Conferences

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 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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I used to do these presentations regularly during my time in UCL (University College London). Its always great fun to share what I’ve learnt over the years. I get to review and re-look the concepts that deal I with daily.

 

Teaching has always been the best form of learning for me.

One of my favourite parts about these sharing sessions is the Q & A.

There’s a huge gap between theory and practise. Something which I struggled with when I first started too. I remember having an accounting related question on Free Cash Flow vs Owners Earnings that was unresolved for over two years.

I touched about how big that gap can be briefly in my podcast on the perils of index investing, and why its so hard.

You can check it out here:

One of the members of the audience had a great question which commonly comes up:

Is it better to buy cheap companies at good prices,
or wonderful companies at fair prices?

What Warren Buffett Thinks

He’s said this a number of times over the years in various interviews. Here’s the thing though.

I don’t think this is an end all be all statement that conclusively settles the debate. Let’s consider a few things:

  • Academic research shows that investors who invest in “wonderful companies” tend to under-perform “terrible value companies” 
  • Buffett’s track record running his investment partnership far exceeds his track record when he changed styles at Berkshire Hathaway in the last 2 decades
  • He has bought “cheap stocks” from time to time in his own personal account

I tend to find that wonderful companies are easy to spot. Markets tend to be very good at identifying such companies.

What they are not so good are at pricing them appropriately, and investors often end up paying too much for growth.

Not to mention that companies with true “competitive moats” are not easily identifiable.

The Only Thing That Is Constant Is Change

Industries change. Technology changes. What’s a moat might not be one 10 to 20 years from now. Buffett has invested in plenty of companies that have seen their moat being eroded over time.

That’s probably why Buffett tends to stick with things that tend to change glacially.

Like food & consumer products (Kraft, Gilette, Coca-Cola), transport (BNSF), and retail banking (not investment banking!) operations (Wells Fargo, Bank of America).

He’s gone out on a limb to say that he doesn’t invest in technological companies. IBM doesn’t count in my book. If you read his interviews, he tends to see it more as a service provider. But that’s a story for another day.

At the end of the day, I think the peril of investing like Buffett is that we are not Buffett.

He took decades before he slowly shifted to his current style of investing, has an unparalleled network, incredible intellect and a vast amount of knowledge accumulated from decades of non-stop reading.

So Why Does Buffett Buy Good Companies at Fair Prices?

My own opinion is that is a constraint he faces in his opportunity set. He has tens of billions to deploy, and billions more coming in yearly. A good problem surely, but his universe of stocks are limited to those in the S & P 500, and maybe some private companies.

Buying cheap stocks wouldn’t move the needle for him at all. 

His lack of investment opportunities at his size is really shows in his relative under-performance compared to his early days managing small sums of money.

Finally, I think there’s a huge distinction between buying a company and buying a stock. If I were a CEO, I wouldn’t want to buy a lousy run-down company too. Think about the headaches of turning it around.

But as the last post highlights, investing in stocks is very different from investing in a business.

Investing in “cheap cigar-butt stocks” might not be fanciful, but where they excel in are the relative ease in which a determined investor can succeed.