In an episode of The Zurich Project Podcast, presented by MOI Global, David Seaman discusses intelligent investing in emerging and frontier markets.
Members, log in below to access the restricted content.
Not a member?
Thank you for your interest. Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:
Probably the best thing I’ve read is around “run off” margins from this @manualofideas post:https://t.co/wEAqROIVsa
— Alex LaPrade (@alexlaprade) March 24, 2019
NOTA DEL EDITOR: La siguiente idea de inversión, escrita por Jean Philippe Tissot, miembro de MOI Global, es extraída de la carta anual 2017 de Tissot Ayram Family Partnership.
* * *
Terminé la carta del año pasado diciendo que había iniciado una posición en una compañía que ofrece servicios de consultoría a empresas y estaba en transición a un modelo de negocios SaaS: esta compañía es Franklin Covey [FC].
Las empresas con un modelo de SaaS exitoso y baja rotación operan con múltiplos altos dada la conveniencia de negocios con ingresos recurrentes altos. Sin embargo, para FC, la transición significó dañar las finanzas por un largo periodo de tiempo. Para ilustrar el cambio en la contabilidad, tenga en cuenta que una transacción en el modelo de negocios original implicó el 100% de la venta como ingresos al inicio de la venta; por el contrario, un modelo de negocio SaaS reconoce los ingresos en el estado de resultados en un periodo de tiempo (en el caso de FC, este periodo es de 12 meses); mientras que los gastos para generar esos ingresos se reconocen inmediatamente en el estado de resultados.
This article has been excerpted from a letter by MOI Global instructors Chan Lee and Albert Yong, managing partners of Petra Capital Management, based in Seoul.
We increased our position in Yuhan, one of the largest pharmaceutical companies in Korea with a long history of operations, when the stock price plummeted during 2018. Yuhan sells a variety of subscription and over-the-counter drugs as well as active pharmaceutical ingredients (APIs). The company’s main drugs include both licensed-in global blockbusters and in-house manufactured generics. Its API business has been growing steadily through its partnerships with global pharmaceutical companies such as Gilead Sciences. Lately, the company has been actively pursuing an “open innovation” strategy in its research and development of new original drugs. Despite the seemingly slow progress, the company has amassed outstanding research and development capability, and we think its pipeline of diverse drug candidates has potential in the global market. However, the stock was trading cheap for a long time because of the market’s lack of understanding of such prospect.
The stock price finally rose during the third quarter when the company announced its first major license-out deal, a lung cancer drug candidate to Janssen Biotech for US$1.25 billion. This announcement was made public in early November while the broader Korean market was going through a rout. In addition, many investors do not seem to realize that the company is also a major manufacturer of home and personal care products through its joint venture with Kimberly- Clark (whose value is not fully reflected in the current stock price). Thus, we think the company is still substantially discounted with a high margin of safety.
We also increased our position in CS Wind, a leading wind tower manufacturer. The company manufactures wind towers in six different overseas production facilities and delivers them to global wind turbine manufacturers including Siemens, Vestas and GE Energy. As wind power technology continues to grow in scale and becomes increasingly cost competitive against fossil fuels, the wind power industry is likely to expand further even without governmental subsidies. The company has a proven track record of satisfying stringent quality requirements and technical specifications of global turbine makers. That is why the company continues to win orders from major upcoming wind farm projects. With a recent acquisition of a U.K. outfit, the company also made its foray into the offshore wind power market, which is expected to grow faster than the onshore wind power market. For this reason, we think the company is significantly undervalued given its favorable industry outlook and the competitive market position.
Despite the broader market decline last year, we had a few winners. In particular, the stock price of SM Entertainment [replay session], Korea’s largest entertainment agency/music studio, rose substantially as the company generated strong cash flow from its diversified portfolio of K-pop artists. As Korean Wave (Hallyu) continues to gain popularity worldwide through new media platforms such as YouTube and other streaming services, the company’s topline and profit are likely to grow even further. We like the fact that the company has a very well-structured in-house production system, which will allow it to keep churning out hit music along with new K-pop stars. Some of its K-pop artists are recruited from other countries such as China, Japan, Thailand and the U.S., which increases their international appeal. Even with the last year’s price rise, we believe the stock has further room to ascend.
