Hi all, Philip here.
I would like to share the advice and journey of an acquiantance that I met before in Sabah that is building a beach resort together with another friend of mine. His advice and lessons given in the youtube interview are things that I have also practised through the years. He and I slightly different views of investing and intrinsic value, but he is a very nice and friendly man to talk to. He is a true gentleman, soft spoken and not prone to showing off his wealth, but he has a deeply rational and disciplined mind, very useful when investing.
His results have also been very very good the past few years ever since he left investment banking to become a full time stock picker managing his own private equity. His core concepts of looking at investing in business first, instead of just buying stocks and accounting financials are very much what gave me my good long term returns in the market. As he is a much better talker than I am, I present his interview here.
For those who want the quick and easy, here is a summary of points that he shared that I think are important to capture for the young investor.
When trying to master investments, these are what to look for:
1. Management quality for the business
2. Debt levels/ Gearing levels
3. Scalability of business / Total Addresable Market
4. Competitive advantage aka "Moat".
5. Cash rich companies can never go Bust.
6. Buy companies with decent valuations compared to future earnings.
7. Avoid Value Traps
8. Be in touch with the market. Read at least 2 hours a day. (WB and CM reads at least 11 hours a day as a full time investor)
9. Ignore macro economics and concentrate on the business. (Being able to predict the weather is a wonderful, but a useless venture)
10. 10% of capital in short term trading, 90% for longer term investments.
11. Fear disruption.
12. Buy what you are familiar with.
13. Invest in people you can trust.
14. Be disciplined.
15. Make investing your passion, not money.
16. Make your mistakes early.
17. Don't be emotional.
18. Buy a fantastic company run by honest, capable guys.
19. Love the process of investing, not the results.
20. Track money as a scoreboard, not as a way of showing off.
Now, lets go into the breakdown piece by piece.
Buy a fantastic company run by honest, capable guys.
Invest in people you can trust.
He values having a good manager to work your business highly, I do too. How do you value management? Thriftness, hard work and a disciplined mind. The things that he brought up should be items that stand out when you look at management. Not the fancy cars, expensive clothes or high salaries. What should pop up in your mind are the things he brought up: How impressed he was with Koon Yew Yin after their China company trip, where he went back home to Perak via bus instead of a driver and chaffeur, or QL cheah, where during lunch he would go through the bill item by item and bring it up when it doesn't tally. These are guys who you want on your side, setting up QL, Mudajaya, IJM, Gamuda, Hartalega. You should be thinking about investing in the same way, instead of collecting stocks, you should be thinking of collecting wonderful managers and hardworking workers who help you grow your business. Once you have them on your side, you don't just dump them on the wayside or throw them away, you sit on them and ride their hardwork and success as far as you can.
2. Return on equity.
Debt levels/ Gearing levels
Cash rich companies can never go Bust.
Buy companies with decent valuations compared to future earnings.
When you look at business instead of stocks, you need to concentrate on one important factor. Think of it like a banker. If I borrowed you MYR100, how much can you make in a year from that MYR100? 10 ringgit? 20 ringgit? This is where ROE comes in. It has nothing to do with the share price and PE, but has everything to do with real life. Take for example his Hartalega, why is it valued so high? one average, every year for that MYR100 borrowed it to, they are earning 25 ringgit. That is an amazing return and growth for a long term period.
3. Finding a Moat.
Scalability of business / Total Addresable Market
Ignore macro economics and concentrate on the business.
First, ignore macro economics because it gives you noise and a lot of false positives/negatives. It would be like trading using SMA200. SMA50 and SMA100 all at the same time, giving you completely different signals. Being able to predict the weather is a very wonderful and useful thing. But trying to build your own satellites by hand and floating it around the world alone is an exercise in futility. Instead, you are better off finding the perfect cornfield in the best location possible, nearest to supermarket for delivery. In other words, find the competitive advantage. Here, one thing that I always think about and Ian puts it brilliantly, is how scalable the business is. Once you decide to concentrate on the business, try to find how they are doing things better than their competitors, and how efficiently they are growing and scaling their business up. Ian gave the example of glove stocks, where given the raw materials and location, it was easy to open 20 new factories, install hand former production lines, and grow the business output. In comparison, compare that to the F&B restaurant guy where the owner/chef has to work there 18 hours a day, and can't open another restaurant without a huge drop in quality.
4. Learn something New Every Day.
Be in touch with the market.
Buy what you are familiar with.
Make your mistakes early.
10% of capital in short term trading, 90% for longer term investments.
Don't be static, keep improving your knowledge every day. Ian Yoong reads at least 2 hours every day. Warren buffett and Charlie Munger reads 11 hours a day. Read financial reports, economic books, technology books, finance, science, read everything. You never know when it may come in handy in building your mental models of how things will perform over time. Don't be afraid of doing stupid things, just make your mistakes early and move on. If you wait until you are 55 to make a huge financial mistake, you may realize it is too late to return from it. Always be in touch with the market, the biggest danger is not the daily business, but the market disruptor that can creep up and change your entire business viability. Take for example businesses like film cameras which were killed when they introduced digital film, hotels when airbnb came into the picture and retail business when alibaba and amazon came in. Ian also proposes a little gambling just to learn new things, he puts in 10% of his capital into short term trading ( which rarely happens, but I also wrote about PPHB and STAR as short term opportunities that can give you some margin of safety above the volatility), the losses and such from such should provide a good guide to improving your 90% investments in longer term stocks.
5. Learn to be Rational
Avoid Value Traps
Make investing your passion, not money.
Don't be emotional.
Love the process of investing, not the results.
Track money as a scoreboard, not as a way of showing off.
The secret sauce to speak in making money from the stock markets is simply to be rational. Avoid being greedy or taking unnecesary risks in investing. Stick within your circle of competence, buy the stocks that you understand, businesses where the business model is clear to you, services that you have used, people that you trust. Don't go halfway around the world throwing tons of money into a company you barely know about. Understand that not all businesses have to grow, there is a terminal value to everything. Some value traps occur because the main shareholders dont want to let go their business fully to outsiders who want to slash workers and sell parts and distribute profit, others because the business is a good business but is not able to expand, so they keep it small and manageable. Learn to recognized these traits which is very unique to asian countries where families inherit businesses and positions more than western countries. Be disciplined in investing, make it your passion to invest and your goal to get it right and make a correct investing choice, rather than looking at how much money you can make. Don't be emotional either in losing money or making money. Fall in love and be passionate in the process of investing, not just the results and wealth that follows. Track money as a scoreboard for you to see how you perform versus benchmark, not as a way of showing off. Results need to be backdated versus the choices you didn't make just as much as the profits that you did make. It is no use making 25% in one year, when the broader market is making 80%, just as losing 25% in one year is a win, if the benchmark market is losing 80% of their wealth.
In the end, the stories and lessons are very similar. What is important is to practise rationality, and how you can turn of the greed/fear part of your brain when the pressure is highest.
Hope you learned something new today,