Fund Manager| Peter Lim Tze Cheng

I am writing to introduce a Malaysian fund manager, Peter Lim Tze Cheng by referring to some of the articles that I read online. 

Excerpts:

One of the reasons why Lim Tze Cheng became CEO of Inter-Pacific Asset Management Sdn Bhd (InterPac) was to start a fund that could create a positive impact on society. The InterPac Social Enterprise and Social Responsibility Fund was introduced in May.

This does not come as a surprise as Lim has been donating half his salary to charity since 2007. While he can afford to have a luxurious life, he still drives a scooter to work every day and lives in a modest apartment.

“I would like to have a Mercedes-Benz and live in a bungalow; they are nice. But are they necessary? Most of my money goes to charitable causes. I don’t keep much for myself,” says Lim.

He has always been involved in charitable causes, partly due to his humble family background. He was born and raised in Muar, Johor. His father was a bus conductor who worked on the buses that travelled between Muar and Batu Pahat.

Lim, who is the youngest of six siblings, started working in factories when he was 13 to help reduce the family’s burden and buy the things he wanted. In university, he started a business where he imported stationery from China and sold it to the cooperatives in schools and universities to pay for his education and living expenses.

“Anything I wanted back then, I had to earn it myself. Nothing was handed to me by my parents. That is also how I have been throughout my life,” says Lim.

Another incident that contributed to his involvement in charitable causes is the fact that his elder brother was a drug addict and he had seen how his brother asked for money from his parents to buy drugs. “I can tell you that my eldest brother was a drug addict since I was a year old. What you read in the newspapers or see on the big screen about drug addicts is true,” he says.

Because of this, Lim has always wanted to do something more for society. When he joined InterPac, he seized the opportunity to launch the Social Enterprise and Social Responsibility Fund — the first of its kind in the local fund management industry.

The fund is a wholesale equity fund that invests in Asean markets. The initial minimum investment amount is RM300,000. There is an annual management fee of 1.5%, but no sales charge.

Every year, the fund disburses 20% of its returns to its investors so that they can donate the money to charity. The remaining 80% is reinvested in the fund.

“I tell investors to draw a 3km radius from where they live and there is bound to be an orphanage or charity home. They can donate the money by buying rice for such charities, or fixing the roof or kitchen, or doing something bigger like building schools,” says Lim.

The fund has raised RM7.6 million so far. His goal is to raise RM100 million. “To me, this is my dream come true. I have hung photos of various religious leaders on the walls of my office. It is a reminder to grow the fund and continue doing good for society.”

Some of his sharing I found that was quite useful and knowledgeable and also a published book that he wrote to guide the layman on how to invest unit trust or shares. I hereby compile the information gathered from the articles that I read online in the summarised form.

Summary

1. Choose a handful of stocks you know are set to boost profit and hold out until they rise. If you get the first part right, and can resist the temptation to react to daily events or try to time the market, the rest of the job should, essentially, be dull -- all you have to do is ignore the noise.

2. Concentrated Strategy: Lim pursues a concentrated approach, never holding more than 40 stocks, with most holdings usually making up at least 3 percent of the portfolio. Some years, he says, he won’t add any new companies if he can’t find good ideas, preferring to double-down on existing picks.

3. Lim was attracted to the company (Inter-Pacific Asset Management controlled by Tan Sri Vincent Tan) because it gave him a chance to set up a social enterprise fund, an ambition he had for 10 years, he said.

4. Despite his success, he says his real excitement is in making money for charity. He gives half his salary to a non-denominational non-profit organization that helps the country’s needy. His social enterprise fund returns 20 percent of its gains to investors for donation to charitable causes.

5. The global markets did not totally collapse and after 2009, they embarked on a long recovery period and have not looked back since. Lim says he knew this would be the case based on the data he had read on the level of cash US banks had deposited with the Federal Reserve at the time.

“The Fed published a quarterly report on the total cash US banks deposit with the central bank. I remember that in the fourth quarter of 2008, I read one of these reports and noted that the banks had a high level of cash deposited with the Fed. I decided to do more reading and concluded that it was not a real crisis.

“If the financial system has no cash, that is a real crisis. But if your banks have a high level of cash sitting with the Fed, the so-called ‘crisis’ is due to a lack of liquidity because banks are not giving out loans.

