Choivo Capital
(CHOIVO CAPITAL) Business Sense Investing
Choivo Capital
Publish date: Sun, 19 Aug 2018, 03:02 AM
One of the biggest arguments we have here in I3 usually relates to “Business Sense”.
Koon Yew Yin and Stockmanmy etc usually take the side of “Business Sense”, while Kcchongnz usually takes the other, which I quantitative valuations (P/E, P/B, ROIC, ROE etc)
Having met Kcchongnz a month or 2 back, I realized that both Kcchongnz and Koon Yew Yin is actually quite similar to an extent.
Kcchongnz purchased one of my recommendations which was definitely not cheap by any quantitative metric, but had a fantastic business moat behind it. And his many picks were not fantastic quantitatively, but had pretty decent business.
While Koon Yew Yin talks about business sense a lot, but his golden rules say that the company should be below 10 P/E. So clearly, quantitative valuation still play a part. Having said that, I do wonder why he uses P/E instead of EV/E.
The difference between them, is that they both emphasise the other factor too hard.
Having said that, I would rather put my money with Kcchongnz, errors of omission is far better than errors of commission.
In investing, it’s better to be too conservative than too arrogant and aggressive. Which is definitely the defining trait for Koon yew Yin.
Valuation and intrinsic value.
There are 2 aspects to investing.
- Quantitative
- Qualitative
Quantitative
The first is fairly straightforward. Look at the EV/EBIT, P/E, ROIC, ROE, P/B ratios, and based on that, if it’s cheap enough, with a large margin of safety, purchase the company. Also remember to diversify.
This was practiced by Benjamin Graham and Walter Schloss, and they obtained pretty decent returns. This was when the US markets were still quite inefficient, and just came off a depression, bargains were everywhere.
And to an extent, can still be practiced relatively widely by retailers in the KLSE, given the inefficient nature of our markets.
Having said that, you should note that the incredibly outsized returns are usually not found here. As you should be paying for earnings, not assets.
As Warren Buffet says, he is not a liquidator. Having said that, one of the reasons he moved away from this was because his capital got too big, and he preferred the process of buying fantastic companies at fair prices.
Qualitative.
This is what people like stockmanmy (now known as qqq3) or koon yew yin, call “Business Sense”.
This is most interesting aspect of investing, and the most profitable if done well.
What is the Intrinsic Value of any investment?
According to Warren Buffet, the intrinsic cash flow generated by the investment from now till infinity discounted at an appropriate rate back to the present.
Notice how he does not say P/E needs to less than 10, or that P/B needs to be 0.5 times. In fact, in his 2013 annual meeting, he said that he does not consider those instrumental to his decision to purchase.
And if you look at his best investments. Like Coca-cola, GEICO, General RE or American Express, he definitely paid what his teacher Benjamin Graham would not consider to be cheap.
And when you throw in NetJets, which lost USD677mil over the next 10 years after he bought it, before the company dominated the fractional jet space worldwide and started making outsized profits from 2013.
And looking at his most recent admitted mistakes. He confessed that he made an error in not buying Google, Microsoft and Amazon.
These purchases when purchased, were not cheap by any quantitative metric.
But, according to Buffet, as he bought them, or considered it his mistake not to buy them, he clearly considered that at the prices he paid (or would have paid), would be much lower than the amount of money that can be generated by these companies over its lifetime, even when discounted by the risk free rate of return.
So, the million dollar question.
How do you calculate the discounted cash flow of a business over its lifetime?
To do this, you need to know a few things.
- The resilience of the earnings.
- The growth rate and the resilience of the growth rate.
- The ability of the company to maintain pricing power in times of inflation.
Short questions, with simple but hard answers.
According to Buffet, he needs to understand the business so well, that he can see the next 5, 10, 20 and 30 years with a high level of certainty.
Most people do not know this. But he was one of the first investors in Intel (he was friends with Andy Grove), but he sold out early.
And many people are likely to also know that he is very close friends with Bill Gates, how could you not buy Microsoft? What question could you possibly have that Bill Gates cannot answer.
Interestingly, back in the year 2000, Bill Gates did admit that, if he had to go away for 20 years completely to an abandoned island, he would be more confident in his capital being secure in Coca Cola versus Microsoft.
Well, according to Warren Buffet, he understood the products, he used them and he could see their moat. However, he wasn’t able to understand the business so well, that he can guarantee that these companies will still be around.
