2 Vital Elements Of The Successful Deep Value Investor + Other Updates/Thoughts

General Updates

I know that in my previous post not too long ago, I mentioned that my next post would be on LTC Corp. I really think I can present it in a very instructive manner that highlights an important point for many deep value investors to be. It will likely be a very long post though, and I just haven’t gotten down to it.

This, plus the one company that I’ve narrowed down to and am currently doing due diligence on, plus my upcoming not-so-long awaited holiday, is going to take up most of my September. I’m bringing along all the needed materials on my trip that’s needed for me to continue my DD on the company though. 4 trips a year is starting to hint of laziness on my part. I think this has to be cut down in 2017.

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Anyway, I am genuinely very surprised by the response from my previous post.

Usually I get some emails coming in each time a new post comes up. Most of them are to clarify some data I’ve written, some are from vested fellow shareholders who are sharing their opinion as well (many thanks, it’s appreciated), many are from readers who ask general, broad questions about value investing.

To date, I’ve replied each and every single email promptly and to the best of my knowledge. (Except 1 that got sent to the spam folder accidentally)

This time, I received 3 times the emails I normally get. WOW. I am not sure why. What exactly did I write? It wasn’t even an in depth analysis on any company.

I even got some mails from some local hedge funds, 2 of which are intriguing enough for me to give up my anonymity to meet and chit chat. 1 gentleman has a really impressive track record, far better than mine. I hope the conversation gives me some insight.

1 reader really made my day with a funny yet critical email about my book list. Yes, I said in my About page that my book list is a good place to start. And yes, I’ve only just realised that there’s only 1 book in that list currently. Rupert is getting a lot of free publicity.

I assure you my book list is much much longer in reality. In fact, I have a mini home library. I love to collect books. I don’t necessarily read all of them, but I still like to collect them and catalogue them. I’m old school in that way. No ebooks for me.

Let me side track a bit while we’re on the topic of books. Check this out:

This is the Stuttgart City Library. Just look at it. WOW. I’m making a detour specially to visit this in 2 weeks. It’s a public library. It’s not even a tourist attraction I think, but just look at it. It’s unreal. If I have a home library that looks like just 1 floor of it…

Anyway, I received a few emails asking for “mentorship”. I replied to you guys individually, but I thought to explain my reply here.

I’m flattered. Well, not really actually. A little bemused actually.

I have to respectfully decline all such requests because:

1. I’m not arrogant enough to think that highly of myself.
2. I want to remain anonymous as far as possible. (I have very valid reasons for wanting this)
3. I think deep value investing is something that cannot be taught effectively. It has to be experienced.

So let me emphasize that SG TTI currently and in the forseeable future, does not run any training courses or stuff like that for the above mentioned reasons. Points 1) and 2) are self explanatory, but let me explain point 3) in greater detail, using my personal experience as substantiation.

You see, successful deep value investing IMO, requires 3 main elements (I know the title says 2, but please read on):

1. In depth, thorough research. So much so that you become a mini subject matter expert.
2. Independent thinking, arrogance, confidence, a certain psyche
3. Luck

I’ve mentioned point 1) many times before in my posts. Again, IMO, the best question to ask each time is “What am I seeing that everyone else has missed?”

Which is why if you read about an idea from the news, an analyst report or from some expert, chances are it’s too late. Well, if you read about it from SG TTI, it may not be too late cos not THAT many people read this blog. Not yet, anyway.

I’m very elated though, to know that many “experts” are silent “ThumbTackers”. It kinda feels a little humbling, and yet exciting because it’s one of my stated objectives (in my About page) to create a platform for ideas, mine or anyone else’s, to be challenged and debated on.

Alright, so we all need to become a mini expert in whatever you’re investing in. How’d you do that? By of course, pouring into the financial statements right? What do you need to do that? As stated in my “About” page, you need a basic working foundation in accounting.

Nothing fancy, just some general knowledge. Nothing that you can’t pick up from an accounting book. I should know, that’s what I did.

