Author: Jun Hao

First off, thanks for everyone who came down on Saturday and said hi to me. I had a lot of fun both during the presentation and the Q & A.

The Fifth Person did a post-event write up which you can find here.deepvalue

A copy of the slides can also be downloaded here.

Popular Holdings Divestment

During my presentation, I also talked about an idea of mind that had worked out well – Popular Holdings. 

Its was taken private earlier this year.

I wrote up “post-mortem” of the investment which was picked up by Nextinsight.

Powermatic Data Systems Case Study

I also talked about a company which fell into my criteria of being a “deep value stock”.

I actually wrote about it a couple of months ago, and you can check out the investment thesis here:

POWERMATIC – HIDDEN ASSETS, HIDDEN VALUE? (PART 1/2)
POWERMATIC – HIDDEN ASSETS, HIDDEN VALUE? (PART 2/2)

*Disclosure: I own shares in Powermatic, and am long the stock.

Photos from Invest X Congress 2015

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Calm Before The Storm
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Talking about Deep Value
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Adam, AK, Rusmin, Jun Hao, Victor

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Yeo Seng Chong of Yeoman Capital
Yeo Seng Chong of Yeoman Capital

I sat down recently with Mr. Yeo Seng Chong in his office at Robertson Walk.  He is the founder and CIO of Yeoman Capital Management, which in turn manages the Yeoman 3-Rights Value Asia Fund.

Since inception, his fund has yielded an absolute cumulative return of +788.16% or a CAGR of +12.96% p.a. nett of all fees for the 17 years and 11 months to end 3Q 2015, in SGD terms with dividends re-invested.

Over the same period, this Index increased by +91.61% implying a CAGR of +3.70% p.a.

I think its safe to say that his results have been most satisfactory, and that investors in Yeoman are happy with his results thus far. 

Looking Beyond the Numbers

Mr Yeo attributes a big part of his success to his own multi-disciplinary experiences over the years, which then allow him to home in on what matters most: the business itself, and the value it represents.

Maturity and experiences over his long career have also taught him to keep an open mind, and to connect with people from all lines of work.

Although the numbers are without a doubt the foundation of what he does, but behind that is a highly qualitative judgment that requires experience.

Herding Behavior When Stretching For Yield

Mr Yeo’s comments are in sync with what other prominent investors such as Howard Marks and Seth Klarman have been warning in recent years – investors are increasingly stretching towards “riskier bets” in this increasingly yield starved world.

He comments that Singapore investors have been attracted to the “perceived safeness” of real estate and corporate bonds, which ironically makes them more dangerous as prices rise beyond the actual fundamentals of the asset.

I can’t help but think of the same “common wisdom” of the crowds back in 2006/2007 in the UK and the US when houses were perceived to be “safe”.

Still, the government stepped in in time to defuse the situation with repeated rounds of cooling measures, and my own data indicates that housing prices have actually gone below their historical trend for now.

Mr Yeo thinks that equities offer a much more compelling risk reward ratio as compared to other asset classes. Put simply, they are unloved and unwanted at this stage.

Once cannot help but recall the words of Sir John Templeton:quote-bull-markets-are-born-on-pessimism-grow-on-skepticism-mature-on-optimism-and-die-on-john-templeton-58-34-87

Thoughts on Malaysia and Productive Assets

The stock markets in Malaysia are cheap – especially if you take into account the dramatic depreciation of the Ringgit in the last six months.

Mr Yeo thinks that this represents an interesting risk/reward situation, with investors benefiting from a potential strengthening of the currency, and an appreciation in the stock price itself.

Still, as he stressed, the key is to invest in productive assets that generate cash flow and dividends, and not to simply hold cash.

Discipline & Professionalism

Mr. Yeo credits the success to his fund to a disciplined approach to investing, that his grounded on the quantitative aspects of a business.

He explains that it is important to be intellectually honest, and working in a professional setting means that it is crucial to always review investments when the fundamentals deteriorate.

Contrast this to the all to common behavior of retails investors in simply forgetting about investments when they sour, or turning short term ideas into “long term holdings” when the thesis doesn’t pan out.

Unlike most funds with high turnover rates, Mr. Yeo moves at a much more glacial pace, with stocks tending to remain in the portfolio for 5 to 6 years on average.

Thoughts from the Interview

I think 18 years is as long a time as any to judge the long-term success of a fund, and Yeoman Capital is testament to what applying sound investing principles can do.

Still, if you take a look at his original 3-Rights Value Fund, you will see that the results are volatile, with significant down years in 2000, 2008 and 2011.

Therein lies a valuable lesson.

