Tay US Fund Final NAV Update June 2014

table

Accurate as of 30 June 2014

Initial Net Asset Value: $10.00

Net Asset Value as of  30 June 2014 $18.83

Graph

Hypothetical Growth of $10,000 invested since September 2011 (NAV at September 2011 was $9.71)

* Due to an error in the calculation of the NAV of the iShares S & P 500 TR Index, the figures have been revised to reflect the correct NAV in the corresponding time.

* A total return index is an index that measures the performance of a group of components by assuming that all cash distributions (dividends) are reinvested, in addition to tracking the components’ price movements

* I have changed the benchmark to the iShares S & P 500 TR Index to reflect the fees of a index fund. NAV is calculated net transaction costs and tax.

3 Lessons I Learnt from Investing

So, as a prelude to our review for the 2nd financial year, I thought that I would post some thoughts about what I’ve learnt while investing for the past 4 years.

Due to professional commitments, I will only be updating this blog semi-annually.

#1: Focus and Grind

One of the main reasons why I became competent in investing was focus. Finance is exciting; there is nothing quite like it in the world: It never stops, there is always something new happening, and providing that it is done right, it can be immensely profitable. Nothing gets people more excited than the idea of getting rich, and there are an abundance of people willing to sell you the latest system to help get you there.

When I started out, I was extremely suspicious of all trading strategies. But with time, I have come to change my stance on it.

You can make money investing in almost ANYTHING. That’s the truth. There are people who make plenty of money trading commodities (Jim Rogers), using a global macro strategy (George Soros), or in real estate (Donald Trump).

The point is whether YOU can do it. The 80-20 principle holds true in any field of investment that I can think of. If there is a market, someone is making money.

The question is not whether they can make money, but whether YOU can.

Everyone I know who has made significant sums of money investing in shares as a common trait is extremely FOCUSED on one field of investment. People who are great in forex stay within forex, people who are great in real estate stay within real estate, and people who are great in investing in businesses stay within that area. It’s only when they venture out of their competence that they get burnt.

Malcom Gladwell repeatedly talks about the “10,000 Hour Rule” necessary to become the top in one’s field. Think about it for a moment: if you tried 10 different investing strategies over the course of 5 years, how good would you be compared to the guy who honed in on his skill of investing in businesses by reading a thousand annual reports?

Admittedly, it’s much easier to talk about starting a bunch of different new things compared to actually honing in on our skills day in, day out. It’s exciting to talk about the potential rewards, to get hyped up about the changes and impact that it’s going to have on our life… but reality slowly sets in after we realize it’s much harder than we thought, and we soon move on to the next project.

This cycle repeats itself, and soon we find ourselves becoming a jack of all trades yet the master of none.

Grinding isn’t glorious or exciting to talk about over the dinner table, but it is a necessary trait that all famous people have. Every leader in their field is famous for one thing to which they dedicate their life and passion to – Steve Jobs, Michael Jordan, Bill Gates, Henry Ford, and Rockefeller. The greats are great because they became great in their field, and the only way to become great in investing is to focus and grind relentlessly in one specific field.

#2 Nothing Worth Having is Free…

…and this is especially true for anyone who is trying to dominate their field.

There isn’t a shortage of free information – it’s available everywhere. Like your average Asian, I’m out for a good deal just like everyone else. But I can say with conviction that the last place you will ever want to save costs is on your education to becoming a competent investor.

The average person will spend tens of thousands of dollars on a college degree, spend endless hours of their time studying and building up a spotless CV to get a great job, yet when it’s time to spend a couple of dollars to buy books, or go to meaningful conferences (not seminars that are out to grab as much money from you as possible), they suddenly extol the virtues of saving money and their lack of time.

If you treat investing like a hobby, you are going to get the same results. The people you are up against include:

1) Professional Fund Managers are some of the best paid individuals in the world who do this FULL-TIME for a living, and they still have a notoriously hard time beating the market.

2) Investors like Warren Buffett, David Einhorn or Seth Klarman have spent decades perfecting their art.

3) Investors who live and breathe the market, and love to do this day in, day out.

The odds are stacked astronomically against you, and the last thing you want to do is to make them worse. In order to become great at anything, we all have to pay our tuition fees one way or the other – be it in time or money. While it is possible to learn from your mistakes, why not learn from the mistakes of other people? There is a sheer treasure trove of information for value investors out there.

If you decide that this is not for you, fair enough. Buy a market index fund and rest easy at night. But if you want to become the best in this field, make sure you realize the commitment you need to make to dominate it.

#3 Build a Great Supportive Network

This is my favorite way of short-circuiting my learning process in any field.