It also helps (not entirely necessary), to pour into the FRS guidelines. It’s available online, I’m lazy to post the link here but you can google it. FRS = Financial Reporting Standards

Yes, it is pretty dry, but hey, nobody said it’s easy right. Anyway, if you want, you can just look into the specific FRS that’s related to the company that you want to invest in. Look in the front part of the AR and it’ll usually say the specific FRS relating to stuff like revenue recognition, inventory management (FIFO VS LIFO VS Weighted Average) etc.

Now at this stage, you’d notice that there’s absolutely no mentorship/training needed. It’s just something that you’ve to spend time to do. It’s free. It’s nothing complicated. Anyone can do it.

The question is, will you?

Now, on to point 2). This is exactly opposite from point 1). This is something that I’ve given a lot of thought to. I honestly have. It boils down to the question:

Are investors born, or made?

In short, can you come up with a programme that can mold a baby, to be a world class investor? Or is it something that you’re born with?

This question is very important to me because I have 2 kids. I think this is the 1 skill I hope to pass to them. It is not altruistic. I personally need to know the answer.

Here’s my long conclusion:

Broadly speaking, most characteristics in medical terms, (like I said, I work in healthcare), can be divided into genetic vs environmental factors.

Genetic factors are stuff like your hair colour, your eye colour, your height, you skin colour, your muscle type (white vs red muscle fibres) etc. Things that you can’t really change.

Environmental factors are stuff like the way you walk (assuming no disability), the way you talk, your math ability, your confidence etc. Things that you are taught or influenced.

Yet, dividing things into 2 broad categories, is usually wrong in nature. Most things in nature, is distributed via a bell shaped curve. This means there is always a group in between.

For example, sure, height is determined by genes. But if you jump a lot during development, it helps you grow taller. Nutrition too, which is an environmental factor, of course determines your height. So most things, are in between.

My point is, an investing psyche is somewhat similar. It is not genetic. You aren’t born with it. Yet, it is so ingrained in you, that for all realistic purposes, it is practically impossible to change TOO MUCH. You can improve on it to a certain extent. To change it drastically, you probably have to undergo something drastic. Like a life threatening event of some sort. Something that breaks your old psyche.

It is an accumulation of your experiences and exposures growing up. Stuff like how your parents behaved, what your friends talked about, specific experiences that had an impact on you. These shaped how you think, process information, and come up with conclusions. It also determines other characteristics that make up the investing psyche, stuff like arrogance, like determination, like independent thinking.

In short, in my opinion, it can’t be taught per say. Someone can point you in the right direction, like what this post hopefully does. But you have to experience it. And in all honestly, even if you try to, it’s practically impossible to change it TOO MUCH.

Point 3) is luck. Well if you have enormous amounts of 3), then forget about 1) and 2). In fact, forget about value investing. You’re set for life.

The world is a complex place. Many things can change yet more things. Ever heard of “The Butterfly Effect”?

Points 1) and 2) only increases the odds of a successful investment, it doesn’t guarantee one. Luck is the final key that you need. We all need it.

Which is why, I’ve learnt belatedly (again, I wrote about this in an earlier post), that it’s important to have a certain cut loss. I haven’t done this previously, but have now incorporated it. My earlier post about Michael Burry touches a bit on this cut loss concept that he utilizes too. (Case Study: Michael Burry – Caterpillar Inc.) Well, we all learn and improve continuously.

This quote sums up point 3) and the cut loss part nicely:

“I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”

Stanley Druckenmiller, 1994

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So if you think about it, of the 3 points:

1) can be learnt by yourself.

2) can hardly be taught, maybe it can be improved on just a tiny little bit.

3) I need it just as much as you do. You also don’t need anyone to teach you to cut losses.

So, what good is my mentorship, or some sort of training?

I can honestly tell you that I can easily type such a long post on this subject matter because I have looooong gave it much thought. How’d I mold my kids to be a Bill Ackman/George Soros/WB?

