Ser Jing is a 25-year-old student-of-life with a passion for investing. He loves reading up on the subject as well as books relating to sociology, psychology and even technology. To him, investing does not exist in its own bubble. Therefore, wide-knowledge of what makes the world tick might sometimes throw up some really interesting investing ideas or improve his thoughts on the theories on finance. Outside of investing, he loves to spend time playing football and music, hanging out with his family and friends and travelling the world. There is nothing more exciting for him than scoring a goal, strumming a chord or diving into the deep blue sea – apart from finding that elusive 10-bagger of course!
FFN: At what age did you get started in investing?
Ser Jing (SJ): I started learning about investing when I was 18 and started really investing when I was 23.
FFN: How did you get interested in investing and who inspired you to get started?
SJ: During my first year in Junior College, I was taking Economics as one of my mandatory subjects. I did not quite believe the assumptions that were being made about how people worked with money. One particular assumption I still remember even now was – when people have discretionary money, they buy bonds. I doubted that assumption and started to look for people who really understood money and worked well with it. I had a natural disdain for the hubris and fast-pace of trading activities, something I had a little experience with while watching the grown-ups. This eventually led me to Warren Buffett, who counseled that there was a business behind every stock-symbol. He had a famous mentor, Benjamin Graham, who wrote a book called The Intelligent Investor. I wanted to purchase it but when I finally went to a book store, I had forgotten Benjamin Graham’s name and bought another book with Buffett’s printed recommendation on its front page. It was Common Stocks and Uncommon Profits, written by Phillip Fisher. It was then that I realized that Buffett had two mentors and one of them was relatively less well-known.
I read the book and though it was not easy for me, it gave me an excellent education on the finer points on stock-investing. It has since become one of my investing-lode stones. So, Phillip Fisher was my first inspiration to the world of investing.
My next big inspiration would be the entire community at The Motley Fool. I discovered Fool.com in 2010, when I was in a summer internship. At that time, my interest in investing had waned but reading the articles and participating in the forums at The Motley Fool brought back the fire and I have not looked back ever since.
So in all, I would say I have two main inspirations – Phillip Fisher and The Motley Fool.
FFN: What was your life like before investing and how is it now?
SJ: My life before learning about investing was that of any other normal student. I love football and music and just studied normally to attain my grades. When I started learning about investing, and about all the different great investments, which are not-by-chance, great companies doing great things for society, I started to think hard about what I wanted to do. I came to the conclusion that I should really try to be involved with people and activities that I love, as much as possible – let passion take the lead, as one of my investing buddies would tell me.
Now, I also spend a lot of time reading and thinking about investing. I look at ‘shopping’ differently, thinking: “This brand looks great, can I buy parts of the company?” Besides having audacious goals (which might not be achieved) with regard to being involved in investing in any capacity, my life has not changed much. I might have perhaps become a little stingier with money because I would often think of how much more of a company I can purchase if I had not spent my money on a certain article of clothing or an expensive meal.
FFN: How do you choose which stocks to invest in? What are some of your strategies?
SJ: Most of my stock purchases come from recommendations made by The Motley Fool’s Stock Advisor subscription service. After they make a recommendation, I would read through it and then do my own due diligence. How has their balance sheet changed over the years? Have they been producing meaningful Operating Cash Flow as well as increasing it materially over the years? Is their business capital-intensive? What are their earnings like during recession years? Does the business have a wonderful brand to leverage upon or does it have a strong economic moat with pricing power? Is management allocating capital wisely (in terms of dividend payments, retained earnings or acquisitions)? These are some of the questions I ask myself about the company before I make a purchase.
A more detailed criteria is as follows, in addition to the questions I ask myself:
1) Earnings: The company must be making a profit, and have a nice up-trend in their earnings over time.
2) Revenue: The company’s revenues must be increasing over time as well, because the most powerful way a company can grow is to make more sales.
3) Cash Flow: The company must have consistent and strong cash flows. I will generally stay away from companies that have earnings but no cash flow because chances are high that such companies might be playing accounting games and I have no interest participating in such games with them.
4) Clean Balance Sheet: Preferably, the companies must have more cash than debt. Sometimes, I might make individual judgements on companies that have more debt than cash, but by and large, I prefer companies with more cash than debt. Being in a net-cash position would ensure the financial survival of a company in horrible economic times without having to sell off any of their money-making assets or worse, declare bankruptcy.
5) Evidence of economic moats: This is the most ‘squishy’ subject and to be honest, is almost entirely subjective. There are numerical clues, such as the company’s Return on Equity and Return on Net Tangible Assets that might let me know if it has a strong economic moat. Generally, the higher the Return on Equity, for a company that has a clean balance sheet, the stronger the possibility of it having a strong moat. Economic moats can come from other things like having a strong brand, great management, pricing power or being a low-cost producer.
