside "headfake" sometime in the summer to make it look like the former. I think we could see something similar to 1994 or 2004 whereby the market traded sideways for the majority of  the year as the market takes a wait and see approach to the withdrawal of fed stimulus. In 1994 and 2004 the fed was hiking rates from low levels.  This time around, we got the withdrawal of stimulus via QE. It's dangerous and rather foolish to believe the market will unfold the exact same way it did in some previous time frame but there are a few times where the action does "rhyme" to some degree when circumstances are similar, but the market never plays out the exact same way. I can't tell you how many times I've seen people overlay a current chart with that of some previous time frame claiming how there's a repeat in history taking place and it never turned out.

Switching gears now. In my year end review, I pointed out how one of the things that I needed to stop doing was checking my stocks every day. It's often the case that I would check them multiple times a day as I'm sure most people do. I've learned the hard way how damaging this behavior can be both to your bottom line and mentally. It causes you to become fixated with the ST and may lead you to take inappropriate actions namely, selling in disgust/fear when the price has been sliding  for some time or selling too soon after the stock had a good move to the upside when the fundamentals and valuation warrant doing neither (the mistake I tend to make).  Given that I make "conviction bets" with a value focus and LT horizon it's pointless to focus on the day to day or even month to month fluctuations in the stock price (unless your target price is hit which you can be informed via a price alert). The only focus should be on fundamental developments. Even if you are able to resist making an inappropriate ST trade;  watching the day to day action will put you on an emotional roller coaster with highs and lows that can take quite a toll on you and impact the other parts of your life. Some people handle it better than others but the more you have on the line the more likely you are going to be impacted by the day to day ups and downs.

There have been a few times in recent years where I have suffered mentally because of adverse ST moves that were not fundamentally driven - they were liquidity driven due to a large seller who wanted to liquidate for non-fundamental reasons or perhaps trivial ones. Despite being pretty sure I got the fundamental story right and being fully aware that the microcap space is prone to nonsensical volatility due to liquidity events as I described above; when a significant adverse move happens I still can't help but worry at least a little if someone knows something I don't or I overlooked some important factor. Those nagging worries can easily turn to doubt and paranoia if the stock has a prolonged slide. It will also make me prone to selling too early once the stock does turn around as I don't want to have to go through another agonizing experience again on the next correction. If I had not gone through the emotional roller coasters I'm pretty sure I would not have made many of the premature sales I made over the years.

It's been about 2 weeks since I've gone "cold turkey" by not checking the price of my stocks. I have real time alerts that will notify me when news is released and I will receive a price alert if the stock hits an upside target price so it's not like I'm just sticking my head in the sand here. If there is a fundamental justification to take action I will. It was hard to do this at first and I felt very anxious but now I've been able to just let it go and there's no urge to check. I feel so much more relaxed and clear headed. I'm more productive with my day as well. If you have a similar LT approach to the market I strongly recommend you try this. You must however, not confuse this strategy with being in denial about a bad situation whereby the company you own is in bad shape fundamentally and you don't want to look at the price anymore refusing to sell a loser.  A perfect example of this would be Nortel 10 years ago.

This "no look" strategy really makes a lot of sense if you're a LT value investor. As such, you are not interested in what the stock price is unless it hits at least fair value. You view the purchase of a stock the same way you would the  purchase of a private business and so if that's the case, would you then check the value of your business the day, week or month after you bought it? Of course not. The only thing you care about is the business itself and how it's running and if it's doing well, you won't be interested in selling it unless you get at least a fair price for it.

As a result of my new-found strategy I will disable comments and will not answer emails (because I will not check for them) at least temporarily.

Top picking

There's no shortage of bearish calls out there. There's even comparisons of the market to 1929 based upon a chart overlay. That's a joke. Yes, there are some signs of froth namely the IPO market - the Candy Crush IPO seems ridiculous.  I read a report that said about 75% of announced IPOs in the US were money losing companies which is about the same percentage as early 2000 near the peak of the tech bubble. I suspect the social media and cloud computing space  is largely responsible for a lot of this froth. These types of studies are worrying people - even Cramer is concerned! However, there's no comparison between where are now vs early 2000.  Economically speaking, the US economy was running at full steam with record low unemployment in early 2000. The Fed was concerned about overheating and was tightening rates to the point where the yield curve was inverted;  a condition that always precedes a recession and major bear market. Optimism in general was palpable with consumer confidence at record highs. There was also this notion that we were in some sort of new economic paradigm thanks to the internet and the market as a whole was historically very overvalued on pretty much every metric you can think of. We are nowhere close to the conditions that existed in early 2000 or the start of other major bear markets. Monetary conditions are still very accommodating even with tapering. The economy is expanding but only modestly, unemployment is coming down but is still at unwanted levels and widespread optimism in general is non-existent - consumer confidence is still well below 100.