Investors must always remember that investing in stocks involves living with volatility.

However, if one can overcome short-term price fluctuations and take a long term view, then satisfactory results are possible with hard work and diligence.


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Mr Yeo Seng Chong will be speaking at the upcoming Asia Value Investor Conference in Hong Kong on the 8th December 2015. You can find out more here.

 

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6th Singapore Corporate Governance Week

I attended the 6th Global Corporate Governance Conference organized by SIAS at Raffles City today.

One topic which stuck with me was the debate on the role of shareholder activism in the financial markets, and more specifically the recent spate of short selling reports by anonymous individuals.

I think there’s a general unease with short selling among most people.

After all, no one likes to hear bad news. Especially not of companies they own.

And yet, short sellers play an important role in the market. They temper the exuberance that can get out of hand.

They are the naysayers that keep us sceptical when we should be.

After all, there is no shortage of optimism in the markets, with an overwhelming number of brokerage recommendations leaning on the positive. History is replete with instances of what Greenspan would call “irrational exuberance”.

They happen far more often then we think. Or remember.

So… Is Short Selling Wrong?

Curiously, one of the panellists felt that it was wrong to go short a stock, and then publish a report on it detailing why.

I must admit I struggle to see why that would be considered morally wrong when it is deemed acceptable to publish a bullish report after going long a stock.

Are we to say that only positive information should be released in the markets?

Where Do Anonymous Short Sellers Fit?

Another criticism is that short sellers often post these reports anonymously – leading to little accountability.

Well, it’s not hard to see why.

Here are just some of the headlines reflecting Noble’s response upon the release of the short report by Iceberg:

Noble Group Files Lawsuit to Stop Criticism

Noble Group Sues Former Credit Analyst After Iceberg Reports

And yet, the criticism levelled by the short-seller had merit as covered by a series of letters from Michael Dee which you can read here:

Michael Dee: Response To Noble’s Open Letter

Why Noble choose not to sue Michael Dee who himself highlighted similar points to the report from Iceberg, and instead responded (for a while) with an open letter back to him is anyone’s guess.

Without engaging in who was right or wrong, it’s hard for me to imagine the turnabout in investor disclosure that came about months later when the depression of Noble’s share price turned out to be slightly longer than “temporary”.

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YTD Performance of Noble Group N21.SI

Where Do I Stand?

At the end, in this “David vs Goliath” battle, it seems to me that short sellers or activists are for the most part, out-gunned. They are the underdog here, and I do love rooting for the underdog.

True, they have a vested agenda, and stand to profit from their research and efforts.

But who in the financial markets isn’t here to profit from it?

Activist and short-sellers live and die by the validity of their arguments, and the truth in their statements. If they are wrong, they get punished heavily financially.

I do not envy the life of one that sells short.

My own experience is that they tend to do far more work than the average buy side research. Their reports tend to make illuminating reads. One cannot help but wonder whether the presence of more short sellers who had shared their research would have dampened the damage caused by the successive wave of frauds of Chinese listed firms all around the world.

 

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I recently sat down with Teh Hooi Ling in Aggregate’s office – a quaint shop house along Joo Chiat Road. I must admit a certain bias towards Aggregate’s approach, reading about them in The Edge a few years ago when they struck it out on their own.

They’ve come a long way, with assets under management exceeding $200 million.

One cannot help but admire their entrepreneurial spirit in getting to this mark.

Not to mention their exceedingly fair compensation structure.

No management fee is charged. They only get paid when they deliver their results.

Hooi Ling joined Aggregate in 2013, a coup for them and a loss to Singaporeans, who had derived considerable wisdom from her unique and insightful column “Show Me the Money“.

We spent over an hour talking about her own experiences in prior career as a journalist, and her new career at Aggregate.

Among the many lessons I learnt, here are the most memorable:

1) The Way You Invest Must Compliment
Your Personality

Teh Hooi Ling, Head of Research

Some people are born traders. Other investors. Each one of us must do some soul searching, reflection and introspection to see what makes us tick.

There are many ways to invest, but the most successful investors are ones who can exploit their own personalities to their advantage.

There is only so much that can be taught.

In my previous post, I talked about the split between concentration and diversification.

Aggregate’s approach adopts wide-spread diversification, investing in over 250 securities.

It helps them sleep easy at night, knowing that a single stock will not bring down their portfolio in the off chance they have misjudged the company.

That tallies with my own thinking on the subject.

Do what you know, do what you’re comfortable with.

2) Doing The Research To Hold Long Term

Hooi Ling has done Singaporean investors a favour by collating the data on valuation metrics in stocks in South East Asia. You can check out some of her presentations here.