“This is not a real crisis, but a short-term phenomenon. That is why when the Fed started to lower interest rates and the banks were forced to give out loans, the market recovered. That is what gave me the confidence to buy during the crisis. Not many people took note of the reports because of the bad news reported in the media and there were fears that the market would crash.”

6. Lim Tze Cheng talk about his mentor, Tan Teng Boo.

Lim attributes his ability to cut through market noise and remain true to his convictions when making investment decisions to his mentor Tan Teng Boo, the founder, CEO and managing director of Capital Dynamics Group. He had joined Capital Dynamics as an analyst in 2003 after a short stint as an accountant at BDO Malaysia.

“It was very tough. Every month, we lost a few analysts. They lasted only about three months on average. Over the six years I was there, we lost about 60 people a year. At one point, I even plotted a chart and found that the peak month [for analysts leaving] was April,” says Lim.

It was tough because he had to conduct thorough research on the entire value chain of an industry before visiting a company. He also had to meet up with all the relevant regulators to understand the industry’s regulations.

Then, he had to talk with the representatives of government agencies such as the Malaysian Investment Development Authority to gain knowledge of government incentives and foreign investment flows. He also had to meet with the competitors of a particular company as well as its suppliers.

“Company visits were the last thing we were allowed to do and many analysts did not have the patience to go through the process,” says Lim.

More importantly, he had no access to brokers’ reports nor a Bloomberg terminal, which are important sources of market information. This was due to the cost-saving measures implemented by the firm. Another reason was to allow its analysts to make independent judgement calls and produce their own research reports instead of being affected by what was being said in the market.

“We did not have any Bloomberg [terminals] and all the brokers’ reports went to Tan. At the time, I did not even know there were brokers’ reports. This means that if you want to analyse something, you had to analyse it from scratch as you do not know what kind of calls the other brokers are making [about the companies you are looking at]. The independence is really there.”

Lim took six months to produce his first analyst report. Even then, he could not obtain Tan’s approval easily. “If you talked nonsense, he would challenge you. This was partly because he had access to brokers’ reports. But at the time, I was young. I also did not know he had access to this information and wondered how he knew all these things,” he says.

Despite the challenges, Lim appreciated Tan’s patience in allowing him to take his time to learn things. “He is very patient and does not compromise. That is one thing I admire about him. It is the same when it comes to investments. He really does not care what the market is saying, whether it is a ‘buy’ or ‘sell’. If he likes a stock, he can wait years to buy, sell or hold on to it. His patience is really amazing and I respect him for this. That is one of the reasons why I worked for him for six years,” he says.

7. For now, Lim’s favourite sector is technology due to its growth potential. He likes test companies that utilise technology to conduct tests on electrical and electronics (E&E) components such as light-emitting diode (LED) lights and smartphone chips. Many local companies belong to this category.

8. “You would ask why as smartphone sales have not seen a huge increase. But smartphones are not the biggest consumer items globally — it is cars. According to statistics, 400 million smartphones and 90 million cars are sold every year. But what is the price of a smartphone compared with that of a car?”

9. Globally, cars are becoming more electronic, says Lim. Not only are regular cars using more E&E components, there is the emerging trend of hybrid, electric and autonomous cars.

Hybrid and electric cars allow drivers to save on fuel costs while contributing to a greener environment. Tesla has just introduced the first affordable autonomous car, the Model 3, which costs US$35,000 each.

“Cars today use more E&E components than they used to. And even more will be used in the future. So, it is the car industry that has been causing the surge in demand, not smartphones,” says Lim.

10. Companies he likes include Elsoft Research Bhd, one of the core holdings of his funds. There are also Vitrox Corp Bhd, which conducts visual testing for E&E components such as LED lights, and Aemulus Holdings Bhd, which conducts testing for wireless chips used in smartphones and other devices.

“[Local companies] are quite strong in the testing business and they are supplying their services globally. These companies will be the beneficiaries of the bigger trend,” says Lim, adding that it is based on this strategy that he does not hold the stocks of some semiconductor companies that many other fund managers are holding.

