Fishing, Pessimism, and Cheah Cheng Hye
"the great challenge in life is to say yes"
Heya! Issue #17. As always, sharing what I’ve been reading, learning, and compressing. Since I’m keen to travel again, a quick quote from Anthony Bourdain:
As you move through this life and this world, you change things slightly, you leave marks behind, however small. And in return, life — and travel — leaves marks on you. Most of the time, those marks — on your body or on your heart — are beautiful. Often, though, they hurt.
Here’s the format of today’s email:
Part 1: Fishing and Investing
Part 2: Pessimism
Part 3: Under the Spotlight: Cheah Cheng Hye
Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.
Fishing where fisherman ain’t
The other day I was talking about my investment strategy on microcap companies. What appeals to me is that fund managers with resources often aren’t able to take advantage of smaller companies. Usually because of a mandate on a minimum market cap they can invest in.
So essentially, my goal is “fishing where the fisherman (investors) ain’t”. Fishing being seeking returns and the fisherman being investors. But what if there are no fish there? If my writing makes no sense, maybe this 4x4 matrix might:
So bottom right is the sweet spot. Either way, you want returns (duh!). But, the less competition the better. So you have to think about where you can compete with less competition. Microcaps due to less competition from funds? Private equity and venture capital because it’s unavailable to the majority of individuals? Illiquid mining companies located in rural areas? Pick your poison.
I just find getting fish is hard enough. It’s even harder when there’s someone next to you going for the same thing.
Does any of this make sense? Or have I gone off the deep end? (Literally)
Pessimism
Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
- Daniel Kahneman
Kahneman, a Nobel prize winner in economic sciences, found that people respond stronger to perceived losses than gains.
Does this give investors a reason to be pessimistic towards stocks and the economy?
Pessimism, Optimism or Neutrality?
I’m a subscriber to Howard Marks’ analogy that investor sentiment is like a pendulum.
At one end is pure euphoria and optimism. Things will continue to get better forever.
At the other end is pure pessimism, negativity, and fear. Things will never get better and only get worse.
Assuming equal time at either end, the average is technically a happy medium in the middle. But very rarely does investor sentiment lay there. It swings through. Barely spending any time in the neutral sentiment position.
But why are investors always so (seemingly) pessimistic?
It’s Easy
When talking about sports teams, how often do you find yourself picking out positives from your team’s performance? Maybeeeee after a great game, they receive praise.
But I feel the default is negativity. “Should have done XYZ”. “Umpiring was a joke”. “I could have done better”.
It’s just easy. I’m guilty of this too don’t get me wrong. Finding optimism and reasons to be positive is no easy task.
And the same applies when investing. I’m willing to bet there are plenty more perma-bears than perma-bulls. Negativity overall is an easier state of mind than optimism.
“It is easier being sceptical, than being right.”
- Benjamin Disraeli
It’s in their best interest
“Their” being value investors and the media. If you’re a value investor, by default you’re looking for cheap prices to invest at. In order for things to be cheap, things aren’t going to be good. Earnings will deteriorate, stock sentiment will drop or the economy could be taking a dump. Good stocks aren’t cheap unless somethings going wrong.
So in order for you to buy these good stocks and be invested, you’re probably going to be pessimistic. You want things to get (maybe only perceivably) worse, giving you a chance to invest cheaply.
Why is finance news pessimistic? Because pessimism sells. It appeals to your primal fear to keep you reading and watching. And their best interest is attracting an audience. So pessimism beats optimism.
Action and Inaction
Pessimism gives more action than optimism. You can talk on it, act on it and generally keep busy.
Optimism? You may have a small period where you’re actively buying. But after that, it’s sitting on your hands and letting compounding do its work.
You don’t really talk about your optimism on things. You just wait for your hard work to come to fruition.