If the companies fulfil these criteria, I would consider them for purchase because I have yet to determine if the value of the company is attractive in relation to its stock price. If the value of the company, as measured by its PE is generally attractive after consideration of its prospects, I will purchase them. I then monitor them through the community forums in Motley Fool as well as keeping track of their quarterly and annual results. The Motley Fool’s community forums are an unbelievable source of great information. I have learnt a lot from the forums and depend on them for a lot of my ‘scuttlebutt’ research, particularly since I am investing in companies that are in the USA.
I tend to also invest in companies more than once. I copied this strategy from one of my favourite analysts in The Motley Fool, Thomas Engle, who also gave an interview on your blog. After I invest in the company at a particular PE, I will look to invest in them again over a few quarters or years at an even better value point, again measured by PE. The better value point could be achieved in different situations such as the stock price of the company not keeping up with earnings, or it could be market volatility that drives the stock price down without any changes in the fundamentals of the company or an over-reaction by the market with regard to temporary slow-down in earnings growth – these are all great times to add to my initial stock purchases.
After reading the writings of Howard Marks (a professional investor whom I really admire and follow) of Oaktree Capital, I have also come to appreciate the power of cycles in the economy. So, in that regard, I look at the overall S&P500 current PE ratio as a proxy for the state of overall market valuation. Bear in mind that during the dot-com bubble, the S&P500 PE went to 45. During the 1960s, it was in the high 20s when Warren Buffett eventually closed down his partnership because he could not find bargains. The S&P500 PE ratio was also approaching 25 when the Financial Crisis in 2008/2009 hit. These historical benchmarks can allow me to think of setting aside a cash cushion by lightening my stock positions based upon overall market valuation.
However, by and large, I am a firm believer that society improves as the years progress and so, the world gets richer and we should have meaningful portions of our wealth be placed in companies that can compound it for the long-term.
FFN: What are some of the stocks in your portfolio currently?
SJ: Most of the stocks I own are in the US market and they include Apple, Panera Bread, Chipotle Mexican Grill, Dolby Laboratories, Activision Blizzard, Netflix, Ford and Berkshire Hathaway among others. The only local company that I have a part ownership of is Kingsmen Creatives.
FFN: Where and how do you look for companies to invest in?
SJ: As mentioned earlier, I rely on the Motley Fool a lot because I have a team of very honest and intelligent professionals who screen through the universe of USA-listed stocks before making a recommendation to me. I then apply my own admittedly less intelligent thinking to it before selecting from that pool of recommended stocks.
I have also had the fortune, over the past few months, of being acquainted with a group of excellent individual investors whom I now correspond with regularly through email or in person. They have clued me in to some potentially great investments, which you are a member of.
I am also constantly on the lookout for better stock screeners or forums and have recently discovered Joel Greenblatt’s excellent Value Investing Club. I have not had much time to properly go through the various posts, but will eventually make time to do so.
FFN: It is always good to have an investing group that meets up regularly to discuss great companies and share ideas, especially if that’s done over a beer!
What are the mistakes you have done pertaining to investing and what are the lessons learnt?
SJ: Yes, good beer and company really goes well! I mentioned Ford as one of the stocks as I own and it in fact has been one of my greatest losers. I purchased it without realizing it had a Credit Arm to its business, which in essence, meant that I was buying a stake in a company that was making and selling cars and making loans. At this stage of my investing life, I am still unable to understand the balance sheet of financial institutions. I made a mistake with Ford because I purchased it without understanding the whole scope of its business, and invested in it purely on the back of Motley Fool’s recommendation. That is not to say that Motley Fool made a bad recommendation – it was a mistake on my part because Ford was probably not an investment for me. I have since learned to not invest in companies that I do not have a good understanding of.
I will continue to hold Ford because I believe in investing for the long-term and in doing so, helps train my temperament because I only invested in Ford slightly more than 2 years ago, which in my book, is a short-time in investing.
I have also made two-fold mistakes with regard to valuation and timing of purchase. I purchased companies at PEs that were a little too high because I was greedy to have a stake in them and I plowed my desired dollar allocation into them at one shot. I have since learned not to do so, as mentioned in one of the earlier questions. It is ok to purchase great companies at slightly richer valuations provided there is more money on hand to take advantage of further mispricing when prices fall.
Lastly, the cleanest balance sheet coupled with the nicest historical trends in earnings and cash-flow would not mean a thing if the company’s growth path has been permanently snuffed out. I might have made such a mistake by investing in Dolby Laboratories, which generates a significant amount of its revenues from supplying audio-coding technologies to PC makers. As most of you might have realized, iPads, Macs and generally tablets have been slowly taking over the world and might even supplement PC usage. This would mean that Dolby’s room for growth might be permanently stunted. Even though they have started to provide similar audio-coding technologies to mobile-devices, it is still insufficient to make up for the PC makers decline. In essence, Dolby’s path to growth has been blocked – whether the obstacle is permanent or not, time will tell. It is a potential mistake that I watch very closely.