Nevertheless, the stock prices of most of our portfolio companies declined along with the general market in 2018. The stock price of Com2uS [replay session], a major developer and publisher of mobiles games, began to slide during the second half of last year because of uncertainties surrounding the delay in launching of the new Skylanders mobile game. However, we remain confident that, as one of the most competitive mobile game developers in the world, the company will continue to grow by providing updates and spinoffs of its flagship game, Summoners War, and successfully launching a number of new games. The company is also likely to improve its capital allocation by using its excess cash for buying back shares and acquiring other smaller game developers which will strengthen the company’s game pipeline. That is why we think the stock has substantial upside potential.
The stock price of Hankook Tire [replay session] declined significantly last year because of the delay of its new production facility in the U.S. as well as the sluggish industry outlook. We believe that the current setback is rather temporary in nature. The company’s new factory will eventually ramp up its production, allowing the company to gain its market share in the U.S. Based on our in-depth research, we continue to believe that Hankook Tire is still the most efficient tire manufacturer in the world, and it is likely that the company will recover its high profit margin in the near future. Given the competitiveness of its products and growth outlook, we think the current stock price is exceptionally cheap.
The stock price of Jahwa Electronics, a manufacturer of a key camera module component for smartphones, dropped substantially last year along with other smartphone manufacturers in Korea amid slower growth in smartphone sales. Also, the company’s lower production yield in some parts caused weak earnings during last year. However, given the company’s competitive edge in core technology, we believe that the company is likely to overcome the current setback and resume generating strong cash flow. Despite the recent slowdown, the stock is substantially undervalued at the current price.
By the end of 2018, we sold all of our positions in Korea Re, Mando, and POSCO. Although we believe that these companies are still somewhat undervalued, we exited the positions because we found more compelling value investing opportunities. With the sale proceeds, we initiated a few new small positions. We believe that these companies have resilient business models and competitive advantages in each of their respective fields. More importantly, these companies are significantly discounted compared to their intrinsic value. We will discuss the specifics later once we complete building meaningful positions.
Read summary of Factfullness by @HansHansrosling. Key human instincts which prevents us from seeing progress are:
1. Grouping – rich vs poor
2. Negativity
3. More of the same – Straight line extrapolation
4. Fear
5. Exaggerate problems— Rajeev Agrawal (@rajeev_agr) March 24, 2019
Intersting presentation on active vs passive h/t @manualofideas https://t.co/oOqb5mGsC1
— Chris Mayer (@chriswmayer) March 22, 2019
To investors who have had success in the market, investing may start seeming easy. You buy, the security price goes up, you sell. Easy.
Mistaking luck for skill will make an investor confident in his own abilities. Confidence, in this case, may be synonymous with over-confidence, a cognitive bias that inevitably leads to permanent loss of capital.
The overconfidence effect is a well-established bias in which a person’s subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high.
In an interview with MOI Global, Brad Hathaway reflected on the difficulty of obtaining true “edge” in investing. According to Hathaway, while it is possible to develop an edge over other investors, it is far from easy.
At the 2016 annual meeting of the Daily Journal Corporation, Charlie Munger responded to a question about his “favorite” mental models as follows:
“…we’re always talking about multiple models, and that means I have many. That’s the nature of reality. There’s no way that it can be easy. You are all in the investment business – do you find it easy? Anybody who finds it easy is wrong. You are looking at an illusion. Occasionally you’ll get an easy one, but not very many. Mostly it’s hard. How many people find it hard? (Most of audience raises hand.)” [source]
Howard Marks, who shares an intellectual kinship with Munger, has commented at length on the illusion of ease in investing:
“What Charlie and Professor Galbraith meant is this: Everyone wants to make money, and especially to find the sure thing or “silver bullet” that will allow them to do it without commensurate risk. Thus they work hard (actually, study is intense), searching for bargain securities and approaches that will give them an edge. They buy up the bargains and apply the approaches. The result is that the efforts of these market participants tend to drive out opportunities for easy money. Securities become more fairly priced, and free lunches become harder to find. It makes no sense to think it would be otherwise.”
