Wednesday, December 22, 2010

Reflecting on GMG Global and China Animal Healthcare

I'm sorry it's another GMG Global post. Are all political risks the same. Does it really matter.

For those who were young enough to watch the Matrix when it first screened in the cinemas, you will remember that there was one scene where the dialogue goes (you can find the scene here):

Oracle: I'd ask you to sit down, but, you're not going to anyway. And don't worry about the vase.

Neo: What vase?

[Neo turns to look for a vase, and as he does, he knocks over a vase of flowers, which shatters on the floor]

Oracle: That vase.

Neo: I'm sorry...

Oracle: I said don't worry about it. I'll get one of my kids to fix it.
Neo: How did you know?

Oracle: Ohh, what's really going to bake your noodle later on is, would you still have broken it if I hadn't said anything?

Unless you have been stuck in an airport in Europe due to the snow, you will most likely know that shares of GMG Global - China Animal Healthcare to a greater extent - have taken a beating, falling below the $0.30 mark with heavy volumes. The reason has been plastered in the papers, that the political turmoil in the Ivory Coast has affected GMG Global's operations there. This has affected its shipments of rubber out of the African country's ports.

The political strife in the Ivory Coast resulting from the elections was not entirely foreseen. If you read this article, GMG Global Poised For Big Things, written at the start of the year, you would have been informed of the possibility of turmoil buried all the way in the second last paragraph.
White, Grey and Black Swans

But the question is, would it have mattered at all? If you had not bought the stock at the start of the year because you were worried about the risks, you would have lost out on a 2-bagger up till this point in time. But if you did bought the stock only recently due to its proposed acquisition of Tek Bee Hang, you would have ended up losing a small fortune. There are just so many ifs in life.

The lesson learnt (on hindsight?) here for me is that if there are certain risks that are flagged from the beginning, the onus lies on the investor to keep track of the events that will cause downside. Already it was mentioned that the elections would be contentious. On my part, I could have and should have at least find out what are the latest developments with regards to the Ivory Coast elections.

I am sure that GMG Global is not the first and only SGX-listed company to be affected by political events. Banyan Tree Holdings, which runs resorts in the region, comes to my mind. It too had been affected by the political events in the kingdom which has since reach and uneasy stand still. Bangkok has only recently declared the lifting of martial law.

Factoring political risks in the long run

Political events have both upside and downside risks. If you have the appetite and ability to short, political events are golden opportunities for making loads of money. Just ask George Soros or any "special situations" or "event driven" fund manager.

But such events fall into a spectrum in terms of returns and probability and are very lumpy. Political events can be global or regional with the boundaries very blur. 9/11 can be considered a global event while the Ivory Coast election a micro one.

How should we factor these political risks when valuing the attractiveness of a stock? How would value-investors do it? I really have no answers to the question I posed. And to rephrase the Oracle, would you have not bought or sold the stock, even if someone no one told you that there will be conflict in Ivory Coast?

But there are things we can do to protect our portfolios. Diversification is the most common answer. Limit 10 percent of your portfolio in terms of total cost to any one stock, should dampen the downside. And by using percentage of cost to total portfolio cost, it does not force you to re-balance every year, something I find deleterious to performance.

Staying current is a more tiresome alternative. That would mean trawling the news everyday for developments that are linked to the political risks already defined for a particular stock. This is very demanding and further complicates the investing process, as the investor willingly gets bombarded by the noise in the media. Moreover, you can never really tell how an event will play out. Did you know that America would invade Iraq as a consequence of 9/11, even though Iraq had nothing to do with the whole incident?

I am not actively monitoring the happenings in Ivory Coast which are affecting GMKG Global's stock price negatively. I would preliminarily say that there will be another stalemate, since the incumbent which was voted out has refused to vacate the office. The light at the end of the tunnel won't be seen so early and blood will be shed. However, I am confident in the next 3 months that some sort of truce can be ironed out.


  1. Do you think China Animal will keep dropping further? Will you consider buying more at 30cents maybe.

    If big funds still hold them, they must be doing something right?

  2. Hey Anony,

    you should read the announcement sometime back regarding the CB subscription. Anyway, I wont be buying more of CAH. I had thought of selling it but I was at work and could not make the decision.

    It is a bit disappointing to see it drop so much within the first day, to the extent that all the upside was probably priced in before the actual day of listing by way of introduction.

    Fundamentals aside, the fact that it is floated in two country means that demand of shares has increased with supply remaining constant.

    Blackrock will definitely try to exit from its investment eventually but how is the question you shou8ld try to figure