Remember, this was 2000 or so. Google just overtook Altavista in the search engine space. And Microsoft was still very dominant, even in search. Google becoming as big as it was today, is not guaranteed.
Microsoft just over took Apple for a few years, and there wasn’t a guarantee that they won’t lose in the future.
And for Amazon, he always admired Jeff Bezos. Jeff was the first CEO to properly expense options. He admired him for that so much, he quoted him in the annual report, and bought Amazon bonds. But he just couldn’t buy the stock, as he thought it would be a close miracle for Amazon to make it, considering how many internet companies in the same field that died.
During those years, it was also so common for great companies to lose their moat so quickly, Kodak for example.
And amazingly, despite missing out those companies, he still obtained such amazing returns for the last 18 years.
It’s one thing to know roughly how a company will perform for the next 3 months, but it’s completely different to understand a company so well, that you can say with a high probability how it will be 10 to 20 years from today.
Using normal quantitative measurements only, it would be very very hard to buy Berkshire Hathaway whether at USD19 per share, or USD300,000 per share today. It was close to fair value at every level, it’s just the difference in size.
The only way you will be able to see the hidden qualitative of this business where, you can identify (accurately) instrinsic value that others wont be able to see, you need to know the management, the business, the competitors, the suppliers, the customers, the economic characteristics.
All of which takes a lot of time and thinking, Warren Buffet when he bought Coca Cola, read every single copy of the annual report from 1886. And very old news articles from more than 100 years ago.
Interesting bit of knowledge, in 1930, there was an article saying how most investors looked at Coca Cola, and felt bad that they missed it out in 1910 etc. And how it wasnt cheap then having gone up more than 20 times.
Well, i you bought one share at 1930 for 17 dollars, and held it to the day Warren Buffet bought in 1988, you would have roughly USD2.1 million.
And if you bought Coca Cola when Buffet bought it, you would be up about 22 times by today.
That is business sense for you.
Interestingly, even Benjamin Graham admitted that if you removed GEICO from his portfolio, his returns will go from more than 20% per annum for 30 years, to the low teens.
He bought it because it was cheap enough, but it was such a fantastic business, it could grow to where it is today.
Graham also said that he could see how the qualitative aspects are very important. But he felt it was much more difficult to teach how to value the qualitative aspects, and the buying quantitatively cheap companies were a much safer and secure way for the average person. Which is true.
But the second is also much more fun!
Conclusion
Having said it, most people will now say finding these amazing businesses at fair values is a very hard thing. You can maybe find 2 or 3 max. And less than 10 in your entire life.
However, do note this. You only need to put significant amounts of money into these companies once or twice, and as long as your hold long enough, your life and finances is guaranteed.
Why should something so financially rewarding be so easy?
Personally, I can see maybe 5-6 companies in Bursa that is fantastic, and only 2 or 3 that is at a fair value and not overvalued.
Heres to finding more.
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Website: www.choivocapital.com
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Discussions
10 people like this. Showing 50 of 61 comments
Normally people theory veli panlai loh....!!
Posted by Alex™ > Aug 19, 2018 01:03 PM | Report Abuse
Got track record to prove? Sounds nice wor... Can execute or not?
2018-08-19 13:05
Of course, if ur time frame is longer, then maybe got chance la... Buffett always says that. Unfortunately, ppl who invest just prior to great depression couldn't survive to see the rebound. How?
2018-08-19 13:07
For raider....simple....just pick a napshot stock right here...to prove that this is no no theory talk loh....!!
No need prove any historical track record loh.....!!
Posted by stockraider > Aug 19, 2018 01:05 PM | Report Abuse X
Normally people theory veli panlai loh....!!
Posted by Alex™ > Aug 19, 2018 01:03 PM | Report Abuse
Got track record to prove? Sounds nice wor... Can execute or not?
2018-08-19 13:07
Good idea stockraider sifu... Ah Jon, Apa stock can hoot? Give a time frame...
2018-08-19 13:08
Cantonese say..."Talk war on paper"....talk is cheap.
Where is your track record?
2018-08-19 13:09
Alex boy...ur kun su will be fired immediately when the casualties come rolling in.
2018-08-19 13:12
Betui juga... Need wait tentera report... Now still theory stage... Fast... Recommend stock to hoot~
2018-08-19 13:14
Here is i3.
Talk some practical stuff.Want talk theory go teach in college.
2018-08-19 13:14
No idea. I just try to improve my thinking, thought process, and thus investment picks.
