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.

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.

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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.

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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.

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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

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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