11. Lim also likes companies with a regional or global presence in the consumer manufacturing sector. “My portfolio is very manufacturing-centric. I won’t touch things I don’t understand. I need to see and touch them if I want to invest in them,” he says.

12. Oriental Food Industries Holdings Bhd and Power Root Bhd are two companies he likes in this [consumer manufacturing] sector. They have been expanding their export business, which has enabled them to generate good earnings despite weak local consumption in recent years. “About 50% of their business comes from exports. That is why they are still able to perform when domestic consumption is soft,” says Lim.

13. He also looks at the evolution of these companies. One example is Oriental Food, whose product Super Ring has been popular since it was introduced more than a decade ago. But when the healthy food trend came along, the company replaced its artificial cheese flavouring with a natural one. It also expanded into healthier snacks such as Jacker potato crisps. The company’s latest product is biscuits, he says.

“You can see the company’s evolution into manufacturing and selling higher-grade products. On top of that, it manufactures products for some Japanese brands, which is not easy. This shows that management is thinking about the long term. In fact, the company has been around for more than 30 years,” says Lim.

He adds that investors who look into companies like these have to accept that their revenue growth will not be exponential. The natural growth rate is 5% to 8% per annum. But there will be a bigger jump when they increase production capacity.

14. Being a bottom-up stock picker, Lim says the real risks of his investment style are those related to the company’s business such as a change in management. “Let’s say, the founder and CEO passes away and there is a complete change in management. This is definitely one of the key business risks.”

15. He also considers selling a stock when the company starts to diversify into sectors that are not relevant to its core businesses. Based on his experience, most companies that embark on diversification fail to generate good earnings.

“It is a warning sign and I am usually quite worried when they do that. Diversification does not work out most of the time based on history. It shows that the company is not so confident about the future of its core businesses,” says Lim.

16. He says companies should distribute their earnings via dividend payouts to shareholders instead of using it to diversify. “For instance, a glove maker that diversifies into property. Why do I need you to diversify? If I want to have property exposure, I can buy into another company that has a focus on the property business. Why don’t you distribute your earnings to shareholders?”

17. After spending the last 17 years recommending stocks and managing investors’ money, he has turned to investor education as head of research at EquitiesTracker Holdings Bhd.

18. One of the ways he does so is by publishing research reports and making them available to the public at no charge.

19. “I also think many retail investors have forgotten about the fundamentals of valuing a company. If you are looking to buy a stock, which is a business, you need to consider many qualitative factors such as the company’s brand values, competitive advantage and reliability of its workforce. But nowadays, some of them behave like investment analysts, focusing on forward earnings and valuing a company based on future dividends, cash flows, interest rates, among others. One should think like a businessman who wants to buy a company, and not just analyse numbers like an academic exercise.”

20. The job of a fund manager is to evaluate various stock recommendations provided by analysts and decide on when and what stocks to buy, he points out. “For instance, an [equity] analyst tells a fund manager that he likes 10 of these companies. The fund manager’s job is to decide whether to invest in, say, six or eight of them. He also needs to decide how much money to invest in a particular stock and when to buy or sell it.”  

21. The job of an analyst is to research various companies and come out with a conclusion on whether the stocks are worth buying. “So, you would only want to become a fund manager or an analyst if you want to specialise in these specific skill sets,” says Lim. 

Source:

1. Fund management boring for Inter-Pac Asset Mgmt CEO who is up 51% this year

2. Cover story: Man on a mission

3. 2018 The Edge Thomson Reuters Lippers Fund Award: Inter-Pacific Asset Management Sdn Bhd - Won Two Individual Awards

4. First Person: Empowering retail investors
5. Proof of Value - Medium 

6. What I learnt as an Analyst

Opinion: Warren Buffett will soon tell us what he really thinks about stocks, investing and the coronavirus pandemic -- by Lawrence Cunningham

I would like to summarise what I thought was important while reading the article,  Opinion: Warren Buffett will soon tell us what he really thinks about stocks, investing and the coronavirus pandemic.

Summary:

Φ First, Buffett has been as vocal during this crisis as he has been in others — and his tune has not changed.  For instance, on February 24, as the pandemic gathered lethal force, Buffett sat for an interview with Becky Quick of CNBC. He called the pandemic “scary stuff,” but said it does not alter his long-term outlook or approach — disciplined fundamental business analysis remains vital.