A great network is primarily divided into three groups of people:

Mentors: While theory and personal experience is essential, I learnt the most by sharing my own mistakes and successes with my mentors to see what can be tweaked. There is always room for improvement.

I have had the privilege of meeting an incredible group of people willing to share their own experiences with me.

I truly believe that most people want to help others succeed. We are innately programmed to do so. They might not always have the time, or be in the right place to help you, but you have to be persistent, and you have to keep looking. The moment you start looking, I guarantee you that you will find people who will take your game to the next level.

Peers: People who are on the same journey can be a great sounding board for ideas and informal sharing. I was very lucky to meet an incredible group of people heading in the same direction that I was, and I have learned a great deal from every one of them.

Even if you can learn just one thing from someone, that to me is a great relationship. People talk to me all the time about different companies, and I have learnt about industries or businesses that I wouldn’t have considered previously, or viewpoints that I would never have considered.

As Steve Jobs said, the dots only connect when we look backwards. Some of my best investment ideas have been the result of a dozen different experiences and interactions combined, and it’s quite amazing to see how it all comes together at the end.

Friends and Family who Believe in You:

This is the most important group. Getting great in any field requires a lot of dedication and persistence, and you are going to fail a lot to get there.

Having a great group of people around you who believes in you when you struggle to and who can help you return from any setbacks you may need to overcome.

You can’t get to the finishing point on your own, and the people you hang around with the most – your close friends and family – are, I feel, so important in helping you stay on track.

My thoughts on building relationships:

According to Buffett, Graham said that he wished to do something foolish, something creative, and something generous every day. The last part had a huge impact on Buffett as it did on me.

The fact that a man of Graham’s ability shared his knowledge so freely astounds me to this day.

A mentor I had once taught me, relationships aren’t about taking, taking and taking. It’s about giving without the need for anything back. People are naturally helpful and want to help you if they can.

So every day, I try my best to be helpful to someone else, even if it’s in a small way. People appreciate the small things as do I. This I believe is the key to great relationships and it ensures that both parties grow as individuals.

Each of us has our own talents and strengths, and thus something of value to offer to everyone. So if you want to build up a great network of people, always remember to give before asking.

Final Thoughts:

This has been an especially long post, and I have tried to keep it as relevant to someone starting out as possible. There are a few great resources that I recommend as I feel that they will help anyone build a solid foundation if you want to get a good grasp of fundamental analysis and value investing:

The Intelligent Investor – Benjamin Graham

Warren Buffett Biographies (Both Versions)

Berkshire Hathaway Annual Shareholder Letters

Finally, I want to give a special mention to the Manual of Ideas, which is run by two extremely talented individuals – Oliver & John Mihaljevic.

I believe that they have done something quite remarkable in bringing top notch information to the masses. Imitation is the finest form of flattery, and in profiling top investor holdings (with write ups), I have learnt far quicker by understanding how the best in our field think about an investment.

The many Value Conferences (also by them) have also been a joy to participate in, and I was lucky enough to be a participant in the first one ever organized. Howard Marks, an investor who I have nothing but the utmost respect for, is a frequent speaker at it.

Tay US Fund NAV Update June 2013

holdings

Accurate as of 21 June 2013

Initial Net Asset Value: $10.00

Net Asset Value as of  21 June 2013: $13.75

graph

Hypothetical Growth of $10,000 invested since September 2011 (NAV at September 2011 was $9.71)

* A total return index is an index that measures the performance of a group of components by assuming that all cash distributions (dividends) are reinvested, in addition to tracking the components’ price movements

* I have changed the benchmark to the iShares S & P 500 TR Index to reflect the fees of a index fund. NAV is calculated net transaction costs and tax.

* Portfolio Net Asset Value will be updated quarterly at the end of the third week of each month.

Final Piece on Investing: Experiences & Lessons Learnt

This will be my final piece on investing as I look to take a break from writing. It represents the culmination of not only my own investing experiences to date, but the work of countless others that have come before me. They form the foundation of all that I know about investing, and I hope you find it useful.

The markets are generally efficient at pricing securities. So in that way, I do agree with the general notion of the efficient market theory. What we exploit, and how we invest is to find pockets of market inefficiency, and to exploit the differences between price and intrinsic value.

To understand where to look for market inefficiencies, it’s easiest to examine the underlying assumptions of the efficient market theory. I will be covering the ones which I feel most pertinent.

Imperfect information:

The more coverage a stock receives, the harder it is to find divergences in intrinsic value based on traditional forms of valuation. They exist sporadically and infrequently – and right now, we are betting on two highly publicized companies in the US where coverage is high – Bank of America & AIG (our thesis is that the legacy problems that have led to recent lackluster results are being resolved, and their true earnings power will eventually be realized).