Perhaps I will set up a mentorship or some course in 30 years, once I’ve verifiable proof that SG TTI can mold these 2 kiddos.

I will sound out a caveat though: I understand that different strokes work for different folks. I personally do my best work when I’m left alone. Growing up, I’ve never learnt anything in school. All I learn in school, is what needs to be learnt. Then, I’ll go home and learn it myself. I can honestly say this is no exaggeration.

Yet, there are all types of people. Some may learn better via some different medium of instruction. Some may even learn only through hands on experience. Hence, for these folks, some form of mentorship or learning programme would fit them. There are some providers of these, I don’t endorse any. But one can easily find out for oneself.

I’d be very cautious with expensive, fancy courses that teach value investing though. That’s an oxymoron, isn’t it?

TBH, if you’d force me to make a recommendation, I’ll recommend you to go for:

1. Course on psychology
2. Course on accounting
3. Course on business administration

In that specific order of importance/relevance.

I’ll end by pasting a part of my reply to some of your emails

“…… My replies are similar: I would be glad to help answer any questions that is within my sphere of competence. But deep value investing by it’s nature, is very hard as it involves a lot of hard work, and a lot of emotional aptitude. You may be hard working, but the emotional aptitude is something that cannot be taught by someone else. How do you tell someone to think independently? 

I think the emotional part is mostly part of your psyche. It’s not genetic, but it’s so ingrained that it’s difficult to change. It can only be improved upon. It’s a part of how you were brought up, your experiences in life thus far, the people who influenced you etc. The hard work provides you with comfort and confidence in your stand, but true deep value investing requires one to be so confident in your thesis (of course after having put in the hard work), to the extent that you are able to withstand all other popular opinion……”

As always, have fun hunting for value.

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Minority Shareholders Vs Management Of SG Companies

I know there are many related professionals (hedge fund managers, media editors and content providers, senior management, analysts, brokers as well as, a few HNW private investors) who are subscribers/readers of SG TTI, hence, this post may be controversial to some. I’d like to think it’s certainly honest.

Over the years, I’ve increasingly put more and more emphasis on the quality and competence of the management in the companies I’m doing DD on. In my experience, the level of transparency and accountability of SGX listed companies is still very far lacking behind those of US listed ones. I’ve previously mentioned this in an earlier post (Differences between investing in SGX listed vs US listed companies)

Many companies with absolutely incompetent and/or dishonest management remain listed on SGX, the only penalty for the management being a chronically low share price. Yet, this is hardly a disincentive as they continue to reward themselves with remuneration that is not reflective of their abilities or achievements. Who pays for this? The other shareholders, mostly minority ones, by virtue of a depressed share price, higher staff costs and lower profits.

If at this stage, you’re thinking that “hey, isn’t there a board whereby the remuneration is decided by a separate committee?” Well, I think the whole concept of a BOD monitoring the performance of the CEO, is a pipe dream in my instances.

In reality, the BODs are buddies with the CEO. They’re in it together. Independent or not.

Having said that, this is not true of all SGX companies, and perhaps, not even true of most. A good case in point is Lian Beng Group, where 2 independent directors quit in protest of the remuneration of the key executives just last year. Now, I have not examined in detail to determine if their points are valid, just pointing out that these 2 independent directors had the guts and the integrity to quit when they felt it’s unfair, and they couldn’t correct it behind the scenes.

How many other independent directors would do that? Or would it be much easier to just shut up, sit tight and let the executives do whatever they want, and happily collect your director fees all the same?

Interestingly, what has happened in the 1 year after the 2 independent directors quit? Absolutely nothing as far as I know. Life goes on. No changes, not even much hoo ha in fact. Curious, isn’t it?

There are definitely some black sheep companies that I am aware of, and I am amazed that these guys can continue to sit pretty in their positions year after year, collecting fat pay cheques for doing absolutely nothing of significance.