Another thing you will tend to see near the peak of a bull market is how most people embrace or find reasons to justify what appears to be froth as opposed to looking at any sign of optimism or froth as a contrarian reason to be worried as is the case today and in recent years as well. Take Cramer for example. In February 2000 he posted an infamous article about how you had to own  these 10 "new world "  names  (high flying  internet stocks) if you wanted to make money in the market. He was not alone. I remember how in 2000 practically every equity mutual fund in Canada had Nortel as a top holding. At its peak Nortel made up a ridiculous 1/3 of the TSX. You see, retail and many of the "pros" embraced the market and eschewed logic. They made justifications for the nose bleed valuations (the internet will spawn a new era of massive growth and so traditional valuation metrics are not applicable). Can you honestly say that this sort of sentiment prevails today? Hardly. This time around Cramer is siding with the bears pointing out the froth in the IPO market instead of embracing it  and other skeptics are not in short supply. Sure, there's more optimism out there vs a couple of years ago but that's only natural after a bull run like this. And let's face it, you, me and everyone else still has 2008 fresh in our mind and worry of a repeat anytime there's a problem. A lot of people out there are also still convinced that the this bull market is "artificial" in that it's all due to the fed.

So, the bottom line is that despite the signs of froth out there (specifically the IPO market),  there's no comparison to 2000 or 1929. The unwinding of this froth could lead to a correction but unlikely the death of the bull market. The fact that's there's so many top watchers still out there suggests to me that there's still a LT wall of worry out there. I think it's also indicative of sour grapes. A lot of pundits out there were reluctant to embrace the bull market and largely missed out on it and so now it seems they want to make up for it by nailing the top. Too fucking bad.

As I've been saying for some time, the correction when it comes will be elusive. Many people, including LT bulls like me, have been on guard for it for several months and all we've seen are rather minor dips. These kind of situations are rather frustrating but I still think the best course of action is maintain your positions in high conviction names and keep your standards higher than average when it comes to adding new longs while maintaining a healthy cash reserve. I'm not outright hedging with puts/shorts at this time, but you do whatever you gotta do.

Personal circumstances

Nothing much has changed in regards to market action since my last post. The market continues to frustrate both bulls and bears. Both camps have been expecting the market to have a sizable correction for some time now but it hasn't happened. This watched pot never boils syndrome is nothing new, we've seen this situation happen many times since the bull market began. As it turns out, the correction tends to happen a lot later than most expect and only after maximum frustration has been reached.

Switching gears now. I've often said that the greatest obstacle to success in this game can be yourself. Mental/emotional mistakes will significantly prevent you from reaching your potential and at worst can do you in completely. One of the biggest roadblocks to success is that people often make buy/sell decisions based upon their own personal experiences or circumstances instead of the fundamentals. Let me explain what I mean. Let's say you have a twin brother with the exact same skill and mindset as yourself who is on vacation at the moment. You discover a very undervalued stock with great risk/reward qualities that trades at $1. Instead of buying it right away, you decide to just watch the stock  for a while to see how it does, and it moves up immediately. A month later it's at $1.40. You still view the stock as undervalued but chances are, if you're like most people, you will have a hard time pulling the trigger at $1.40 because you discovered it at $1 and feel like a idiot chasing it at $1.40 when you could have bought it for $1, but like most people, you would be willing to buy it if it dipped back to $1.20-$1.25.  Your brother returns from his vacation and discovers the same stock. Like you, he thinks the stock is a great opportunity but unlike you, he's not anchored to that $1 price it was trading at because he was not around when it was trading there. Your brother has no problem pulling the trigger at $1.40 while you still hesitate because you are still anchored to that $1 price. No matter what the stock does from this point, your brother's action is correct, while yours is not. You are basing your decision upon your personal experience with the stock and mental hangups rather than the company's prospects/fundamentals. The market doesn't give a rat's ass that you discovered the stock at $1. Second of all, if you see a very undervalued stock that you believe is worth multiples of it's current price, you shouldn't wait for a dip in the hopes to buy it a bit cheaper because in doing so you risk missing out on the big upside that it's likely to have - the risk/reward scenario in waiting for a dip in this case is very poor.