Whatever returns come, i accept it.
No realistic track record for now. Because i've only been in market for a short time.
We will find out 5 - 10 years from now, if im just panlai at theory, or am actually a good investor i guess.
Yes raider, the thing is when you buy a very high quality business, the margin of safety in terms of price you need will be much lower.
Haha 3iii, i definitely spend alot more time looking for companies with very high quality, but sometimes, some companies are far too cheap, while having pretty decent management. Can buy abit.
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Alex™ Ur method is for 20% p.a?
19/08/2018 09:07
stockraider Yes correct...but both is not mutually exclusive loh....!!
Why can't u have the benefit of both ??
Business sense & quantitative with margin of safety leh ??
3iii I agree with all the points in the above article of Choivo. I have an added step, that is Quality FIRST, then Price.
19/08/2018 11:55
2018-08-19 13:16
You are right.
That's why i said, the resilience of the earnings and the resilience of the growth.
Investing, when you consider the cashflow produced by the company over its lifetime, require you to look very far into its future, and to know it with certainty, is very very very very hard.
If you look at coca cola at 1930, 1988, you can see some of the incredible economic characteristics of the company. And try reading what wb wrote on this, quite insightful.
I have no comments on tencent or netflix, but i would like to getmyself in a position where if i see something similar in the future, i would have the thought process needed to identify this as a potentially fantastic investment, and put significant capital in.
But its really really really very very hard. When i read the old reports for Alibaba, Tencent and Netflix, i really dont know if i would have bought any. Maybe a small to mid position in the first 2, but Netflix, really no idea.
Fidelity did a research in their investment accounts, and what they found out, was that the accounts that performed best, were the ones where the investors forgotten they even had an account. This is fascinating to me.
As humans, we always think we can predict the short term future accurately, but it clearly is not so. And we have biases that make us remember the correct predictions and forget the wrong ones.
Imaging you bought PBBANK say 10- 20 years ago or even during IPO, they are so many times, when its above fair value, but it was worth it to hold, because of the
fantastic management and economics behind it.
Even Warren Buffet made so many mistakes when he bought capital cities, bought at 13, sold at 20. Rebuy at 43, sold at 73. Rebuy at 120, and buy alot more and hold before it was sold to Disney.
And he always made fund of how he was so foolish to even sell a single share.
Right now, as you are probably aware, malaysia market is very small, i can only find maybe 5 companies, with 2 or 3 at fair value or cheaper. Maybe its because i am deficient in my knowledge.
As an ikan bilis, i can put make these 2 companies 50% plus of portfolio. If i was an elephant, i will need a lot more of these fantastic companies. Tgat is very very hard.
And i have never said my way is the best, if you have the ability to predict quarters will very very high accuracy, and time the market and sentiments to a T. By all means do that.
But most people can't, and those that think they can are often lucky. I know i definitely can't.
I critique the other method a lot, but if you can show me intellectually how to predict quarters to a T, do a Expected Value calculation and size your bet using the Kelly Method with high accuracy, and have it in a way that is intellectually clear, instead of just gut feeling. By all means, i will change my mind and make money faster.
People's failure to defend their viewpoints intellectually, is their own admittance that they are either lucky, or they are too genius that they cannot explain.
But when it comes to the second, i read Warren Buffet letters from 1955 to 2018, and i see how this man turn USD19 per share to USD300k per share, every step of the way. He is really a genius, i don't know if i can ever reach his standard. Or even 50%.
At USD20mil portfolio, he already had the kind of thinking he has today, just more shallow (which is damn deep when compared to most). I don't see him talking about agility.
At the end of the day, you have to pick the investment method that works for you, some cannot concentrate because they have low tolerance for risk or are more conservative etc. Or some are too concentrated because they are greedy and not because they know the business that well (this is me). And its ok to just admit that.
But regardless of what method you choose, you must be very very intellectually honest with yourself.
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soojinhou But then, everything about paying a fair price hinges on growth rate isn't it? If I can accurately forecast growth rate precisely, I would be a trillionaire many times over, won't I? Tencent was considered an unstoppable force until just recently, so was Netflix. Hindsight is always 20/20, of course on hindsight Coca-cola justifies the price Buffett paid, but when he first purchased it, it's at best a calculated bet. Don't get me wrong, Buffett is the best for generating returns for managing humungous amount of capital. But why should ikan bilis like me aspire to be him, when I can use agility to my advantage to get higher returns than his? You problem, in my opinion, is your arrogance to think that you way is the only right way and everyone else is crap, and then start shitting on everyone else's method.