These companies are logically, usually the small-mid cap companies, with little fan fare and little spotlight. Obviously if it’s a well followed company, the spotlight and scrutiny that follows would incorporate some sort of governance, whether it’s by choice or not.

Perhaps the minority shareholders only have themselves to blame for not bothering to let their voice be heard. But that’s another debate by itself.

Last year, it was reported that a supposed activist hedge fund, Dektos Investment Corp took up a 2% stake in Hock Lian Seng. I took interest as I owned 1,000,000 shares in Hock Lian Seng then.

In fact, I’d probably have to thank Mr Roland Thng as the Dektos’ buying & the subsequent publicity probably contributed to driving up the share price incessantly since then. Dektos became the catalyst that my deep value investment needed, in order for the price and intrinsic value to converge.

I’d respectfully argue though, that Hock Lian Seng is hardly a target for the activist shareholder. It’s a great buy for a value investor.

After all, activism suggests that you’d need to make certain changes, usually by pushing management to do the right thing, and that’d form the catalyst to correct the gap between the share price and the supposed intrinsic value of the company.

In that regard, what changes would you have Hock Lian Seng do? As expected, there hasn’t been any news/changes since that particular report. Looking at the AR, I am guessing that Dektos Investment has since cashed out of Hock Lian Seng. They’d likely have made a very nice profit doing so too, so kudos to these guys for a good investment.

I’m rooting for these guys, as I think we need more activist guys like them scouring the local SGX market. They also have a relatively small AUM of $5mil, hence, I’m guessing they’ll be looking at the same undervalued companies in the small to mid cap as I typically do.

Let me quote from that particular news article:

“It’s a new approach and the market will need some time to get used to it,” Mr Thng, who is chief executive officer of Singapore-based fund-management firm Dektos Investment Corp, which runs EVA Capital, said in an interview. “Activist investing is a bit offensive in the Singapore and Asian context.”

Many Singapore companies have a controlling shareholder, which makes it easier to resist demands from activist investors, said Mr Hugh Young, the Asia managing director at Aberdeen Asset Management in Singapore.

“It also isn’t the cultural norm,” Mr Young said. “It’s all more consensual in Asia, less confrontational. Things have been done a lot more quietly, behind closed doors.”

Oh boy. I couldn’t agree more with these 2 guys.

Recently, I queried, very politely initially, the management of a company. The questions I asked were reasonable, and typical of what a concerned shareholder would ask. The company was losing money on certain projects, which by itself is nothing unusual, but the problem is they have had a long track record of occasionally losing money in such projects.

My question was simply that why hasn’t management learnt from past experience, why do they keep repeating the same mistakes again? I even helpfully suggested that perhaps they’d like to incorporate a wider safety margin in their tendering process.

Instead, I’m met with a generic reply from an external IR vendor:

“Dear xxxxx

Thank you for your email dated 3 August 2016 to the management of xxxxxxxx

We are from xxxxxxxx, the Investor Relations consultants serving xxxxxxxx

Amidst the local property sector reeling under the lingering effects of the cooling measures, it has been very challenging for the building and construction industry in Singapore.

Our management and staff are constantly monitoring project costs and managing project risks. We are continuously implementing measures to mitigate project losses but we may still encounter unforeseen circumstances. Our current focus is to successfully complete the projects on hand, and embark on new projects selectively.

The xxxxxxxx projects are accounted for via the percentage of completion method in accordance with the xxxxxxxx accounting policies for construction projects as stated in the Group’s Annual Report.

 We appreciate your support and concerns as our shareholder. We apologise that the management is unable to share specific details such as project names due to selective disclosure rules by the Exchange.    

Best Regards

xxxxxxxx”

I could come up with this reply myself. It’s basically an absolutely useless reply with a lot of words, but no answers, except the part about the POC method, which they’ve kindly confirmed for me. They’re basically hiding behind an external IR vendor.

Well, I wasn’t pleased. This time, I sent a strongly worded letter requesting management to provide greater detail. I also informed them that they should treat all correspondence as public information (we can’t have selective disclosures now, can we?), including my questions.

