Lessons from the World’ s Top Fund Managers RONALD W. CHAN John Wiley & Sons Singapore Pte. Ltd. Copyright ª 2012 by John Wiley & Sons Singapore Pte. Ltd. Published by John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628, tel: 65–6643–8000, fax: 65–6643–8008, e-mail: [email protected]. 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Printed in Singapore by Markono Print Media, Singapore. 10987654321 To my wife, Jacinth, who reviewed this manuscript more times than I did Contents Foreword xi Preface xiii Chapter 1 Free to Choose in Value Land 1 Walter Schloss, Walter & Edwin Schloss Associates Living through the Great Depression 5 The Meaning of Survival 7 Net-Nets 8 Setting the Right Pace 11 Know Thyself 15 Chapter 2 Once Upon a Time on Wall Street 17 Irving Kahn, Kahn Brothers Group Becoming Graham’s Disciple 22 Preaching Value 25 A Centenarian Diet 30 vii viii CONTENTS Chapter 3 The Making of a Contrarian 33 Thomas Kahn, Kahn Brothers Group A Modified Graham Approach 38 The Case for Obscure Securities 42 Market Reflection 45 Chapter 4 On the Shoulders of Value Giants 47 William Browne, Tweedy, Browne Company A Valuable Detour 52 Statistics and Beyond 54 Setting a Global Standard 56 The Social Science of Investing 59 The Market Ahead 61 Chapter 5 A Journey to the Center of Value 65 Jean-Marie Eveillard, First Eagle Funds Valley of Tears 70 The Inefficient Market 71 The Meaning of Value 74 The Courage to Say No 77 Seeking Protection 79 Chapter 6 The Self-Taught Value Spaniard 83 Francisco García Paramés, Bestinver Asset Management On a Solo Value Hunt 88 Investing Made Simple 90 Austrian Economics and the Market 93 A Global Rebalancing 97 Chapter 7 The Income-Conscious Englishman 101 Anthony Nutt, Jupiter Asset Management A Victorian Mindset 105 Finding the Right Investment Culture 108 Trusting Only Tangible Income 110 The Courage to Keep Going 114 Contents ix Chapter 8 The Frequent Value Traveler 117 Mark Mobius, Templeton Emerging Markets Group Reading between the Minds 122 Thinking Big and Small 124 Trouble is Opportunity 126 Feeling the Market 130 Chapter 9 The Value-Oriented Businessman 133 Teng Ngiek Lian, Target Asset Management Learning the Numbers 136 The Art of Contrary Thinking 138 Targeting Good Businesses in Asia 141 The Relativity of Valuation 143 A Value Lifestyle 145 Chapter 10 Value Investing in the Lost Decade 149 Shuhei Abe, SPARX Group A Musical Beginning 153 Breaking the Language Barrier 155 Learning from the West 156 The Evolution of SPARX 158 Building a Westernized Asia 160 Searching for Value 162 Chapter 11 Eternal Sunshine of the Value Mind 165 V-Nee Yeh, Value Partners Group A Multidisciplinary Path 168 Seeking a Comfortable Price 171 Finding a Value Partner 172 Spotting Value Minds 176 Becoming a Man of Value 178 Chapter 12 The Accidental Value Investor 181 Cheah Cheng Hye, Value Partners Group Starting an Investment Hobby Shop 187 Building a Value Temple 189 x CONTENTS An Industrialized Process 191 A Value March Forward 195 Chapter 13 The Making of a Value Investor 199 A Humble Portfolio Construction 202 The Art of Valuation 204 Reading for Ideas 205 More than Just the Fundamentals 206 Timing for an Exit 208 Having the Right Temperament 209 Acknowledgments 213 About the Author 217 Index 219 Foreword tudents of investing look for a formula, a way of combining accounting and other information that will produce infallibly S good investment results. Even Benjamin Graham, the founder and leading spirit of by far the most successful school of investment practice, spent a good deal of his time looking for such a formula. To this end, students read both technical works and the retrospective tes- timonies of high-performing investors. In both areas, they are largely disappointed. The technical approaches have a meager record of success. A few notably good books have been written (for example Joel Greenblatt’s You Can be a Stock Market Genius and Graham and Dodd’s Security Analysis). But reported technical investment approaches rarely, if ever, lead to consistent, high-level returns (if they did they would be adopted by everyone and would become self-defeating). Investment memoirs generally also disappoint students. They tend to be long on philosophy and short on advice for how to buy particular securities. However, as the works of successful investment practitioners, the memoirs do have much to recommend them. They describe, however non-specifically, investment approaches that worked in practice. And xi xii FOREWORD they capture an important aspect of investment success: that it depends more on character than on mathematical or technical ability. This is the consistent message of investment memoirs as a group. The problem is that each memoir presents a unique perspective on the character traits necessary for investment success. Different authors emphasize different characteristics: patience, coolness in a crisis, wide- ranging curiosity, diligence in pursuit of information, independent thought, broad qualitative as opposed to detailed quantitative under- standing, humility, a proper appreciation of risk and uncertainty, a long time horizon, intellectual vigor and balance in analysis, a willingness to live outside the herd, and the ability to maintain a consistently critical perspective. Unfortunately, an investor with all these qualities is a rare bird indeed. That is why Ronald Chan has done such a valuable service in writing this book. He has put together a set of thorough and rigorous portraits of a comprehensive range of notable value investors in a manageably short number of pages. His descriptions cover multiple generations from Walter Schloss and Irving Kahn to William Browne, multiple geographies from Asia to the United States to Europe and the full gamut of value investing styles. By combining descriptions of investment approaches with investor background, he illuminates the connection between individual character and effective investment practice. Taken as a whole, the book provides each practical value investor with the necessary material to sift through the historical records to find the style that is most appropriate to them. Ronald Chan’s work is an essential starting point for any nascent value investor and an invaluable reference for experienced investors. BRUCE C. N. GREENWALD Director, Heilbrunn Center for Graham and Dodd Investing Robert Heilbrunn Professor of Finance and Asset Management Preface Try not to become a man of success but rather to become a man of value. —Albert Einstein he best advice I have ever received came from my father. When I began searching for a career after finishing college, he advised T me to stay away from three potential headaches in business: labor, rent, and inventory. As any labor-intensive business is likely to lead to office politics, my father advised that I look for a business that requires little manpower. Then, as the high office rents in a world city such as Hong Kong can easily squeeze profits, he said the ideal is to find a business that requires little office space. Finally, as handling any type of inventory requires both manpower and space, an inventory-based business should also be avoided. Taking his advice to heart and looking for a business that met these three criteria, I found investment management to be a perfect fit. The labor force is my brain, the office need only accommodate a few desks, and the inventory is the investment positions recorded in brokerage accounts. xiii xiv PREFACE Although investment management may allow one to avoid the aforementioned headaches, becoming a successful investment manager still involves considerable challenges. It requires extensive knowledge of the financial markets and the ability to react to different market circumstances. It also requires a prudent strategy to achieve sustainable investment returns and a sensible investment philosophy to build the right investment model. In developing my own investment philosophy, I read the work of Benjamin Graham, became aware of the phenomenal investment success of Warren Buffett, and came to realize that the value investing concept makes perfect sense.