Φ Buffett drew comparisons to the U.S. stock market crash on October 19, 1987 and the credit market panic of September 15, 2008 — from both of which the world eventually recovered.

† 1987 October 19, Black Money:  is the name commonly attached to a sudden, severe, and largely unexpected stock market crash that struck the global financial market system. In the United States, the Dow Jones Industrial Average fell exactly 508 points, accompanied by crashes in the futures and options markets.

†2008 September 15, Global Financial Crisis: The filing for Chapter 11 bankruptcy protection by Lehman Brothers on September 15, 2008 remains the largest bankruptcy filing in U.S. history, with Lehman holding over US$600 billion in assets.

The bank and financial services firm had become so deeply involved in mortgage origination that it had effectively become a real estate hedge fund disguised as an investment bank. At the height of the subprime mortgage crisis, it was exceptionally vulnerable to any downturn in real estate values.

The bankruptcy triggered a one-day drop in the Dow Jones Industrial Average of 4.5%, at the time, the largest decline since the September 11, 2001 attacks.

Φ In the first of those, Buffett said he had never before seen people more “fearful, economically;” that “the economy is going to be getting worse for a while;” and that frozen credit markets were “sucking blood” from the U.S. economy. Things were no better six months later, when Buffett said the economy had “fallen off a cliff” and a turnaround would take time — but that five years later normalcy would return.

Φ In this current crisis, just as in the 2008-09, it is not only impossible to predict daily market volatility, it is impossible to predict how long it will last.

Φ Berkshire’s survival includes maintaining abundant liquidity, meaning Buffett will not allocate all capital to acquisitions or other investments. That is why Berkshire is also actively adding to its already-large cash position: in early April issuing $1.8 billion of yen-denominated bonds and, following an issuance of a €1 billion European debt offering in February.

Φ One unique difference between the crisis now and in 2008-09: Berkshire is just as frozen as every other company in a paralyzed global economy. As Buffett explained on CNBC recently, the construction industry has been stalled — hurting the carpeting business at Berkshire’s Shaw Industries unit and insulation sales at Johns Manville —and retail has been largely closed, hitting Berkshire’s businesses from Dairy Queen to See’s Candies.  Yet again stressing the long-term over the short term, Buffett said: “There’s always trouble coming.  The real question is where are those businesses going to be in five or 10 years.”

Φ “A major catastrophe that will dwarf hurricanes Katrina and Michael will occur — perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as wind or earthquake, or it may be a total surprise involving, say, a cyberattack having disastrous consequences beyond anything insurers now contemplate.”

Strategy| Guides to Net-Net (Cigarbutt) Investing

This article: Your Essential Guide to Net Net Stocks I found that it's interesting to know the investing strategy of net-net (cigarbutt) that Benjamin Graham advocated and practised. This author has done a great job to share with the readers as to the essential guide to net net stocks. After reading, I would like to highlight the key points of the articles that were shared.

Excerpts

Here's what you can expect in this essential net net stock guide:

1. What Exactly Is a Net Net Stock?

Essentially a net net stock is a low Price to Book stock but where the “B” in the P/B ratio has been stripped of all long-term assets. That's about the easiest way to explain the concept.

Why strip away long term assets?

Stripping away long term assets turns book value into what net net stock investors call net current asset value (NCAV). By focusing only on the NCAV of the company, a net net stock investor is calculating a highly conservative estimate of the company’s liquidation value.

2. Why Are Net Net Stocks So Cheap?

Companies with Market Caps below their NCAV are often very troubled – they’re facing large business problems that investors just don’t think the company can come back from. Sometimes these problems reach to the core of the business, such as a major industry disruption that has all but killed a company’s only product.

It's not uncommon to find companies that have seen their revenue decimated by as much as 90%, and their earnings turn to large losses. If you see a company devastated this way, the last thing you want to do is buy stock in the company. In fact, if a typical investor owns shares in the company, he's very likely to want to dump the investment.

That reaction is understandable. In situations like that, investors have little hope that the company will survive, especially if the firm has debt to pay off. But, not all distressed situations are created equally. Some distressed firms are stuffed with current assets and have little in the way of debt or liabilities. It's these companies that astute value investors swarm in to buy.