It's this type of thinking that also makes us sell our winners far too early which is something I continue to be guilty of doing. Rather than selling based upon the fundamental factors of the company, most people will incorrectly sell largely based upon their own personal circumstances such as how much profit they have or how large a percentage of their portfolio the stock is (rebalancing). I'm 100% certain that anyone who's been playing the market for some time has make this mistake. It's probably the biggest detterant to making a killing in the market.The saying "you can't go broke taking a profit" is bullshit. If you want to travel the path of mediocracy then by all means follow that advice.

The right way to play the market is to make your decision based upon always looking at the stock with "fresh eyes". When the stock in question has make a good move up ask yourself this, if you had just discovered the stock that day, would you still consider it a buy? That answer should be the primary factor of your decision to buy or sell. Forget about the past or what your avg cost is. That means fuck all in terms of where to stock price is likely heading in the future. The only time you could justify selling a stock "prematurely" is if you uncover an equal or more compelling opportunity.

It is very difficult for even the great investors out there, to avoid the dreaded mistake of taking profits too early. As Livermore said

I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

I have made this mistake with hwo.to. The stock now trades at $4.50 and I sold out 92% of my position at an average price of about $3.20 leaving big gains on the table. Although I rationalized my decision to sell with some fundamental factors, a large part of the reason I sold was due to my personal circumstances. My avg cost was $1.45 and I collected nice dividends along the way and so I made out well, but I obviously could have done a lot better. I could be a little hard on myself here because although I believe it's a mistake to sell based on personal circumstances, my situation was unique in that I had made a large initial investment  in hwo and I did the same with gre.v and so I had 80% of my portfolio in just 2 stocks. I think I had bitten off more than I could chew and didn't feel comfortable being exposed this way. So I think in this case, making a trade based on personal circumstances may be at least partially justified because I made such large bets which I normally don't do, but in any case, I don't think I handled hwo.to properly. I sold too much of it even though I was exposed the way I was. I should have sold some shares, but I overdid it and I lost my nerve.

There's a lot of delicate balances to keep in order to have optimal success; I've said this before. Discipline vs conviction. But I will say this: If you want to make big money you gotta have the balls to bet big when there's a golden opportunity and you gotta have the balls and the patience to ride that mofo to the point where it's at least fairly valued. If you try to ride the whole thing from undervalued to overvalued then you're being greedy. Again, delicate balances.

New all time high...again.

The market has managed to make a fresh new all time high once again foiling the burned, likely suicidal bears who thought that January decline was the start of something really nasty. Naturally, there has been a surge of inflows and a sharp rebound in bullish sentiment which suggest that the easy money of this rebound has been made and that one should be alert again of a top but not be over anticipatory. As I've always said, you have to be respectful when a market is making a fresh 52 week high and especially respectful of an all time high for it signals strong momentum which leads to further gains. That's not an invitation to go all in long, but rather to refrain from going short. I think status quo is a good move - maintaining core longs with a nice cash reserve. It will be interesting to see how the market reacts to the "Russian invasion" news over the weekend. As I've always said, these types of one offs don't derail bull markets; they only cause short lived dips at best.

This weekend Buffet released his annual letter to shareholders. You can read it here. For any aspiring value investors pages 16-20 are a must read. I have advocated many of the points he makes here on this blog. Buffet is a very knowledgeable and intelligent man but like he says in his letter, you don't need to be expert or have superior intelligence to achieve great investment success. There's many lessons Buffet teaches; some key ones are these:

• Be very patient and wait for that fat pitch before taking action. Look for those no brainer situations whereby the price you are paying is so cheap relative to what a conservative estimate of long term earnings will be, that it's not even necessary to know much about the actual operations of the business. 

• Buy stocks the same way you would buy a private business which means you don't care what the "market" values the business on any given day aside from the day you are buying it; all you care about are the cash flows the company is generating and the return on your investment from these cash flows - not from your ability to sell to a greater fool. This means that you shouldn't be looking at the value of your stocks every day.

• Stick with predictable businesses whereby you are reasonably sure that their products are going to be around many years from now and not be a victim of technological obsolesce. This allows for good earnings visibility in the long term and thus allows you to have conviction with your risk/reward analysis. This is the reason why Buffet loves insurance, bank, food/beverage, and utility companies and pounces on them when they sell at a discount due to a panic or general economic downturn.