Interview

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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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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 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.

I had a nice chat with a fellow value investor in London who recorded his thoughts on the conversation, and kindly allowed me to reproduce it.

Lesson 4: “Mean Reversion”

againstthegods

Prices, in long-term, will return to their mean. This is also John Bogle’s way of looking at the market from a general picture point of view. Moreover, mean reversion will help the investor to identify possible bubbles-wild fluctuations of prices that tend to sky-rocket and then plummet back to earth to reflect a number closer to the real value of the company.

This does not mean that markets are rational.

It means that in long-term, it is the business value that wins and not the short-term market vicissitudes.

Lesson 5: “Free cash flow”

As a new and enthusiastic value investment scholar, I read most of the books on Warren Buffett. Consequently, I heard of a concept called ‘owner’s earning’. Mathematically, this concept is translated into net reported income plus depreciation, amortization and depletion (DAD) charges minus capital expenditure (that is capital that the company needs to stay in business).

Mr. Buffett explained that he uses this measure instead of free cash flow (FCF) because FCF is measured as net income plus DAD charges. However, this is non-sense as one must also account for the costs of doing business. However,

I knew that the free cash flow was defined as cash flow from operating activities minus capital expenditure. Peter Lynch, one of Fidelity’s star managers and a legendary value investor, also uses FCF as operating cash flow less capex. Therefore, confusing hit my mind and I asked Jun Hao if he can clarify this for me. He suggested to use Peter’s Lynch measure for simplicity’s sake.

However, he strongly recommended to measure the FCF for a period of at least 5 years in order to get a sense of how a business is doing: remember free cash flow is the amount of money you as a business owner are left with at the end of the financial year – you cannot pay your bills or buy new business with reported net income but with cash only!

Lesson 6: “Enterprise Value”

Jun Hao suggests that a more accurate way of ascertain the market value of a business is to look at its enterprise value (EV) instead of looking at its market capitalization. Market capitalization is the result of number of shares outstanding times the share price.

However, EV is calculated by adding the net debt to the market capitalization and subtracting the cash and cash equivalents from that number. EV is not to be used on its own: most investors use EV to EBITDA to compare firms with different degrees of financial leverage and to value capital-intensive businesses with high levels of depreciation and amortization.

Jun Hao also cautioned me that EV/EBITDA is not to be used alone but together with P/B, ROIC and FCF.

Lesson 7: “Recommended reading”

Of course, Jun Hao is a very well read individual and he was kind enough to suggest some of his most important books with me. The reading list is as follows: anything Howard Marks from Oaktree Capital Management writes, Bull by Maggie Mahar, Deep Value and Quantitative Value both by Tobias E. Carlisle and There’s Always Something to Do: The Peter Cundill Investment Approach by C. Risso-Gill.

Finally, Security Analysis by B. Graham is outdated. What? Yes, the Bible of investment is outdated: the principles within it were very, very relevant to a particular moment in time and were of immense help in a period of corporate governance and disclosure were a rare thing.

Nowadays, it is nearly impossible to find a company that ticks the boxes of Ben Graham. However, I recommend that the book is still relevant from a historical perspective: learn from history even if we, psychologically, are not programmed to do so – this is another key to long-term success.

I had a nice chat with a fellow value investor in London who recorded his thoughts on the conversation, and kindly allowed me to reproduce it.

Lesson 1: “There is no single way to invest”

This was not necessarily new information to me as I was aware that investment is a profession that results in success if it is combined with one’s personality and view of the world.

Moreover, if anyone interested in investment or finance ought to read books on names such as Charles Munger, Warren Buffett, George Soros, Peter Lynch, John Templeton and Guy Spier (to name a few ‘star’ investors) then it will be even more obvious that the way these people approached the investment profession was in a unique manner that reflects the way they are as persons: from a very philosophical approach taken by George Soros to a journey seeking method adopted by Guy Spier.

However, Jun Hao confirmed this for me: he made it clear that depending on your aim (stable income, capital preservation, etc.) and on how you see the business world (i.e. how pessimistic or optimistic you are about the future of the businesses that you read about) will determine, generally speaking, what kind of investor you will be.

Moreover, he suggested that in order to improve and regardless of what path one chooses to take, reading a wide variety of books, company reports and other materials is necessary – I could not agree more on this point: reading is one of the keys for life-long success.

Lesson 2: “The future is unknown”

Nothing surprising here – some might say that this is an obvious comment. And yet, so many of us tend to allow our emotions to control our faith in our convictions: I recommend to anyone reading this to buy and ready thoroughly Influence by P. Cialdini and Fooled by Randomness by Nassim N. Taleb.

These two books will clarify why we are prone to think that the past is a good base to measure the future and why we tend to overly accentuated our faith in statistics, numbers or any form of scientific information. However, Jun Hao explained to me very clear that industries fall and rise all the time: 15 years ago the planet Earth was running out of oil and we were thinking of exploring Mars for resources.

Today, we have so much oil that supply greatly exceeds demand. Moreover, demand for non-electric cars is increasing and the pace of electric cars to punch through the established market of automobiles is still not strong enough to offer a stable projection as to when in the future the majority of the world’s population will be driving electric vehicles: the future is unpredictable. Therefore, focus on the fundamentals of the business and not on market predictions.

Moreover, Jun Hao made it clear that it is important to make the difference between a good investment and a good business: a good business is not always a good investment and a good investment is not always a good business. For example, Jun Hao explained this situation using Tesla as a model. We both share immense admiration for Elon Musk and for his companies.

However, Tesla is hemorrhaging cash!

A quick look at the financial reports will reveal that cash from financing is consistently positive and that the company is losing money for each car it sells – this means that the company has been raising cash to stay out of liquidation. This achievement is attributed primarily to Mr. Musk’s salesmanship skills. However, despite the company’s noble aim and great skills of Mr. Musk, it makes little sense from an investor’s perspective to put any money in this company: a good business is not always a good investment.

Are Investors Financing Elon Musk’s Iron-Man Dream?

Lesson 3: “Emerging markets and information asymmetry”

The reason why emerging markets are an attractive prospect for investors is because more and more local investors have access to the market but they lack the necessary skills, information and experience to actually engage in a fruitful and productive manner in the stock buying and selling ‘dance’.

Consequently, there is high volatility and many, many mispriced companies. The US market at the moment is expensive because the interest rates are low and investors are overly optimistic about the US economy and market stability.