In any case, isn’t this good practice for all management of public listed companies?!

One of my questions in this strongly worded letter was:

“If xxxxxxxx cannot manage their project margins adequately, incurring losses on projects repeatedly, will xxxxxxxx (CEO) consider stepping down and letting someone else who can better manage the company take over his executive role?”

This time, management sent a much longer, much more detailed reply, basically answering all my questions. The reply was specially crafted in a separate letter, signed by the top management, complete with an offer to send me a hard copy.

The details did help me understand certain aspects of the project management, that I previously had doubts about.

They sure weren’t very happy with me though. In response to the above logical question, they said that if the questions I asked were to be made available to the media, it would be considered “defamatory as it is suggestive that the CEO is incompetent”, and that legal action would be taken blah blah blah.

Well, I’ve sought legal advice and am basically assured that it’s a whole load of crap. The question included 2 facts, facts that are verified by hard data and has been admitted by the management themselves.

The 2nd part of the question is exactly that. A question. I asked if the CEO would consider letting more qualified personnel take over the company if he is unable to keep margins in check. None of it is defamatory and ironically, the “CEO is incompetent” part is interpreted by the management themselves. (LOL!) There wasn’t even the word “incompetent” in my letters. 

I’ve since replied them accordingly. I’ve even said that I’m comfortable repeating the exact same question at the next AGM. How’s that for being transparent?

If say, a celebrity is bald, and somehow he’s embarrassed by that fact, and if I make a public comment saying “hey he’s bald!”, sure, that comment may be embarrassing, definitely rude, maybe tactless, but certainly not defamatory. Because it’s factual.

Having said all that, it’s counter productive and in fact, self destructive for me to be adding more trouble for a management of a company in which I have a substantial vested interest in. I’m a deep value investor, and have never set out to be activist in nature.

In any case, my stake, although significant, is inadequate to call for a EGM. In future though, that might be an option when my AUM increases. Not ruling anything out. Anything that can focus the market’s attention on certain management practices would be on the table.

I’m still holding on to my significant stake though, as I think the dynamics are changing. I still think my initial investing thesis holds true. I wasn’t counting on an excellent management in this instance, and my experience thus far just confirmed that. I will say that I’m somewhat pleased with some of the info that I’ve since learnt from the reply.

Anything that adds to my knowledge bank of the industry, can potentially become a competitive edge in future investments in the particular industry.

On a related note, I’ve previously been critical of how King Wan’s management has performed. (King Wan Corporation – Part I, King Wan Corporation – Part II, King Wan Corporation – Part III)

Still, as stated in my earlier posts, I’ve always given credit to their IR, particularly the CFO Francis Chew. I’ve had trouble understanding their financials, particularly the BS as many of their loans to associates are packaged under different items. I am not sure if many analysts/experts bother to ask for a breakdown.

Yet they’ve bothered to provide me with useful information thus far, sometimes, embarrassingly for me, clarifying information that I should’ve picked up myself easily from the AR.

Recently, there’s also been board additions to KW. It seems the more experienced members of the Chua family are taking up board roles in light of the failed investments in prior years. I can only view that as a good thing, seeing that the Chua family themselves have a huge vested interest in seeing the company do better.

The share price has also risen slightly as I expected it to, with improved cashflow from collections from an associate. I don’t think the ride will be smooth sailing from here, but I think the lows are over, simply because most of the write offs are out in the open.

The time to buy, is when there are skeletons in the closet, they’re not out in the open yet, but everyone knows the skeletons are right there. Well, IMO, the skeletons for KW are mostly out in the open now. The ones remaining in the closet, well, everyone knows they’re there.

Now, value investors are great at looking at figures. All value oriented investors understand and monitor various financial metrics; P/B, PER, Yields, CAGR, FCF etc. Many will utilize some sort of stock screening tool based on these metrics.