19/08/2018 11:46
2018-08-19 13:36
The thing about fantastic companies is,
If you look at TP's from every step of the way from years ago. It just looks so foolish.
When the company is fantastic, and you hold long enough, you get very interesting results.
Having said that, people had this mindset in 1999, and in the 1920 Nifty Fifties. And they will not just buy these companies (Many of whom were not that fantastic), but pay literally any prices. And we saw what happened, if they held till today, maybe different story. But they will need to sit through 70-80% portfolio decline lah.
As HM says, A bad company at a low enough price is a good investment. A good company at a high enough price, is a bad investment.
2018-08-19 13:40
VC knowledgeable tak?
Tahu d industries tahu d bisnes tahu d players tahu d companies even betting on more than one companies in d same industries
Tapi success rate 20% je
Macam mana?
2018-08-19 14:25
Good!
Flintstones The safest asset to invest in this world is yourself. Many youngsters are trapped in the thinking that investing will make them real rich. If you have a business, focus on how to improve your business. If you are an employee and have four figure salary like Jon Choivo here, work hard and go for the five figure salary. Stop dreaming of getting rich. You will be better well off than many i3 speculators who have mixed record in thr market.
19/08/2018 09:01
2018-08-19 20:55
Fully agreed. If he can make money through stocks. isnt it his asset? everybody definition of asset is different. If as your skill gets better it generate you more and more money, it is an asset.
The safest asset to invest in this world is yourself. Many youngsters are trapped in the thinking that investing will make them real rich. If you have a business, focus on how to improve your business. If you are an employee and have four figure salary like Jon Choivo here, work hard and go for the five figure salary. Stop dreaming of getting rich. You will be better well off than many i3 speculators who have mixed record in thr market.
2018-08-20 09:35
Alex™ Try business sense investing and execute it before 1997 and 2007...
keyword is holding power. u believe in the product and service u will hold forever.
2018-08-20 09:42
how do u think businessmen succeed? they endure pain and failure much much better than you
2018-08-20 09:43
Qqq,
I can give you an arguement, I can't give you an understanding.
Volatility is not risk.
High risk high reward, and low risk low reward have the same expected value.
The goal is low risk, high reward.
I bought flbhd at rm1. Low risk, its now up to 1.4. High reward.
Volatility or a particularly maniacal Mr market is the friend of an investor.
2018-08-21 00:27
oh...and that thing you want to call low risk high return.....
yeah.....its a marketing trick.
2018-08-21 00:36
If someone promises me low risk, high return, low volatility.
Yeah he's probably bullshitting.
If someone tells me, low risk, return somewhat higher than the risk taken due to the buying of 1 dollar for 50 cents, lack of volatility cannot be promised. Likely to be very bumpy results. But over a long period of time should edge up and be quite satisfactory.
I'll be inclined to listen for a few more minutes.
2018-08-21 00:44
At certain point of time particularly during period of prolonged crisis it may be possible to achieve a minimum 20% gain per annum over say, a three years timeframe.
2018-08-21 00:45
Being able to identify whether something has low or high risk, requires some business sense. Or even common sense.
They are not mutually exclusive.
You seem to be mangling the logic to fit your principle.
2018-08-21 00:52
FLHB?
I too have FLH at 1.00......posted several times the reason I buy is because of the ban on log exports.....and relatively low price and having been neglected for some time.....It got to do with business sense, not low risk high rewards.
2018-08-21 00:57
every thing boils down to business sense...no business sense, no need to talk.
2018-08-21 00:59
If one got no business sense, can go buy s&p index. Outperform most fund managers.
Its not whether you got sense anot. But whether you know the limits of your ability.
2018-08-21 01:21
FLHB?
lets talk FLHB then.
just because it went from $ 1.00 to $ 1.40 does not mean it is a low risk high return stock. Just as it took one path ( the one from $1 to $ 1.40) , it does not mean it is the only path open to it. Of course hind sight is perfect vision, hindsight means only one path is known about its past. But in analyzing a stock, we are talking probabilities of its still unknown future paths......that means we are talking about history, probabilities and business sense.
2018-08-21 08:57
This is why i said it was low risk.
You are right, balance of probabilities.
Right now, you seem hell bent on bending everything to somehow come out with the narrative that you are right.
