The value investors: Lessons from the world’s top fund manager (Part 2)
Author: Ronald W. Chan
Mark Mobius (Templeton Emerging Markets Group)
“Never take other people’s advice when making an investment decision. Always make decisions based on what you have learned and act on the information that you have gathered”
Quoted from Sir John Templeton “bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”
“When it comes to emerging markets, you cannot rely on numbers because they cannot be entirely trusted … Deep understanding of management is required”
“By being humble, you are more open to new ideas and can be more objective in your investment research. With an open mind, you can accept that the world changes and that you must constantly learn new things to keep pace with it… There’s not secret formula to investing… There’s only right attitude”
Strategy:
-Usually apply the ‘5-40 rule’ which means that the sum of positions with over 5% allocation must be less than 40% of overall portfolio. This is to limit exposure to any particular sector or company
-Uses P/E ratio vs GDP as a quick way to compare across emerging markets
-Other indicators include Price to book ratio, ROE, ROCE, profit margins and EPS
-Troubled economies spell opportunities
-Evaluate company’s past 5 years records and project next 5 years
-Holding period of 5 years leaves them room for market volatility
– 4 cardinal rules for emerging markets:
1. Fair – treats investors both big and small equally
2. Efficient – stock exchange and local brokers are honest and charge investors at competitive and acceptable rates
3. Liquidity – ease of placing buy and sell orders on stock
4. Transparent – accounting and financial transparency
Teng Ngiek Lian (Target Asset Management)
“Buying a stock at a low price and subsequently selling it higher without considering its business quality is really just ‘value trading’ not ‘value investing’ ”
“A good value investor comes down to a thorough business understanding and a diversity of life encounters and business dealings”
“Sometimes it is the businessperson’s network and entrepreneurial skills rather than the nature of the business that drive the business”
“If you look at only one company one at a time, then you are as good as blind! You must take relative comparisons”
“While emerging countries have higher growth, they also have greater risk in terms of politics, corporate governance, shorter business cycle and less liquidity”
“Shopping and investing are similar. They are really about common sense, but somehow common sense send to have become quite uncommon”
Strategy:
-Find good companies at reasonable prices
-Beware of political changes especially in Asia where many countries are still young
-Dig into operational details such as distribution logistics, branding and marketing strategy and cash flow management
-Understand what makes the business work. Why do consumer want it’s products? What is the right price structure for those products? What is the contingency plan if product do not sell?
-Consider market dynamics such as who calls the shot in the industry’s food chain
-Distinguish which growth phase a company is in, and then play with its upside and downside sensitivities
-Buying into fallen angles or companies going through necessary growing pains before their earning potential is developed
-Concentrated portfolio of roughly 30 stocks
-Things to look out for when a stock price fall:
1. Is a fall occurring to the broader market, a particular sector or just a specific stock. If it’s just the specific stock then it’s a cause for concern
2. Understand if the fall in price is due to normal business issues or serious problems such as structural changes
Shuhei Abe (SPARX Group)
“To generate investment spark, an investor needs to remain open and be receptive to new insights and information”
“You can be passionate about it but if you want to become a professional investor, you need to develop a system and have the talent to find good investments repeatedly”
“I think a good investor has to evolve his strategy over time to fit the market. But at the same time, he must be consistent with his investment philosophy and principles”
“Luck is only a bonus, over confidence is an ingredient of failure”
Strategy:
-Find a niche or an asset class that best suit a person’s personality
-Finding investment ideas via brainstorming sessions with colleagues
-Find out how much a business is worth two to three years time
-Test out assumptions, play with sensitivities and set a target for the investment
V-Nee Yeh (Value partners group)
“The cash flow generation in a business is the most fundamental and rational basis for determining value”
“Investing requires a broad and lateral mindset”
“Good investors constantly have good ideas about reinvesting capital to create a confounding effect”
“If you are a calm and patient person, then the value investing approach may be right for you, but if you are jumpy and aggressive, then a more trading oriented style may be more suitable… It’s about understating your temperamental compatibility”
Strategy:
-Focus on cash yield, free cash flow
-Consider reinvestment risk when it comes to selling.
-Analysis should be done conservatively to ensure margin of safety. One should look for the downside first before the upside.
-Constant lookout for good investment managers and their portfolio to generate investment ideas
Cheah Cheng Hye (Value Partners Group)
“I believe that learning is the only way to become a civilized and responsible human being”
“Good ideas are often self generated. They come by taking the initiative to learn about new things and by paying attention to detail. Then it is about prioritizing well and focusing on the main points because much of what we read and hear is noise”
“Undervalued stocks in Asia can hand zero volume on a trading day which can be painful to investors”
“To build a long lasting business, it is important to drop one’s ego and to let go of the self”
Strategy:
-Focused on small to mid cap stocks
-Three Rs:
1. Right business
2. Right people
3. Right price
-Divide stock universe into
1. Undervalued and out of stocks
2. Fairly valued and highly recommended stocks
3. Overvalued stocks
-Keep track of external forces that could be business, economic or political driven
-Beware of cheap stocks with lousy business
-Concentrated portfolio of 30 to 40
Book recommendation:
Martin Fridson’s Financial Statement Analysis: A Practitioner’s Guide