One has to take healthy stock in their own abilities as an investor. People who work in the financial industry are generally smart and highly motivated. It is extremely hard to possess an informational edge on companies that widely covered since so many people are working on the same problem as you are. Is it possible to generate superior insight by the careful study of annual reports and financial data? Yes. But the task inevitably becomes much harder, and the payoff far less rewarding with high profile names as such inefficiencies are inevitably arbitraged away as information about the business becomes commonplace.

Following that train of thought, it is logical to deduce that gaining an informational edge is much easier by looking where no one else is. Take for example, the Singapore Stock Exchange. While there are about 450 companies listed, only about 50 companies receive widespread institutional coverage. Gaining an investment edge through rigorous analysis of the remaining 400 thus offers a much higher probability of success since there is little competition. Valuations that typically exist during recession like conditions in more developed financial markets like the United States & the United Kingdom (or Greece now) are commonplace in Singapore.

Inevitably as the markets develop in Asia, such opportunities will cease to exist. But such developments do not happen instantaneously. The evolution of the financial industry in Wall Street took decades to play out. If history is of any relevance to us, I daresay that the development of the industry in Asia will take a similar path, and it will be many years before such opportunities cease to be.

As such, the well-worn path is one that we must avoid if your goal is superior market returns. There is nothing inherently wrong with investing in a benchmark index. However if one aspires to do better than the market, it is inherently illogical that you can achieve that goal by investing like everyone else is. Markets such as Singapore & Japan provide fertile ground for the enterprising and hardworking investor, and as markets continue to open up in Asia – notably China, Thailand & Myanmar among many others – there will be ample opportunities to exploit.

Market prices do not always reflect intrinsic value:

The underlying assumption behind ALL fundamental analysis is that the markets will eventually recognize the underlying value of the security. If you are long a stock, you believe that there’s a divergence between price and value – and that the markets are incorrectly pricing it below what it’s actually worth. If you are short a stock, you believe that the market is placing a far greater value than whatever the business is actually worth.

In truth, learning how to value a business is the easiest part of investing. Through careful study and due diligence, it is not hard to arrive at an estimate of what a business is worth. The difficulty comes in waiting for the market to recognize what we believe to be true.

The traditional bread and butter approach of a value investor is to find companies trading at a discount to intrinsic value, and than waiting for the markets to revalue them to what they are really worth.

Let me present to you a variation of this, one still anchored from the foundations of a focus on intrinsic value, but borne out of my own experiences from how financial markets work. For us to do that, we need to establish the premise behind exploiting this “market inefficiency”.

Humans are rationally irrational. Even after thousands of years, all of us, regardless of our origins are governed by the same fundamental emotions of greed and fear. Investment opportunities that are widely purported to make money (whether they do so is another question) are often exploited by other people. Witness the junk bond mania of the 1980s, the dot-com frenzy of the 1990s, and the sub-prime crisis of the 2000s.

Thus while we invest on the premise that the price of an underlying security and its intrinsic value will eventually converge, the truth is that for the most part, they don’t. Believing that markets operate rationally is the surest way to folly as they reflect so little of what reality is. In the short run, the stock market is like a voting machine. It’s driven by a herd like mentality – and emotions.

Consider this, while value investors like to talk about investing for the “long-run”, the truth is no one knows just when this revaluation will take place, if it ever does (if you know someone who does, my advice is to run for the hills). It could be weeks, months or years. The whole point of speaking in broad specifics is that it affords us the margin of error seeing that we have no clue when it would happen. We have our rough ideas and our expectations, but they are rarely right. If there existed an exact science of forecasting, investors would have no need of portfolio diversification.

In the real world, prices for most transactions are governed by the fundamental laws of demand and supply. When the number of buyers exceeds the number of sellers, prices rise, and when the reverse happens, prices fall. The deeper the market, the greater the liquidity, the smaller the mis-pricings between the prices of what buyers and sellers demand.

The real investment opportunity comes when the normal state of the markets are thrown into turmoil without warning. Consider for example, panic selling in the wake of market wide declines. The number of sellers who want to get out of their positions far outweighs those who are trying to get into the market. They are highly motivated to get out and sometimes not because they want to, but because they are forced to due to margin calls, excessive leverage etc. You are essentially playing the role of a trader, exploiting the differences in positioning that both parties have.

And that’s why sometimes intrinsic value doesn’t matter at all. If you are a large institutional firm taking a huge short position, and word gets round that you need to get out for your position, you are screwed. The market is going to make use of your need to cover your shorts to extract the highest possible price because you have no say in the matter. It doesn’t matter whether your thesis is right or wrong. Let’s say you’re house is being foreclosed and being auctioned off. Now, the value of your property conservatively valued might be $500,000. But more often than not, you won’t get anywhere close to that sum. You aren’t in a position to bargain. Intrinsic value doesn’t matter.

