Random thoughts: Circle of competence

I realize despite more than a decade of investing, I am

Not sure of my circle of competence. 

There are several reasons for this, I list a few below:

1) I do not track my returns or loss through an excel sheet. I track my thoughts and returns through pening my thoughts in a blog post. 

2) I do not have a track record through Bear-bull-bear cycle. I think I went through a bear-bull market already somewhat. I should know my circle “soon enough” and I need not wait another decade. 

3) I am still searching for a coherent strategy. Those who found it, swear by it. Value investing, buy and hold, momentum trading, whatever. I know my best records come from “growth prospecting”, and its by investing in alpha companies through cyclical cycles. However, even such strategy has a lot of misses, in terms of selling too early and missing the property and banking upturn totally etc. Conviction is also lacking, when the price get beaten without any apparent news of earning downgrade etc. I do not dare to nimble on the way down if there is no news to confirm my thesis to be correct or wrong. 

There were many cases where there are clear growth drivers, and the price has run up somewhat, and I hold off buying only to continue see it head north. 

I am just talking about the strategy where I have a better track record. I have tried cyclical plays, turnarounds and asset plays before with rather poor records and I decide to let them “go”

Hence, I am better at determining circle of “incompetence” than competence.

As I prospect for earning recovery or growth, I have found nothing so far. The only investment idea I have is to buy into the aerospace recovery.

I only owned 2 lots of ST engineering and I intend to get more of it and some of SIA engineering over the next 12-18 months if the prices correct further.

From my calculation, the recent cyclical and structural woes of aerospace, especially in the area of MRO is hardly disruptive, it is caused by better design of new aircrafts than need longer periods before the aircrafts need maintenance and repair. And according to ex-CEO of ST-engineering, he already see it coming a decade ago and do not see it as disruptive. The trend will be cyclical and will be captured sooner or later with the increase of aircraft. The most intensive D checks (and also most costly from the perspective of airlines but most lucrative for MRO companies) of aircraft was 5 years in between checks and became 6 years in between checks. Reading SIA Engineering annual reports, the drastic fall in no. Of D checks was in year FY14/15. If u look backwards further, the bulk of D checks run consecutively for 2 years and will taper off. So the next upturn will be for FY 19/20 or 20/21.  That is 3-4 years away. In terms of PE and PER, current price of SIA Engineering is fair, but if one is willing to buy into the potential growth, the next 12-18 months will be a good Window to keep the eyes wide open. 

Of course, it is not just the D checks, the A checks and C checks number are also dwindling and it could be due to newer and better aircraft that need less frequent checks ( more fly hours before check) or due to competitions by other airlines also going into MRO business. 

The number of checks has a high correlation with revenue and profitability. My apologies, u can verify my info through looking at the annual reports, I am lazy to create excel sheets.

I do think SIA engineering is still keeping its competency and competitiveness intact judging by the recent years announcements of renewal of contracts and strategic alliances. The earnings might not yet show due to the cyclical nature.

Why am I sure of the “growth” and that it is going to be cyclical. Order books and deliveres are increasing, it is a matter of time these crafts need servicing.

The graph show the delivery of aircraft by Boeing and Airbus over the years

Then the airports around the world are expanding to meet this future demand. Just google airports with expansion plans. 

I think aviation growth is quite a no-brainer with our govt also placing big bets with Terminal 5 from 2026 onwards. That is a very long term projection ImHO. 

Remember when Buffett talk about investing, he said he believed in US economy and that it will continue to grow. So if u believe Singapore can still be a hub in aviation for years to come, it is not difficult to buy into Singapore Aviation.

U just need to buy 

ST engineering and SIA engineering 

SATS

SIA

4 companies and u have it all.

I just go for the upstream first. But I need to wait at least 24-26 months. Now that is really a boring wait.