Its not enough that people have similar viewpoints with you, but they must 100% follow you. And not just that, but prostrate before you, saying you are smarter and more right than them.
That's my impression of you based on our interactions and my observation.
That is just odd really.
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Posted by Jon Choivo > Feb 28, 2018 07:49 PM
Lets just look at the figures.
cash and cash equivalents is RM98mil. No borrowings. That means this company, you buy now at current market valuation, only 28mil.
Lets say worse case scenario, the company only make 1m per quarter or 4 mil per year till forever. Discount that at 4.5% (Fd/risk free rate rate). The company should still be worth around RM89mil.
Conservative FV: RM89mil + RM 98mil= RM187mil.
Current price of RM125 mil present margin of safety 34%.
That's pretty good.
Now that is very very conservative, assuming profit per year only 4mil.
If profit you estimate at say 10mil. Margin of safety goes up to 61%. Or even just 6 mil per annum. Margin of safety is 46%.
Thats a lot.
But of course, remember, what is low can go much much much lower. There are at least 4-5 companies in malaysia trading at less than net cash and cash equivalents. 2 of them is even profitable!
2018-08-21 10:19
qqq3,
Volatility is not risk. Using Beta, which is used to calculate volatility and risk. It would be riskier to buy MYEG at 0.68 than today at RM1.28.
That is pure stupidity. There is no elegant formula to calculate risk, and the past share price movement is and event stupider way to consider.
For me, OTB picks is risky, because of the short time frames, and highly reliant on sentiment. And that he is willing to buy not so much on fundamental, or to derive economic benefit from the company, but because he think in a few months down the line, someone will be willing to pay a higher price. That is risky to me.
But when it comes to this, clearly has the alpha. The only question is whether it can be maintained, and not wiped out. This one i really cannot answer. Traders, even great ones like Paul Tudor Jones, just seem to be subject very sudden and permanent reversal of fortunes, that can take decades to manifest.
Having said that, if his record is bad, most investors or traders, including yourself, must be down right retarded, with records not even equal to the steam off his piss.
2018-08-21 11:40
So your arguement is if anyone wants to open a fund.
They must consider volatility a risk?
If anyone want to talk publicly, they must also consider volatility a risk, no matter how stupid it is?
If most fund managers think like you, its not wonder most don't beat the index.
2018-08-21 13:38
jon
I know...crooks don't want any rules, crooks don't need any rules.
But properly licensed mutual funds are properly monitored and measured by professionals.
2018-08-21 13:49
In that case, Seth Klarman is a crook, Richard Robertson, Peter Lynch, Walter Schloss are all crooks.
Don't be foolish.
I do not deny that fund management is a sewer of crooks. When you earn money regardless of whether or not you earn money for your investors, and there is low skin in game.
The only ethical rule in fund investing, is to be super clear and honest about your philosophy. Which OTB does.
He has his subscriptions, which i think is the bulk of the earnings. And he manages some people's account.
That's very different from a mutual fund.
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qqq3 jon
I know...crooks don't want any rules, crooks don't need any rules.
But properly licensed mutual funds are properly monitored and measured by professionals.
21/08/2018 13:49
2018-08-21 14:11
u have ambition to be stock market adviser ...I leave u alone.
I have no such ambition and never met one I like.
2018-08-21 14:48
So as long as they use only their own capital, you will like?
Do you like bonescythe?
Highly unethical people when it comes to markets like KYY you like?
I suppose you also hate charlie munger, warren buffet, peter lynch, benjamin graham also?
If i decide to buyout all my partners today, you will suddenly go from don't like me, to love me?
Will i turn from in your view, have wrong philosophy to a genius in market?
You either have really weird standards for life. Or your ego literally is cannot take a loss at all.
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Posted by qqq3 > Aug 21, 2018 02:51 PM | Report Abuse
I like those who plays with own capital...like KYY, like myself.
2018-08-21 17:01
Jon Choivo > Aug 21, 2018 05:01 PM | Report Abuse
So as long as they use only their own capital, you will like?
==========
yes...own money., what is there not to like?
stock market as war....what is not to like?
what I don't like is advisers hang, goat head sell dog meat....not you, that kc fellow.
2018-08-21 17:24
How did KC hang goat head, sell dog meat.
Mind to elaborate?
What is there to dislike about someone managing someone else's money if he's ethical?
2018-08-21 17:26
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Alex™
Got track record to prove? Sounds nice wor... Can execute or not?
2018-08-19 13:03