“And what about the next seven words: “Anyone who finds it easy is stupid”? It follows from the above that given how hard investors work to find special opportunities, and that their buying eliminates such prospects, people who think it can be easy overlook substantial nuance and complexity.”
Howard digs deep into this topic in a memo entitled, It’s Not Easy.
Members, log in below to access the restricted content.
Not a member?
Thank you for your interest. Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:
NOTA DEL EDITOR: Esta idea de inversión es obtenida de una carta a los inversores de Valentum FI.
* * *
La cotización de The GYM Group [LON: GYM] ha sufrió a finales de 2018 pero ha seguido cayendo durante el inicio de 2019. La razón de la última caída se debe a algún informe de analistas apuntando a la potencial saturación del mercado de gimnasios en Reino Unido fruto de la apertura de más competidores low-cost. Recientemente, tras la publicación de los ingresos del cuarto trimestre, hablamos con el Consejero Delegado y Director Financiero y abordamos algunas de estas cuestiones y no parecen estar muy de acuerdo.
New blog post: One of my favorite investment speeches, by Dean Williams of Batterymarch, from 1981. Lots of good stuff in his talk.https://t.co/f3MLLT7wPI
— Chris Mayer (@chriswmayer) March 21, 2019
Howard Marks, Co-Chairman of Oaktree Capital Management, is not only one of the world’s greatest investors but also one of the most generous in terms of sharing his knowledge and experience with the value investing community.
MOI Global members have had numerous opportunities to learn from Howard through exclusive interviews and direct engagement at numerous MOI Global online and offline conferences. For example, William Green, acclaimed author of The Great Minds of Investing, moderated a wonderful fireside chat with Howard at Latticework 2016.
Howard also spoke at MOI Global’s online conference, Equity Income Summit 2013. I’d like to reflect on the following insight, one of many, shared by Howard at that event:
“To me, the most important single question at a point in time with regard to strategy, I’m not talking about tactics, I’m not talking about what’s going to go up tomorrow, I’m not talking about eternity, but for the middle term, let’s say three to five years, the most important thing at a given point in time is how you’re balancing offense and defense… we want to have a lot of offense when prices are low, psychology is depressed and the outlook is bad to most people but we don’t think it’s so bad. And we want to have defense when prices are high, psychology is buoyant and everybody sees a brilliant future, and we don’t think the future may live up.”
What is offense and defense in investing? On page 145 of The Most Important Thing, Howard defines offense as “the adoption of aggressive tactics and elevated risk in the pursuit of above-average gains” And what’s defense? “Rather than doing the right thing, the defensive investor’s main emphasis is on not doing the wrong thing.”
While on the surface there might not seem much difference in doing the right thing and avoiding doing the wrong thing, Howard Marks goes on to say that there is a big difference in the mindset needed for one or the other:
“While defense may sound like little more than trying to avoid bad outcomes, it’s not as negative or non-aspirational as that. Defense actually can be seen as an attempt at higher returns, but more through the avoidance of minuses than through the inclusion of pluses, and more through consistent but perhaps moderate progress than through occasional flashes of brilliance.”
So where do we stand today? In 2013, Howard Marks unequivocally stated “we’re in the middle.” The implication being that investors ought to balance offense and defense as that is what successful investors do in the middle.
Roughly six years later, we wonder what Howard Marks’s assessment is of the current investment climate. Find out by reading Howard’s recent investment memo or by meeting Howard at an upcoming MOI Global event.
Members, watch the full version of the interview shown above.