One of the reasons why distressed debt investing is so profitable isn’t that the underlying businesses behind them are great. They aren’t. Rather investors can pay such depressed prices for their debt that it far compensates them for any risk that they are required to assume. They are placed in a superior bargaining position to demand lucrative prices. If you pay 20 cents for bond with a par value of $1, a lot can go wrong and you can still make a lot of money!

If I could sum this “market inefficiency” in one sentence, it’s that investors should be waiting for situations where the number of sellers far exceeds the number of buyers. This is different from the traditional associated form of “value investing”, because it requires you to be highly tuned in to the market. You take on the mind of a trader, keeping up with the latest developments, waiting for situations to unfold. These investment opportunities normally only exist for short spans of time.

Closer to home, let’s take the situation of the locally listed company – Olam.

When word that Muddy Waters had taken a short position in Olam, market value of its listed debt and equity declined considerably in value. Investors were highly motivated to get out of their positions. Like every other time, it was a case of do first, think later. Now, depending on what you though Olam was actually worth, there was a significant chance to buy the same company at a significant discount to what it was trading just a couple of days earlier – literally a contrarian trade with a short time horizon and not one where the holding period was years.

Individual investors don’t need to do anything when there’s nothing to do:

More than anything else, this is the biggest advantage that individual investors have over institutions. Institutions thrive on activity, and they need to be doing something or anything to justify their fees. Funds have to be fully invested, opinions have to be given even when no intelligent conclusions can be formed, and institutions in general, tend to crowd into the same trades.

Individual investors face none of that burden, and it’s the most powerful advantage you have. You can wait for indefinite periods of time for the right pitch to surface before moving, and you should exploit this advantage to the fullest.

Let me walk through how advantageous by highlighting an example close to home.

Those of you familiar with me know that I generally hold a bearish view of the property market in Singapore. Prices have risen considerably, and the general sentiment of the average investor is far too bullish for me to be comfortable, especially with what is essentially a highly geared investment. An investment idea which combines high levels of debt, and the assumption that interests rates continue to remain depressed indefinitely and that prices of houses continue to rise (or remain level at least) is one that in my view, doomed to end badly (this is what the sub-prime crisis in essence was).

But this is where the individual investor has a huge advantage. If I do not want to invest in property, I don’t have to! Sure, the average person might feel the compelling need to since all his friends are getting rich doing so, but that is different from an obligation to do so.

Now, consider this, if you were running an institutional fund and property stocks or REITs just had a terrific run, you certainly might have reached the same conclusion as me that they were overvalued. But, calls from your clients would soon come in, asking why you weren’t loaded up with property stocks when rival fund manager XYZ who had done much better than you, was. Clients would soon start leaving you, feeling you out of touched with the “new-age” of investing, and soon your livelihood – directly correlated to the amount of assets you managed would be threatened. You would be compelled to start making investments in these assets despite your own personal beliefs – not because you wanted to but because you had to.

Sound farfetched? It isn’t.

What I’ve described has repeated itself countless times throughout history. It’s the same reason why funds are normally crowded into the same trades all at the same time. It’s far better (and easier) to fail conventionally, together, than it is to succeed unconventionally, alone.

In my view, this is really the biggest advantage that individual investors have. The ability to do nothing when there’s nothing intelligent to do, and to swing for the fences when the right pitch comes is fundamental to generating market beating returns. The only way to achieve superior results is to do what no one else is doing.

Final thoughts:

I have drawn upon the works of countless others, coupled with close to three years of investment experience to reach the conclusions above. While not exhaustive, they provide the bulk of what has come to define my own approach to investing, and like all things, will continue to evolve as the years roll by. While I’ve enjoyed it, this will be my last piece of investment writing for a long time coming. To end off, I echo the words of Benjamin Graham which apply not only to investing, but life as well – you are never right or wrong because of what other people say, but because of your research and because of your reasoning. If both are sound, have the conviction to stick to your beliefs and stay the course, no matter what others may say, and in time, you will be duly rewarded.

Tay US Fund NAV Update March 2013

holdings

Accurate as of 17 March 2013

Initial Net Asset Value: $10.00

Net Asset Value as of  17 March 2013: $12.85

graph

Hypothetical Growth of $10,000 invested since September 2011 (NAV at September 2011 was $9.71)

* A total return index is an index that measures the performance of a group of components by assuming that all cash distributions (dividends) are reinvested, in addition to tracking the components’ price movements

* I have changed the benchmark to the iShares S & P 500 TR Index to reflect the fees of a index fund. NAV is calculated net transaction costs and tax.

* Portfolio Net Asset Value will be updated quarterly at the end of the third week of each month.