The key fact to remember is that Graham's net net stock strategy is focused on assets, not earnings, and specifically current assets. Many firms that have quickly eroding operations still have current assets that remain resilient. If the stock is priced low enough relative to the firm's net current assets, it may constitute a net net stock and be an outstanding buy candidate. In the end, it doesn’t matter if the company continues operations or not since there are a number of ways that the investment can turn out really well.

3. Four Common Ways to Win Big

I want to point out right here that Graham favoured net nets that had positive earnings and were paying a dividend. Having said that, the evidence from academic and industry white papers show that positive earnings aren't really important when it comes to buying net nets and dividends can actually reduce returns. This is partly due to how investors tend to profit by buying net nets.

I’ve found that there are four common ways value investors make money from net net stocks: 

[1] liquidation, 
[2] 3rd party buyout, 
[3] price spike due to good news, and 
[4] recovery in operations.

Obviously, if the company doesn’t have a hope of continuing its business then liquidation is a real possibility. Since net net stocks are purchased so cheap, though, liquidations can ultimately mean a quick cash windfall. In these situations, the company distributes the cash received for the assets directly to shareholders. In a full liquidation scenario, the firm will have to cover its liabilities before distributing anything to shareholders.

A firm can also partly liquidate, selling the assets associated with a money-losing division and then distributing that cash to shareholders. Ironically, while Graham's strategy is based on liquidation value, firms rarely liquidate.

6. Narrow Focus Vs. Broad Focus in NCAV Investing

The discussion above should make one thing fairly clear: investors should really take a broad focus rather than a narrow focus on their investing when it comes to net net stocks.

Investors have to make two mental shifts before they start investing in net net stocks. Focusing on the Balance Sheet over the Income Statement is the first shift, and adopting a broad view of investing is the second.

A narrow focus refers to performance over a short time horizon or focusing on the success or failure of individual stocks. Most value investors focus a lot of attention on what an individual company will do going forward and focus far less attention on how their portfolio is constructed. They end up putting a lot of time and effort into conducting in depth research on individual stocks in an attempt to forecast the future.

Net net stock investors, on the other hand, focus on a few telling characteristics of a company and almost totally ignore qualitative research. This is because net net stock investors know that they are using a mechanical investment strategy and that the success of their portfolio depends on the statistical return characteristics of net nets in general. Net nets as a group have yielded roughly 15% over the market return since the 1930s so, as long as they have selected their net net stocks intelligently, they should see a very similar return on average over their lifetime.

Taking a broad perspective and leveraging the returns associated with net net stocks in general takes a good amount of diversification. How much? The more the better. If you're randomly selecting net net stocks then, according to my university statistics professor, 30 stocks is when your portfolio would start to approximate the population of net net stocks. Graham bought 100s of net nets, but I'm after the highest possible returns.

That means that whenever I buy net nets, I try to buy the highest quality picks. These are stocks that have growing NCAV, growing earnings, no debt, tiny Market Caps, are trading at 50% of NCAV or less, and have PEs of 10x or less. These sort of stocks are as rare as they are profitable. If I can find enough of these companies, then I'd be comfortable holding ten stocks. The further away from this ideal that the stocks available get, the more diversification I demand. I recommend that Net Net Hunter members buy 10 to 20 net net stocks, and never buy average quality net nets. Doing so should drastically increase the returns achieved and help prevent investors from buying into frauds.

Knowledge| Steel Industry

At a Glance:

1. Iron (about 98% of the iron mined each year to manufacture steel) is vital to the global economy as it's a key ingredient in making steel.

2.  In 2018, about 51% of the steel produced went into buildings and bridges, with another 12% used to make automobiles.

3. Overall, iron typically ranks as the third biggest commodities market by dollar value behind oil and gold.

1) Oil

2) Gold

3) Iron

4. The steel industry uses pig iron to manufacture steel.

5. Steel is vital for building the infrastructure needed to support economic growth. Both governments and the private sector use it to construct transportation networks such as:

1) bridges

2) tunnels

3) railways

4) transport-related facilities like gas stations, train terminals, ports, and airports

6. Steel is also vital to the energy industry. Oil and gas companies, for example, use lots of it to drill new wells and for pipelines to move hydrocarbons from production regions to end-users.