Warren Buffett’s talked about inaction in his 1996 annual letter to shareholders
Inactivity strikes us as intelligent behaviour. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market
And again from a 1990 letter to shareholders
Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings
Buffett during those times could be described as fairly optimistic on the market’s returns. So what does he do? He does nothing. Just looks for opportunities quietly.
But talking about the market gives you something to do. And what’s easy to talk about? Negativity and pessimism. Why you’re not actively investing. Why you’re waiting for a better deal. Simply, it gives you something to do and talk about.
It Seems Smart
If optimism appears to ignore risks, then by default pessimism will seem smart by acknowledging those risks and acting on them.
Morgan Housel sums this up better than I ever can.
Optimism appears oblivious to risks, so by default pessimism looks more intelligent. But that’s a wrong way to view optimists. Most optimists will tell you things will get ugly, that we’ll have recessions, bear markets, wars, panics, and pandemics. But they remain optimistic because they set themselves up in portfolio, career, and disposition to endure those downsides. To the pessimist, a bad event is the end of the story. To the optimist, it’s a slow chapter in an otherwise excellent book. The difference between an optimist and a pessimist often comes down to endurance and time frame.
Is Pessimism Justified?
I think it’s natural (and prudent) to be sceptical when it comes to making investments. What do you see that others aren’t seeing? What aren’t you seeing?
Of course, under the right circumstances, pessimism is justified. Encouraged even.
I don’t believe it’s wise to be pessimistic and cautious 100% of the time. Nor wise to be optimistic and hopeful all the time.
As Howard Marks would say, you have to calibrate and alter as circumstances change.
Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
- Jason Zweig
Under the Spotlight: Cheah Cheng Hye
Each week I provide a little spotlight on an investor or operator I admire. Cheah Cheng Hye is this weeks focus, in a nutshell:
Born in Penang in 1954. His father passed away when he was nine so his mother’s sole job was raising him and his siblings.
His first job was folding newspapers for The Star, and he would eventually be a financial journalist for almost 18 years.
Only started his life as a fund manager when he was 36. Then co-founded Value Partners in 1993 which now manages over $15 billion.
China’s $70 billion Opportunity [Link]
On value investors having an edge in China and Asia:
Active investing still outperforms in China and is likely to continue to do so for a long time. One reason is that 80 percent of investors in Chinese domestic markets are retail investors. They’re trend followers, day traders, shotgun traders, so they tend to buy at the top and sell at the bottom. As such, professional managers armed with research on the fundamentals tend to outperform.
I agree that, in more developed markets, active fund managers are struggling—though I’m not totally pessimistic, even here. In the US, passives now are responsible for more than half the buying and selling. That can be quite dangerous because everyone will run for the exit more or less at the same time: it could create a stampede. But that’s the West. Here in the East and Southeast Asian region, active fund managers that do their homework still have an edge, and that should be sustainable for quite a while.
Cheah at the Sir John Templeton Investment Roundtable [Link]
China’s goal on the value chain is interesting:
If you are successful in the value chain you own the brand, the intellectual property, the design and the industry standards. In this chain there’s only one real superpower at present: the USA, followed by Japan and Germany and to some extent the UK. The real reason the US feels threatened by China is that China, having advanced from the supply chain in the 1990s to the demand chain currently, now aims to move into the value chain. The value chain represents the final frontier, the last battle. Who captures it will be the next dominant superpower.
Thoughts on governance and what to be worried about in China,
It was very bad in the 1990s, but is now actually above average for emerging markets, partly because penalties are very harsh. In fact, rather than dishonesty, I’m more worried about inefficiency and lack of competence.
Is China poised to take the superpower mantle from the US?’
Personally, I think China has to solve its own issues with its identity as a civilized country first. We are eagerly awaiting the next generation of Chinese who will be much more multi-dimensional, in terms of attitudes, not only respecting China, but also the rest of the world. A narrow approach focusing solely on China’s interests is not fit to fill any vacuum left by the US. I favour continuing financial leadership by the US. It may not be perfect, but it’s predictable.
