Not all diamonds sparkle, and not all that sparkle are diamonds. This is the key message that I took away from 8I Education’s two-day Value Investing Summit (VIS), which was conducted on 14 and 15 January.
If you had attended the event, you might have brought home a very different understanding of value investing.
The theme this time is “Unearthing Hidden Champions”, but it is more than a one-time event of digging for gems. Firstly, before you start digging deep into company reports…
You must be able to identify a hidden champion.
Raw diamonds, despite their natural beauty, do not sparkle brilliantly the way polished and cut stones do. Nevertheless, the value of the raw, uncut diamond still largely determines the value of the polished diamond.
I think hidden champions are like raw diamonds; they might not bedazzle you with their brilliance, which is why they are often overlooked and underappreciated.
In the words of 8I Chief Investment Officer Kee Koon Boon, hidden champions are extremely successful yet low-profile companies that offer investors de-correlated returns. Similarly, Mohammed Ali-Reda, Managing Director at Darkhorse Capital, compared hidden champions to a dark horse—a little-known candidate who wins unexpectedly.
Koon Boon further explained that hidden champions are also likely to be the top three global or domestic market leaders in their industries. They are special because their niche and sophisticated innovations make it difficult for competitors to imitate and replace them, and their scalable business models create long runways to compound growth.
Ironically, it is easy to miss a hidden champion because of how seamlessly their products fit into our lives. As consumers, we wear them, eat them, cook with them, travel with them, etc, but as investors, we tend to leave them out of our portfolios.
On the other hand, Koon Boon also noticed that some investors, in their search for value stocks, fall into value traps, or invested in companies who used fraud tactics to make it seem as though they have all the attractive traits of a “value stock”. This will be further discussed in a subsequent article.
Apart from finding the hidden champions, investors would also need to avoid “lemon companies” to attain long-term success, said Sid Choraria, Vice President of Investments at APS Asset Management.
You need to have enough faith in your “hidden champion”.
Picking the right stock(s) is just the beginning.
Value investing typically requires a long-term commitment from the investor, who stays with the chosen stock through thick and thin, including market frenzy and downturns.
It is a bit like getting into a long-term relationship with a trusted partner. One does not simply dump his or her partner when the external environment becomes less favourable.
But an average investor might not realise this.
During the panel discussion, when asked about the greatest mistakes that investors make during market crises, Lauren Templeton, founder and president of the Templeton & Philips Capital Management said: “The mistake is that they sell.”
But she admitted that even seasoned investors can be prone to panic selling amid the market downturn.
She quipped about an instance where she even had to “save her from herself” by walking out of the office so that she would not do anything rash.
Her advice is: “Don’t sell in the bear market unless it is to buy something better.”
8I Executive Chairman Ken Chee added: “A lot of people are concerned about what happens when the market crashes. I think the focus should be on when the market crashes, do I know which company to buy? Focus on the things that you know, the businesses that you know well and make sure that the management has decent capabilities, strong financials, and preferably no debt, so it doesn’t matter whether the interest rates go up or down.”
You also need to strive to become a “hidden champion” yourself.
Attendees of the VIS had seen a number of examples of value stocks during the case study presentations and the inter-varsity stock research challenge, each supported by extensive research. But if you are still unsure of what to do about them, you might want to first follow the below advice from Warren Buffett.
“The most important investment you can make is in yourself.”
That is also a belief held by Koon Boon, and he finds it more important for one to grow in one’s career before growing his money.
If you were familiar with martial arts (or Wuxia) novels written by writers such as Louis Cha (aka Jin Yong), you’ll realise that many of the most revered heroes and the most accomplished pugilists started out as “nobodies” who spent countless days of training to master their kungfu, and many years overcoming adversity after adversity, which only made them stronger, braver, and wiser.
These people did not opt for a quick and easy path, and sometimes even stood up against what was perceived as the norm.
Likewise, for value investing, Ken expressed that investors should be looking for companies that innovate with passion and a sense of purpose to add value to humanity.
Perhaps, at the end of the day, it takes a hero to appreciate a hero, and a hidden champion to unearth another hidden champion.
8I will be conducting a 1-day Value Growth Workshop on 11th, 12th or 25th Feb 2017.