Don't invest in this fund, absolutely not!

The news said a Chinese fund manager pays $2.1M for a lunch with Warren Buffet. It is a great news for the organizer. Maybe not for the fund investors.

Here is the performance fo this fund, Pure Heart Fund, from their website.

Besides this website, you can inquire about the Net Asset Values (NAV) of the Fund in following websites: Guotai Junan, www.gtja.com.hk (see Investment Fund Net Asset Value Report in the middle of the Home Page) Bloomberg Ticker: PUREHCG KY
Cumulative Performance %
YTD
1 year
3years
Since launch
Issue date: Jan 16.2003
NAV/unit: 100.85
YTD: -8.02%
1 month: 2.01%
3 month: -3.28%
1 year: -9.40%
3 years: 165.85%
Since launch: 488.10%

It is very impressive to have 488.1% in 5 years. In the past year, the fund started down turn 1 year ago. It isn't very necessary to seek advice from Mr. Buffet so soon with this price. Also, this fund is obviously attached a security firm, Guotai Junan, which has Chinese military background.

Why does the fund manager want to have lunch with Buffet? Here is their investment ideology, also from their website

"We do not follow stock index and price-volume analysis. We rarely use individual stock charts as the basis for investment decisions. We only partly agree to fundamental analysis. By taking a long-term view, we believe that the share price of a (well managed) enterprise will undoubtedly reflect its intrinsic value over time. Our selection criteria are quite simple. We seek enterprises that can survive. These enterprises have been established usually for a decade or more and have relatively high success track records. We strongly believe that if we own part or most shares of these enterprises, our investment will grow and breed success together with the companies.
We see ourselves as private enterprise investors rather than security analysts. We dedicate ourselves from the onset to the fundamental investment. Our first step is to screen for enterprises with long-term competitive advantages and a high probability of becoming industry leaders within 20 years. We then conduct due diligence on a company’s financial reports and announcements in a critical manner. Our analyst team conducts ground research by visiting their clients, raw material suppliers, electrical power suppliers and so on. We also investigate the actual sales statuses of these enterprises."

Compared their performance and ideology, there is no indication of "long-term" investing. It is quite volatile. Besides, $2.1M is from whose pocket eventually?

So don't invest in this fund!!

Shopping gaming and value investing

Shopping gaming is a largely psychic play. Calculating what seller's and your interaction results in different results. Sometimes it is hard to tell when you win or lose. For example, many stores are offering discount, 30% or 50% off. How do you know if they would go further down even after these fire sales?

If you have a chance of bargaining with the seller, there is art of negotiation in this case. The key is to find out what the bottom line is. Do you want to make an offer first or slam his offered price? Making an offer is risky since you don't know his bottom line. Too high will sadden you. Too low you might be pissed off and lose the deal. What to do? Obviously, low ball is better off for your pocket. The key is leave leeway in further bargaining. For example, you put yourself in a layman position. A too low offer doesn't upset the seller because you're a rookie. The game can be ongoing.

It is not obvious how this shopping game related to value investing. It becomes so after realizing that these two situations all seek to find "intrinsic value" and this value is hard to find in these situations too. Intrinsic value can be growth, asset, or cash flow etc. It is similar you may shop something for its color, size, price etc. Not a fixed form for this value. At this moment, you can see their similarities. Is there a correct answer? No, it is up to purchasers' taste. But lower your offer is always good and you don't need to worry about being pissed off. The only thing is set up a window that comforts your expectation.

Uglier and uglier rating

As the market turns down, you can see more "down gradings". But the ugly fact is that the down gradings are mutual. This is kind of funny. Investment Bank A projects B is in trouble and downgrades it. B's stock free falls. On the other hand, B also release A's financial dim report. B downgrades A too. Let alone a whole bunch "Research Firms" involving this hoax. Obviously, there are interest conflicts.

Keep your mind cool.

Inflation or not?

Fed left rate unchanged for a few month. This wait-and-look attitude is quite different to previous sharp rate cut. The bet is high prices from oil, commodity could be mitigated in the coming month. Of course, a rate hike could deteriorate the supposed-to-be-back credit crunch and housing market. This is a hard call.

Does the current situation result from previous rate cuts? It probably means Fed had gone too far. Easy credit provides abundant ammunition for speculators in commodity and oil market so that they could drive up prices. On the other hand, rate cut effects on credit market needs time to ripple through. This vacumm period is proved to be painful for Fed.

Higher prices definintely define inflation is coming. Also considering layoff and wage staggnant, there is no much room for Fed on the next move. If they raise rate in a few month while the housing market doesn't seem recovered, then slowdown will be unavoidable. Apprantely, there is no reason to go down or remain.

So Fed is stuck.

Credit crunch 2.0

Credit crunch 1.0 was identical to "subprime woe". One of the outcomes of Credit Crunch 1.0 was the death of Bear Sterns. After that, market rebounded and optimism loomed. However, this is not the end. Now credit crunch 2.0 is shown frequently on medias. As this sweep got to result in something, should we project there is any demise of something and mark the end of 2.0?

Corp. News

Old (but important) trading news:

1. Wells Fargo (WFC) extended their original 120-day mortgage default period to 180-day on April 1, 2008. WFC is not the only one adopting this strategy to mitigate mortgage problem. The tatic would be help in July's release of their Q2 report.

2. Ambac (ABK) retreat credit rating from Fitch. ABK says their would focus more on operation than on rating.

China hike gas price, a political play?

China anounced 18% gas price as well as electricity increase on last Friday. An article on Reuters stated that this is a political play to achieve one-stone-three-birds strike. First, it can curb gas consumption and oil price soar. Second, it projected the Chinese government's image of concerning international pressure on efforts to reduce oil demands. Third, it is selected at a timing that surprised international community so the autonomous is evident, especially under Western countries' pressure that China should remove oil subsidiary. But remember there is a high level involvement in next week's oil convention in Saudi Arab. Regardless of what actual consideration is, the act is widely welcome and had an immediate dent on oil price, a $5 drop.

At the same time, Chinese authority assures there is no significant impact on domestic price. This is very doubtful when CPI reached 7.8% level. The red hot economy has indefinite connection to oil consumption. An 18% hike doesn't have much impact on CPI? Come on... There are other subsidiaries on the way. So this politics play well domestically and internationally.

So what if oil price shrug off the play and keep rising? It looks like the case because there is no actual changes except OPEC would commit more production. Soften dollar keeps RMB rising too.

New Pair Trading

Conventional pair trading finds two ideally closely correlated stocks. The tracking one of them predicts what trend the other could go. It had achieved huge success in the past. The main problem for practioners, however, is that it is not easy to sift out closely correlated stocks among thousands of listings. It is somehow manageble doing within sections or industries. But it is still a mounting job.

With the help of bearish ETF, a new pair trading can be devised so that the search job becomes easier. Any bearish ETF can find its counterpart in the bullish side. Therefore, the search work almost vanishes as long as you fix your investing field. For instance, financial ETF is under banish while bearish financial ETF boom. This essentially hedge trick propel an implementation of pair trading. Of course, the exactly anti-correlated feature could be used for prediction too. It is better off using it as hedge purpose rather than prediction (see figures).

The problem left out is how to pick what ETF pairs to start. For current knowledge, volatility is the main indicator.