Coffee With FFN and “The 21 Year-Old Investor”

This interview involves a 21 year-old investor (he prefers not to reveal himself) who has discovered his undying passion in investing and believes in the value investment philosophy. He likes to buy excellent businesses that are able to compound their earnings over a long period of time. He runs his own investment blog and frequents the Valuebuddies forum. He also has a knack for unearthing information off the internet about his favourite companies, to the astonishment of other forum users.

FFN: At what age did you get started in investing? 

The 21 Year-Old Investor (TTYOI): I started at the age of 20.

FFN:  How did you get interested in investing and who inspired you to get started? 

TTYOI: I seemed to have the impression that the stock market is where one can earn great wealth by buying low and selling high since young from maybe the TV drama serials. I had a chance at it when I was 16 as my school was organising this virtual stock competition. I didn’t really know what the stock market is about as well as all the various terminologies. The competition occurred during 2007 and during the final day, stocks tumbled down in one single day and the winner of the competition was the one who had their positions in cash. The one lesson that I have learnt then is the stock market is very risky and one can suffer huge losses in a single day.

While I was in the army, I tried to read up about investment through books like the dummies as I have the intention to have a go at it once again. I started reading up only in my second year where there’s more personal leisure time. I eventually created a trading account and bought my first stock in September 2011 which was a tumultuous time.

FFN: What was your life like before investing and how is it now?

TTYOI: My life was drastically different ever since I started investing. In the past, I have always been unable to come up with an answer whenever people ask me what I want to do in the future. Now, I am very clear that investing is what I want to do for the rest of my life until my mind starts to fail me. I have found a passion.

It has also slowly shaped my characters and perspective. Patience, focus and long-term view are stuffs which I have learnt during this journey. Regardless whether one is an investor, management or owner, these 3 traits seemed to be a common point for those who have achieved success. I do incorporate them into my everyday decision making process even in non-investment related things.

FFN: How do you choose which stocks to invest in? What are some of your strategies? 

TTYOI: I am a bottom-up investor that is heavily influenced by the style of Warren Buffett. Hence, I try to look for great companies that have the capabilities to generate high return on capital for a long period of time. Great companies are indeed very rare and in most cases they will be overvalued.

ROE is therefore one of my most important criteria and I love to use the Du Pont Ratio to evaluate the component of the company’s ROE. You rarely have a company with a wide moat having a low normalized ROE. Personally, I will also prefer a clean balance sheet as Black Swan will always happen and you do not want your company to face financing problem. I have since started to come to term with having some amount of debt so long as the company should have no problem repaying them even in unfortunate circumstances. High Free Cash Flow Yield is also very important and is often one of the common traits of great companies. If a company has to constantly pump in half its net profit to maintain its business then it means that you are only getting half the cash return as an owner of the company. Decent dividend yield is a good to have but not a must, as I believe it can provide some form of cash flow and return while an investor is waiting for the long haul.

In term of the qualitative, that will be to find a company with a great moat. In most cases, a high return on capital will attract more competitors who are willing to accept a slightly lower return than one does. In such a case, competition will be such that no one is able to earn supernormal profit for a long period of time. The period of time of which a company is able to earn return above their cost of capital is called the competitive advantage period (CAP).

Companies with great moat are then able to fend off competitors who are seeking to erode their returns. Some of the commonly cited moats are high switching cost, network effect, government regulation, monopoly power (not monopoly) and lowest cost structure. However, we have to keep in mind that they will still be constantly attacked upon despite their moat. Some of these moats can also be illusory and temporary which requires the judgment call of the investor.

Thus, I have to admit that this method is riskier than the traditional Graham’s approach of purchasing below book value and cash. Firstly, an investor can make a wrong call on what seemed to be a moat. Secondly, disruptive technology can make the business obsolete as seen from the case of Nokia and Kodak. Thirdly, as they have high ROE, it will almost be certain that you will be purchasing at huge premium over its book value due to the equation of PER X ROE = P/B. A stock with PER of 10 and ROE of 20% is essentially trading at 2x Book Value. In such a case, you are paying for future growth in book value which might not happen unlike buying a company at a huge discount to book value where only losses can slowly erode their book value. The stock will then potentially have a huge downside.

FFN: What are some of the stocks in your portfolio currently? 

TTYOI: Boustead, SIA Engineering, Silverlake Axis, VICOM, The Hour Glass. I am looking to accumulate more of Boustead and THG.

FFN: Where and how do you look for companies to invest in?

TTYOI: As mentioned earlier, I am a bottom up investor so I have to search for companies one by one. I try to screen for stocks with high ROA (min 10%) and ROE before I research on the potential company’s prospect. I also try to look around for the better businesses out there – there’re quite a number of them right in your supermarket. Valuebuddies is also a great platform for people to uncover some of the gems.

FFN: You are well-known for getting information of companies from the internet easily. You dig deep. How do you do it? 

TTYOI: Because of my riskier investment style, I will feel comfortable investing in a company only if I really understand the company as much as possible. Main sources will include IPO Prospectus, Annual Reports and Company’s websites. These are really amazing source of information though many people do not read them. Competitor’s annual report or prospectus can also be very useful.

Beyond that, you have to search through Google pages by pages. In fact, I can go up to 50 pages just to find a single piece of information. Change your search term and start the manual digging again. Often, you will be able to find some information that will lead you to even more information. It can be some important authoritative report or a specific jargon for that particular business.

Sometimes, I also employ some unorthodox techniques like emailing or calling up the company, their competitors or some other organisation in the identity of customers, students and e.t.c. AGM is also a very important avenue for it is the one day each year that the management will be bothered to discuss about the company with you. Being well-prepared for AGM is essential for one to reap its benefits.

It helps if you read a lot so that you have some idea of what to look for in every sector.

FFN: What are some of your favourite investing books?

TTYOI: Intelligent Investor, One Up on Wall Street, Black Swan, The Little Book That Still Beats the Market, Buffettology, Your First Million, Common Stock Uncommon Profit

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

TTYOI: All sort of mistakes have been made – Buying on rumours, buying without doing FA, selling on fear, buying on greed, failed to cancel order when changing order, speculation. Lesson learnt is probably that mistakes are inevitable and investor should learn from it. I am sure that my list of mistakes will continue to expand in the future.

FFN: What psychology do people need to succeed in investing?

TTYOI: One needs to learn to control the greed and fear within oneself. Losing control of emotion will lead to buying high and selling low instead of buy low sell high. Independence of thoughts is also very important. If one is not willing to stand by his idea and choose to follow the market, he will at best get a mediocre return. Only by going against the general market, can one possibly achieve above market return.

FFN: What advice would you give for beginners who want to start investing?

TTYOI: Start now, make mistakes and learn from there. Investors grow when they learn from their mistakes and not when they make profit.

Always be humble and understand that there’s too much to be learnt out there from everybody.

FFN: What do you thing is the biggest misconception people have about money?

TTYOI: That money is the end. To me, money is merely a mean to an end and in the race for it many people lose focus on what is it that they really want. It is important to know the purpose of making money.

FFN: What is the one thing, in your opinion, do people need to succeed in investing? 

TTYOI: Temperament

FFN: A parting shot for the readers… 

TTYOI: A quote by famous trader Jesse Livermore: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

Ironically, he did die poor as he did not follow his own rule at the end. Have fun investing =)

Visit the interviewee’s investment blog at http://sgyounginvestor.blogspot.com where he shares many great ideas and researches on companies.

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