The Sisyphean Nature of a Graham-ite "Cheap by Assets" Investing Style

A generated picture by Dall-E

Somewhere in the middle of 2020-21 when FANG (Facebook, Amazon, Netflix, and Google) stocks were enjoying popularity, a good deal of investors (even in the "value" oriented camp) preach about the virtues of buying "good" companies at reasonable prices. We call them GARP for short. 

The exact stocks in question isn't crucial, but the kind of stocks is.

The idea of buying GARP companies is that you do not have to buy them at dirt cheap prices. This bear elaboration: cheap usually refers to its price to earnings multiple, or its current price point in a historic 5-10 year chart. 

The idea is that the price is not crucial for GARP because the value of these companies compounded at a good rate, which means the value would eventually catch up with the purchase price even if the purchase price was not at modest levels.

Henceforth, the key question GARP investor have is whether there is a "runway" (is the company reaching market saturation?) or has it neared the TAM, or Total Addressable Market? Would its moat (and thereafter, their usually high ROE numbers) be breached by competition?

If we were to invert our thoughts a little on these companies, surely a few other conditions would make purchasing such companies a lot easier on the stomach.

For instance, if the target company in mind is not a well known titan in the industry, there would usually be the following (advantageous) features:

a) The stock would not be well followed, and therefore not "efficient." It has the added possibility of increased institutional ownership, which can boost share prices.
b) It is simply easier for a small company to grow than a large one. Apple would have to invent another amazing product to boost its already large revenue.
c) It would help that these companies are not in highly popular, competitive industries. 

I believe that the fortunes of well known ideas, especially those as large as FAANG and Tesla's, are fraught with friction. I have only one-and-a-half idea in my portfolio that are invested with the expectancy of moderate growth: FuShouYuan and a spin-off called RXO.

The rest of my portfolio consist largely of stocks that are "cheap by assets." I describe the title of this post as "Sisyphean," as the act of buying and selling such stocks is not too dissimilar from what Sisyphus was condemned to: roll a bounder up the hill, only to have it roll down when it nears the peak, and to repeat this act endlessly.

My approach is Sisyphean because when you buy a stock that is cheap by asset, something happens to the company and cause the stock price to go up. You would then sell it to buy another one that is cheap. This continues endlessly.

Have this investing approach been rewarding? 

For my case, it had been arguably mixed.

1) Innotek: 70%
2) Wheelock Properties: ~40%
3) Xinghua Port: about 57%
4) TTJ: 32%
5) CrossHarbour: 36%

That is absolute returns, which is deceptive. What about annualised figures? With the exception of CrossHarbour, and Wheelock Properties (for which were realized in a matter of weeks/months, both were >1000% annualised which makes no sense other than luck), the figures for the rest are:

1) Innotek: 57.3%
2) Xinghua Port: 94%
3) TTJ: 10.96%

What about the ones which have not been realized? OKP, which is a significant position, is still at a moderate loss (-10%). So is YZJ Finance (-7%) and Central China Management and Central China Real Estate (arguably not a "cheap by asset" position; -27.5% and -0.5% respectively), Nanyang Holdings (-21%), Clifford Modern Living (+2%), and Frasers Hospitality Trust (-15%). These figures include dividends.

During a discussion with colleagues about investing (I was merely urging them to adopt a dollar cost averaging plan with world index funds), one of my smart (but ignorant in investing matters) friend remarked that your job is your best investment. 

This is arguably right and wrong: it is wrong because you have to be physically-abled in order for this "investment" to work.

However, I drew parallels with that fault and my investment style: I have to be "around," or make very active investing decisions, to ensure that it will be profitable. Let's assume that I were to fall into a coma of 5 years, these stocks could enjoy a revival, but I wouldn't be able to sell! ; and by the time I am conscious, these stocks could possibly return into bargain territory again. I witness such fate in my short 6 years of investing. 

One of the things I envy about Buffett is his Coca-Cola and American Express holdings. Both had, as compounders, grew rewardingly in share prices, and providing meaningful dividends that beats the average returns of an index. What can be better than that?!

Investing in cheap stocks has its rewards and it is emotionally draining. It is not the easiest, but the most simple form of technique. And unless there is a huge market downturn (which could cause these compounder stocks to fall dramatically cheap in price), there is no foreseeable changes to my portfolio going forward.

Who Are You, and What Is Your End Game?

“Tell me who your heroes are and I'll tell you how you'll turn out to be.” - Warren Buffett

(Side note: I ain't a huge fan of the way Buffett invest, particularly of the version that runs Berkshire Hathaway. It is a large entity, employed ways and means which aren't accessible by the small guy. But I like him enough as a person and love reading about what he does during his Buffett Partnership years)

I met up with a good friend of mine recently and pondered about what our end game should be. I do have a vague idea: when I am much older and alone, I would be living within a small residence in the company of a couple of cats. 