Now this is an exciting answer to think about.
I believe that we are entering a golden period of opportunity, […] with the greatest opportunities ever seen in the history of the asset management industry in China. The same conditions that in the 1950s in the US allowed giant brands like Capital Group, Templeton and Fidelity to emerge now exist in China. China has no way forward except to follow deregulation, opening up its markets, enhancing the rule of law, protection of ownership rights and liberalization. Financial repression is on its last legs because otherwise the lid will come off and there will be huge capital flight from Chinese households looking for a better return.
Bonus Reading:
Cheah Cheng Hye On Star Media [Link] (Amazing website by the way! Incredible resource for value-oriented investors interested in Asian markets)
PwC’s AWM 2020 Notes from Off-Piste Investing! [Link]
Living Value Investing: The Story of Cheah Cheng Hye by Tony Tsoi [Link] I’m halfway through and loving it.
Value investing is about investing in the three Rs — the right business, run by the right people and at the right price.
Bonus Quirky Content
Something to read: /u/tintinautibet’s comment [Link]
Found this gem on /r/AusFinance of all places!
What you need to understand is that life is really long, and a hell of a lot is going to happen to you. By the time you’re 60, you, and your cohort, will have endured a lot. Love, loss, happiness, anger, betrayal, the birth of children, the death of children.
It’s going to be hard, because it’s always hard. All lives are full of bone shuddering moments. It’s likely that by the time you’re 60, your desire to compare your material circumstances will have evaporated. So long as you’re safe and secure, you’ll be ok.
And a big part of why you’ll be ok is because you’ll have seen how others retreat in to their wealth, their material circumstances, when the going gets tough.I think it was Baldwin who wrote that the great challenge in life is to say yes. A lot of people, faced with how tragic and cruel life can be, will say no. And they’ll retreat into their toys, and their egos, and their judgements; their small cruelties, their vices and self indulgence. If you’re doing it right, by the time you hit middle age, you’ll be judging them for that, rather than judging yourself for not being as well off as others. Their lives will feel hollow to you, and their spoils a snare. Financial security matters a lot, but only to a point, and in the long arc of a life, other things will matter more. Surviving with your heart intact and your head on straight will feel priceless. It’s an easy notion to dismiss, but wait till you see how time disfigures some.
Something to watch: Li Lu's fireside chat with Bruce Greenwald for Columbia Business School [90 mins]
Particularly enjoyed his thoughts on crisis
Every crisis is apparently ‘once in a lifetime’ except they seem to happen every 10 years. Financial crisis are driven by human nature which will never change. As a product of evolution, humans are good at rationalization but not good at being rational.
Li Lu’s advice for a new investor?
Adopt an owners mentality. Try to learn and know everything that you can
Maintain intellectual honesty. Know and acknowledge what you don’t know
Study historical businesses and people. It’ll help you identify good opportunities and characteristics
I’ve taken my own notes and takeaways in a Twitter thread
Something to listen to: Jim "Bones" Mackay, Golf Caddie on STUpodity [Apple Link]
My takeaway? The best players own their fuck ups. A good example is a player who thinks 6 iron is the club but the caddie says 7i and gives it, then their shot come up short? The best players say they fucked up. They own it.
Bones mention Phil and Tiger as guys who never blamed their caddie and owned the wrong yardages.
BONUS Something to listen to: My Favourite Podcasts Playlist on Audiograph [Link]
Full disclosure: Ira, Quinn, and the rest of the legends on the Audiograph team I’m in frequent contact with. But I seriously believe they provide an awesome service! I’ve put together my GOAT level podcast episodes that I think are worth a listen.
Unfortunately due to Spotify’s monopoly over JRE, I couldn’t include the Anthony Bourdain, David Goggins, and Lance Armstrong episodes to my favourite podcast episodes.
Final thought for the week:
Until next Wednesday, have a good one!
- Kalani
You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani.
Liked this post? Why not sign up.
These are always fantastic