The Importance of Diversification

For those who followed the local stock market, you would not have missed the big news that YangZiJiang (YZJ) Shipbuilding has requested for a trading halt after the Singapore Exchange (SGX) flagged “unusual price movements” in the company’s shares on Thursday 8/8/2019. It had fallen 20% or $0.26 to S$1.04 on heavy volume of 83.7 million shares traded before its trading was halt. It also dragged down the STI Index as YZJ is one of its component stock.

There are many speculation of why its share price was hammered so badly, so much so that the company had to call for a halt. Rumor has been circulating that the chief of YZJ, Mr Ren Yuanlin, has been “missing” for over two months and he is under investigation by Chinese authority for association of a corruption case involving Liu Jianguo, the former party secretary of City of Jiangyin and Jingjiang, where YZJ is based. And guess what, given the weak market condition in the Shipbuilding sector, YZJ has since diversified into financing business – profiting from “Interest Income” through micro-financing and lending by buying bonds. However, financing business is strictly regulated in China by licensing requirement and thus, it is anyone’s guess how YZJ manages to achieve that.

Before Thursday, YZJ’s latest regulatory filing was on Monday, when it posted its financial results. Its second-quarter net profit had fallen 6 per cent year on year to 936 million yuan (S$186 million), while rising raw material and labour costs cut gross profit margin for the shipbuilding business to 18 per cent, from 21 per cent a year ago.

But YZJ aside, this case is again a great reminder to all of us the importance of diversification. As retail investors that are going for income, we will NOT have the expertise, time and capacity to browse through hundreds of pages of annual reports, financial statements, closely follow media reports and every move of the company to fully appreciate the business and to react promptly to any surprise. Most of the time we are reactive investors. Some of us may even be passive investors.

As we will have from time to time, a “bad basket/company” in our portfolio, we need to learn to take in stride when something like YZJ happened and impacts us financially.

The way we can avoid too big a hit is not to put all the eggs in one basket. Diversify is the key to mitigate financial risk. Yes, there is a price to pay and that is lower return. But it is better than no return, impact to personal and family life and countless sleepless nights.

city skateboard skate
Photo by Salvio Bhering on Pexels.com

I have my own failures with Noble, Hyflux Preference Shares, China Fishery and several other S-Red Chips earlier that I have to write off the full investment.

What to do, its very painful, no one likes to lose money but life moves on, thankfully, it was only one of the many counters in my portfolio.

I have since learned to accept moderate return in exchange for peace of mind. I do still speculate with certain counters from time to time but I will not take huge positions with them.

The largest holding I have now is Singtel. It used to be double digit % but I have taken the opportunity of the recent run-up of its shares price to reduce my holding substantially. It is still my largest holding but it is single digit now and I will continue to trim my holding whenever opportunity arises until it reaches 5%. That is my comfort level as the max holding of any stock in my portfolio.

Hope you practise diversification too.

It will give you a better peace of mind in the long run.

Take care and see you soon.

Warriortan

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