This is a picture generated by the wonder that is Dall-E:

Pardon the number of cats. Not sure why Dall-E generated only one. There would be a British short hair and the fat cat that lives at the void deck of my block.

Most people desire wealth-- the question is, "Why?" and not "How much?" 

Money is useless per se if it could not be used to buy something. So ultimately, it is the something that we desire. It could be a car, a kind of life, tangible or not. Munger wants freedom-- the freedom from shackles of having to answer to someone.

 

So why the quote at the beginning of the post? I find that a person's idol tend to be quite telling of what that somebody is, or desire to be. 

That, is literally the result of Dall-E when I enter the terms "Walter Schloss picking up cigar butts"

Unless you are a value investing nut, the name Walter Schloss would mean nothing to you. His returns are consistently better than the market's, and his investment approach is simple enough for a person like myself. He has no desire to serve the rich and the famous, or most of all, himself. 

He has never gone to college; I had a offshore learning liberal arts degree which I never put into use. He believe in thrift and have no worldly desires that I could think of-- I think I have been so for my whole life (which explains why I wasn't that driven in many aspects of life). My friend told me that I am like a blank canvas.

It wasn't because I dislike nice things. I just don't feel the joy (rapture?) of using them. I conclude that the end game is to find joy, from something or somewhere. What is the most beautiful thing in the world?

***

When I was starting out, I suffered a hefty loss speculating in small pharma stock. Falling down repeatedly, I told myself that I need to change. I need a system that was not only simple, but could work even if I am marooned on an island. I could think independently and this system could work reliably. 

On reflection, I think it is fair that I probably only half way there.

My wish in investing is that I could look at major market corrections calmly and take advantage.

My memory have not been great but I do remember 2020-22 pretty clearly. The biggest winners came from health, tech and the company everyone knows-- Tesla. Disruption was such a buzz word. Everyone around me wants to talk about those companies. Dollar cost averaging was encouraged for big tech and Tesla. 

I wasn't a fan because of a few reasons:
a) Back of the envelope numbers indicate pretty high multiples.

b) They are huge companies and there isn't much runway to grow (law of large numbers)

c) Competition will eventually come into the picture

[A] is largely about market reversion to mean as well as appetite/mercy. The mood of the market decides how much multiple a company deserves. The same company that have a 50x multiple could be sold down to a 30x multiple when growth slowed, or stalled. That is already a 40% loss btw! 

However, if they could maintain their ROE consistently, the market will usually priced them many folds in the far future. But the big companies have the size disadvantage.

With [B], the David (which is you) will find yourself in the company of Goliaths, which are institutions and big players. They have a tremendous advantage over you as an investor. They might be more in tune with the industry, intimate access to insiders, news; clearer understanding of the interlinking macro-economics data and its interpretations... the list goes on.

With smaller companies, the big players are just not interested.

[C] comes to everyone and erodes return over time, unless you have a competitive advantage. Few companies possesses that. As of writing, Tesla had to cut prices in China. That says something.

Generally, the kind of person that you are, affect the kind of beliefs you have, and the way you would invest. I am deadly boring and pessimistic-realist. I know my approach would bore people to death, but I know I can lose very little (most of the time), because I don't swing for the fences.

I have associates that seeks a more directly-rewarding approach such as  looking for catalysts or likely improvement in earnings. Another approach is to look at macro economic and anticipate which industries would enjoy tailwinds. I have doubts that these approaches work very well in the long term, but I know one thing very well-- and that these approaches are too tough for me and I should avoid them.

In short, it isn't that these approaches don't work. They are too tough for me.

I have to accept that I could not enjoy the fruits that these people could have, but I avoid the pains as well. 

My simpler approach will work fine in most years. There won't be a crowd cheering me on when I finish the race. Neither is anyone going to pat my back, nor do I have to call people dumb or donkeys to constantly validate myself (or derive joy from putting others down?) and feel good. 

***

If investing is a cross country cycling race, and you knew that you do not have the kind of physique to go fast for a long time, or couldn't climb over obstructing mountains to save time, then you have to use other tactics. 

Perhaps you could sleep less and cycle at a moderate pace. 

Or perhaps you are a tough cookie-- you could choose to pedal on even during the foul weather, unlike everyone else who is seeking shelter.

If you are the only person left delivering food in this weather, I guarantee that you will not run out of orders.

Investing is like that. You don't have to act in a manner that disadvantages you. Don't play games you can't play.

Be realistic of the expected returns with the kind of strategy you employed. You could 10x a stock in 1 year, doing something really stupid but you could lose the same (or more!) with the same approach.

I knew long ago that I could never get rich fast.  I couldn't bring myself to take on risky paths like leveraging, buying tons of call options. I would love to get rich fast.

And it is very frustrating because I could see my parents ageing day by day and by the day I "finish" this race, they might no longer be around. I started too late.

And I do feel like I am a failure for that. For the young ones reading, you have my envy. You have a lot of options. Start early, fall down enough times, and you will learn to balance yourself very well.

Thank you for reading and I wish you good health.