The persistence of the “value factor” has been widely documented in the United States and Europe, whereas much less in-depth work has been done in South East Asia.

At the end of the day, I see it as a good compliment from Aggregate.

Battle worn experience from Eric Kong and Wong Seak Eng in picking stocks using a “value approach” from their prior careers.

“From the top” research done by Hooi Ling in giving them the long term conviction that such a strategy works.

After all, investing is never easy when the markets move against you. And they will.

As Joel Greenblatt has said,
value investing works 
because it doesn’t always work.

Patience is a wonderful friend, but exceedingly hard to come by in this fast paced world.

3) The 80/20 Principle of Stock PickingThe-rule-of-80-20

  1. Price-to-Book Ratio
  2. Dividend Yield
  3. Debt to Equity
  4. Cash Flow From Operations

Price-to-book is something I look at a lot.

Reading the prior works of Graham, you notice his tendency to focus on the “liquidation values” of businesses.

Buffett on the other hand prefers to focus on the competitive moat of a business, and the future cash flow that results from it.

Of the two, I find that Graham’s approach is much easier.

Projecting cash flows into the future is not an easy feat. On the other hand, I find it a rare instance where honest management purposefully engages in operations with the intent of losing money.

Not all assets are alike of course. Cash and freehold land are much more valuable than receivables, inventories and leasehold land.

4) Weeding out Fraud

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Read this to save money.

Investing in South East Asia can be treacherous. A significant number of frauds have been reported in recent years.

Among some of the more memorable ones I’ve seen are Sino-Forest, once worth $5 billion, proving that even big companies are not immune.

Hooi Ling advocates looking to see if the cash is real by examining their cash flow statements and dividend pay-outs over the years.

I recommend reading Tan Chin Hwee’s “Asian Financial Statement Analysis” and “Asian Godfathers” by Joe Studwell.

It will give you a master-class in understanding the murkier aspects of business in South East Asia. 

Ending Thoughts:

It’s always interesting to see how different investors approach the same problem of allocating capital.

One thing I’ve learnt is that principles underlying successful investors are always the same.

In the end, investors must decide on their own what works for them, and stick with it despite what other people many tell you. As Graham said:

You’re neither right nor wrong because other people agree with you.

You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right.

And if your facts and reasoning are right, you don’t have to worry about anybody else.

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I will be speaking at the upcoming Invest X Congress next Saturday on the 17th of October. Its a full day event that will be held at the Suntec City Convention Centre.

My segment will be an hour long in the afternoon, and I will be specifically talking about Deep Value Investing.

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Sneak Preview of My Presentation

I dont have a lot of time, so I will focusing on what I’ve learned the past six years applying Benjamin Graham’s investment techniques in Singapore, the US, Hong Kong and Japan.

My goal is to bridge the gap between theory and practise – a problem which I faced myself when I started out in 2010.

Why Deep Value Investing?

Deep value investing is the identification of attractive investment opportunities with limited downside, and significant upside.

In contrast to “growth investing”, we look at places with pronounced mispricings –  in the unloved, neglected, ignored and feared stocks.

Our investment operations are very much “old-school” Graham type operations, focusing on liquidation plays and general undervalued situations.

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Deep Value In Action

Among the stocks which you may have been familiar with are Popular Holdings, ABR Holdings (they own Swensens and Gloria Jeans Coffee), Challenger Technologies.

Less familiar names which have recently received analyst coverage from brokerages include Fu Yu, Memtech and AP Oil.

A common characteristic is how little analyst coverage these stocks received when we firs started buying them.

I can still recall many of the promising growth stories such as Tiger Airways, SMRT and Genting back in the day.

Who Am I? (Blurb from Invest X Congress)

Tay Jun Hao is the founder and editor at The Asia Report. He oversees the investment decisions of Farrer Enterprise, a family office with over 7 figures under management. The annualized returns of the US portfolio that was exclusively under his purview has since generated 27.23% per annum in returns.

In 2013, Jun Hao won the Orbis Stock Picking Challenge, a global investment management firm, with over $30 billion in AUM, beating participants from Oxford, Cambridge, the London School of Economics (LSE), University College London (UCL) and the London Business School (LBS), generating an absolute return of 55.7%, an out performance of 21.7% against the benchmark over the course of one year.

His insights and articles have also been picked up and featured in leading investment portals such as Nextinsight.com and Valueinvestasia.com.

Panel Discussion for Q & A

There will be a panel discussion at the end of the day, where I will be answering questions from the audience too.

It will be my first major scale public event since I came back to Singapore, and I hope it will be a great experience for everyone.

I hope to see you there!

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