Different investors would place different emphasis on different metrics, but that’s going too much into details. The fact is, increasingly, I’m thinking that the qualitative aspects of a company is the key. Afterall, as mentioned many times before, these metrics are widely known and available. The qualitative aspect is much more difficult to assess.

Incidentally, I’ve just finished updating my thoughts on LTC Corp, which just released FY16Q4 results. I think there’s a superb learning example in there, of how a value investor can glean a competitive advantage by going into detail and having an understanding of the industry characteristics. Will write about that next.

When I say qualitative aspects, the management team forms just a part of it. There are naturally some businesses that are just great businesses to be in. The tide is basically in your favor.

WB spoke about such businesses before several times. Conversely, he spoke about Berkshire’s textile business. That’s a business with poor dynamics. Typically, companies in this type of what I call “poor dynamics” type of industry, will find it very difficult to raise prices or gain much of a competitive edge over peers.

Increasingly, I think I’ll have to put more focus on this factor. Assessing qualitatively is IMO, much harder than quantitatively.

Which is why I’m doing it.

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On a completely separate note, I’ve had some questions about forex. Again, I’ll repeat that forex is something that’s a bit too complicated for me. It requires a global macro perspective. Just reading the news is not going to cut it. Unless you MAKE the news.

The only forex I do on a regular basis is the USD-SGD pair as I own USD denominated investments anyway.

For those who’d like to learn about forex, well, I have no idea where to start. But if you’d like to trade forex, there’s a link to Instaforex at the right column. Instaforex provides an absolutely free USD 100 to new sign ups, which you can use to try real forex tradng.

Any profits are yours to keep. So they are basically paying for the 1st $100 of your school fees. I’ve used an account to try receiving the $100 and thus far, it works. (surprisingly. I am not sure how they’d sustain their profits by giving out $100 to anyone who’s verified and signed up)

Ah at this stage, I’m sure there’ll be many crafty guys who’d think about signing up, getting the $100 and closing the account. It doesn’t work that way. They’ve some algorithm of some sort to sieve out people who do that.

Anyway, I don’t think 100 USD is worth the trouble, it’s just an incentive for those who are reluctant to put their own money on the line, to take the 1st step. The only reason why I tried getting this 100 USD is so that I can verify it before putting up a link on SG TTI.

IMO, forex is really really tough to get right all the time anyway, and my view is that it should be used only once in a blue moon when you are highly confident of certain scenarios. (For eg. if you knew Brexit would happen….)

If there are any guys out there who can consistently profit from Forex on a daily/weekly basis, please drop me a mail. Seriously. I’m just curious.

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I almost forgot to mention this piece of relevant and important news on CNA that I just read. It basically provides me with a lot of comfort knowing that my analysis has thus far been rather accurate. Here is the link:

http://www.channelnewsasia.com/news/business/singapore/good-deal-hunting-part-2/3050476.html

I’ll quote:

“To estimate construction costs, we used S$400 per square foot (psf) for projects within central regions, S$350 psf for projects in the rest of central regions and S$300 psf for projects outside central regions. These figures were estimated based on an analysis of average contracts awarded.”

In an earlier post on my investing thesis for BBR (BBR Holdings Investing Thesis), I wrote that I estimated their Lakelife project to have a breakeven price of $727 psf.

I’ve been asked in the comments section, how I’d derived this figure, and it’s been debated somewhat too. I’ve explained my methodology in the comments section too.

Well, taking the above given estimates in the article by Mr Bernard Tong, it corroborates with my estimate.

Lakelife land parcel bid was won at $418 psf, adding $300 psf of construction costs for projects in OCR, we’ll have a break even price of $718 psf, which is pretty much similar to my $727 psf estimate.

Obviously all these are estimates. But having the MD of The Edge Property confirm my earlier estimates is definitely comforting. I trust he’d know better than most guys, seeing that this is obviously well within his turf.

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I’ve also just updated the “About” page to include some common questions that I get. Do check it out.

As always, happy hunting for value.