7. The renewable energy industry also uses lots of steel.

8. Iron ore is a commodity, its price tends to be highly sensitive to changes in supply and demand. If the global economy slows down or mining companies produce more iron than the steel sector needs, the price of iron ore can plummet. The decline in price will have a direct impact on the profitability of iron ore producers and their stock prices.

Source: <https://www.fool.com/investing/2019/12/14/how-to-invest-in-iron-stocks.aspx>

Investing Philosophy| Pricing Power

Buffett's Testimony

Bondi: Okay. What kind of due diligence did you and your staff do when you first purchased Dun and Bradstreet in 1999 and then again in 2000?

Buffett: Yes. There is no staff. I make all the investment decisions, and I do all my own analysis. And basically, it was an evaluation of both Dun and Bradstreet and Moody’s, but of the economics of their business. And I never met with anybody.

Dun and Bradstreet had a very good business, and Moody’s had an even better business. And basically, the single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.

Bondi: Now, you’ve described the importance of quality management in your investing decisions and I know your mentor, Benjamin Graham – I happen to have read his book as well – has described the importance of management.

What attracted you to the management of Moody’s when you made your initial investments?

Buffett: I knew nothing about the management of Moody’s. I’ve also said many times in reports and elsewhere that when a management with reputation for brilliance gets hooked up with a business with a reputation for bad economics, it’s the reputation of the business that remains intact.

“If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station (I’m talking of the past) you know, your idiot nephew could run it. And if you’ve got a really good business, it doesn’t make any difference.”

Bondi: What about any board members? Have you pressed for the election of any board member to Moody’s –

Buffett: No, no –

Bondi: – board?

Buffett: – I have no interest in it.

Bondi: And we’ve talked about just verbal communications. Have you sent any letters or submitted any memos or ideas for strategy decisions at Moody’s?

Buffett: No.

Bondi: In –

Buffett: If I thought they needed me, I wouldn’t have bought the stock.

Financial Ratio| Return on Invested Capital (ROIC)

Regarding the financial ratio, ROIC, I think this article is quite knowledgeable and informative to share with the readers to improve the related knowledge altogether.

Extract

The best long-term investments tend to be companies that can reinvest over and over again at high rates of return.  Those high rates of return attract competitors so you must also understand barriers-to-entry.  But first study how to calculate incremental returns on capital or marginal returns on invested capital (“MROIC”).   

Φ One quick and dirty way is to look at the amount of capital the business has added over a period of time, and compare that to the amount of incremental growth of earnings. Last year Walmart earned $14.7 billion of net income on roughly $125 billion debt and equity capital, or just under 12% return on capital. Not bad, but what we really want to know if we are going to buy Walmart is: 

a) how much of their earnings will they retain and reinvest in the business going forward? and 

b) what will the return on that reinvested capital be?Φ 10 years ago in fiscal 2006, Walmart earned $11.2 billion on roughly $83 billion of capital, or around 13.5%. But in the subsequent 10 years, they invested roughly $42 billion of additional debt and equity capital ($125b invested in 2016 and $83b invested in 2006), and using that incremental $42 billion they were able to grow earnings by about $3.5 billion (earnings grew from $11.2 billion in 2006 to around $14.7 billion in 2016). So in the past 10 years, Walmart has seen a rather mediocre return on the capital that it has invested during that time (roughly 8%).

Φ We can also look at the last 10 years and see that Walmart has retained roughly 35% of its earnings to reinvest back in the business (the balance has been primarily used for buybacks and dividends).

Φ As I’ve mentioned before, a company will see its intrinsic value will compound at a rate that roughly equals the product of its ROIC and its reinvestment rate. So if Walmart can retain 35% of its capital and reinvest that capital at an 8% return, we’d expect a modest growth of intrinsic value of around 3% per year (35% x 8% = 2.8% per year).

Φ This is a really rough measure, and this back of the envelope method works okay with a large, mature company like Walmart.

Φ But what you really want to know is what will the business retain going forward and what will the return be on the capital it retains and reinvests? Of course, there are different ways to measure returns (you might use operating income, net income, free cash flow, etc…) and there are many ways to measure the capital that is employed.