aggregate asset management

 

All our investment ideas are generated in-house from our stock screens and public news flow. We do not follow what the big boys are doing, or try to predict where the investment herd is going next. We are not closet bench-markers – investing in blue chips and popular stocks like everyone else. Our ideas are mostly unheard of, and contrarian.

 

​Our philosophy is value. The search for bargain value stocks is an ongoing process. What attract us are companies that have fallen off the radar of investors, or those that have suffered a temporary decline in their fortunes.

 

We believe that to succeed in investing, we cannot be investing like everyone else – we have to be contrarian, and seek the unpopular, fallen or neglected stock – which often comes undervalued.

 

Our material for analysis is a company’s current and past financial statements, company announcements and any available public information. We look at these closely, and come up with a preliminary valuation which gives us an indication of the attractiveness of a stock or its “margin of safety”. The “margin of safety” is the difference between a stock’s market price and its true or intrinsic value. If we buy a portfolio of stocks at prices which are below its true value, – we believe our portfolio is a safe portfolio, and protects us from permanent impairment. A bear market may wreak havoc on a portfolio’s mark-to-market valuations temporarily, but a true investor can ignore that, and have the conviction that a carefully chosen and constructed portfolio will not suffer permanent impairment. He would be vindicated in the next up cycle, where valuations would be restored, perhaps to higher levels. This is a test that differentiates a speculator and an investor. An investor would welcome bear markets as an opportunity to accumulate even more stocks at attractive prices.

 

We are proponents that a bird in hand is worth two in the bush. We like to buy stocks with strong balance sheets, and relish the opportunity if we can buy them at steep discounts to net assets. In Asia, there are plenty of such opportunities during bear markets, and some at mid-market valuations. Benjamin Graham’s classic net-net working capital case, where companies can be acquired at less than their net current asset values, are seldom found in developed markets, except in the most dire situations, but such gems can still be found in Asia. We enjoy hunting for them – and to poke and examine them – to unravel whether they are truly good investments, or value traps. Yes, the more sophisticated value investor may scoff at these cigar butts ie. dirt-cheap value stocks, but we have found them to be a worthy and rewarding addition to our portfolio.

 

The earnings-based approach to valuation is more an art than science, as it requires forecasting earnings into the future. A wise man once said, “The forecast tells us more about the forecaster, than the future”. Here we tread with caution and trepidation – we resist all attempts to justify a rosy scenario and run the danger of overpaying for growth. A deep understanding of the business model and its operating environment and determining the quality of management is paramount when one is trying to see the future – and meetings with the management is mandatory.

 

We use both approaches – but are mindful of the price we pay for assets or future earnings.

 

If there is sufficient margin of safety. and the risk/reward ratio is in our favour, we will acquire the stock for our portfolio. At initial entry, we never allocate more than 1% of our funds into a new idea. We would increase our allocations as our understanding increases, up to a limit of 5% of our portfolio. But so far, we have found the allocation of approximately 1% to each stock is optimal.

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Why not allocate more than 20% or more to a single idea? No, – we don’t do that – that is called gambling.

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Our holding period for our stocks is five years or more (or in investment parlance – a turnover ratio of 20%) – as value stocks typically take some time to pick themselves out of a rut, dust off the cobwebs of neglect, get up and start cracking, before finally earning their place in the sunshine. Graham’s quote on the first page of Security Analysis says it best: “Many shall be restored that now are fallen, and many shall fall that are now in honour”.

 

We will dispose of a stock when its price is fair, or when more attractive investments present themselves.

In constructing a portfolio, we are mindful not to be overexposed to any single stock, industry or country. We don’t borrow money, or engage in speculative instruments like derivatives or futures. We don’t understand them, so we avoid them.

 

There are no limits on cash holdings. If the market is overvalued, and we find nothing worthwhile to buy, we either hold cash, or return money back to our clients.