What I have learnt from this mistake would be to actually think carefully about the potential for quality-growth in sales, earnings and cash-flow of companies that I am invested in and not just invest in them based on the strength of their financial statements.
For what it’s worth, financial statements are backwards looking and even though past-performance of a company can often be reliable clues for future performance, it pays to also think about what the company can do to continue their success.
FFN: What psychology do people need to succeed in investing?
SJ: I think any investor would benefit himself/herself greatly if they were to read up on behavioral finance or behavioral psychology in general. Behavioral finance is a sub-set of behavioral psychology and these disciplines essentially study how our brains are hard-wired to follow certain predictable behaviors that are generally thought of as un-rational in hindsight.
For example, an often repeated investing adage would be to ‘buy low, sell high’. However, when the markets are really falling, can an individual steer himself to make stock purchases? He/she might say ‘yes’ during the good times, but when the bad times come rolling, the answer would most probably be ‘no’. This is because of an empathy gap where we fail to imagine how we might think and feel when we are in a different mental state. To mitigate this problem, professional investors like John Templeton actually calculates prices of stocks which he thinks would make bargains during times when the markets are good. When things get really ugly, he uses the list to override his emotions.
Knowing that we are predisposed to certain financially harmful behaviors can allow us to come up with safeguards to enhance our investing activities.
Another important aspect of psychology involved in investing would be a contrarian mindset – being able to buy when everyone is selling and vice-versa. It might sound easy, but behavioral psychologists have found that the ‘mental pain’ of being a contrarian activates the same portions of the brain that processes physical pain and so, it might not be as easy as we think. This helps to reinforce the idea that we are doing the right thing even though we might feel real uneasy when investing in times of pessimism, be it an overall market correction or individual company malaise.
FFN: How has the investor in you evolved over the years?
SJ: Truth be told, I have only been investing seriously for 2 years. But there have been changes to my approach, the most important one being investing in a company over different value points.
I am also learning all the time and would want to be able to better identify growth potential in companies. The power of compounding at 15% over 30 years is truly amazing – and if identified correctly, a company that can grow its earnings at that pace for decades, would make it a truly awesome investment.
FFN: What advice would you give for beginners who want to start investing?
SJ: Read Peter Lynch’s One Up on Wall Street! Then, continue reading more about the different flavors of investing in businesses. You will find different investors like John Neff, David Dreman, or even Warren Buffett, who all have different leanings toward investing. But by and large, they are patient, contrarian, have long time horizons and most importantly, study a business. I constantly remind myself that investing is the study of the value of a business and it is a message that I would tell any of my friends who would want to start out in investing. The different strategies toward investing can all work, provided they are based on a logical foundation and it would just be a matter of finding the strategies that you find yourself comfortable with.
And never forget that time is on our side. The big institutions and ‘smart money’ have much shorter attention spans and we can use that to our advantage. Jeff Bezos, CEO of Amazon, once said: “Our plans are always on time horizons of 5 to 7 years, because when we look that far ahead, suddenly, all our competitors disappear’’. I feel it is applicable to investing as well, and so, patience is a virtue here, my friend!
FFN: What do you thing is the biggest misconception people have about money?
SJ: I have no particular insight toward money per-se because it has never been that important to me. I view investing like an intellectual challenge and it is a great plus that it can bring me financial rewards. However, I have never thought of money as being hugely important to the quality of my life. I like fine meals and nice clothes once in awhile, but if I can get to dive once or twice a year, play football and music regularly, hang out with my friends and work in a job that is meaningful, I am a happy person.
If I change the question slightly to ‘the biggest misconception people have about investing?’ my answer would be: The biggest misconception that people have is that investing requires huge capital to start off with. That is wrong because small amounts invested regularly can grow into meaningful wealth. With a long-time horizon, and finding companies that can grow at double digits for years, the power of compounding can work in our favor and deliver great wealth.
FFN: What is the one thing, in your opinion, do people need to succeed in investing?
SJ: Patience is the one thing I think people need to succeed. Investing in great businesses needs time to work out because as Buffett says ‘Time is the friend of the wonderful business, but enemy of the mediocre’. With time, the great businesses get recognized and their value eventually gets reflected in their share price – more often than not.
FFN: Can you sum up your investing philosophy in 10 words or less?
SJ: Buying great businesses for the long-term.
FFN: A parting shot for the readers…
SJ: Health is our greatest wealth. In every festive occasion such as Chinese New Year, Christmas or weddings, I always say: Stay Healthy, and Be Happy. That’s all that matters =)
Do visit Ser Jing’s blog at http://beta.fool.com/serjing/ where you will find great posts on investing. He has also won Editor’s Choice Awards for some of his quality posts!