Together with his team, Soo Chuen Tan has built the global Value Investing firm Discerene Group. They have scaled the firm to a respectable asset manager. In our conversation, we discussed Soo Chuen Tan’s builder story and his investing approach.
We have discussed the following topics:
- 1Introduction to Soo Chuen
- 3Choosing a global approach
- 5Receiving feedback
- 6Opportunity in crisis
- 7Advising young mentees
- 8Balancing offence and defence
- 9Tips on getting started with a partnership
- 10Community Exclusive: Scaling up a firm
- 11The right pace of building an investing business
- 12Clock speed vs. market
- 13Enjoying the bad times
- 14Finding the right investors
- 15Southeast Asia
- 16Attractive markets to invest in
- 17Understanding countries when investing in businesses
- 18Meggitt case study
- 20Management teams
- 21Allowing thesis change
- 22Reasons to sell
- 23Stock cycle
- 24Thoughts on Value Investing
- 25Thank you
Introduction to Soo Chuen
[00:00:37] Tilman Versch: Hello audience of Good Investing Talks. It’s great to have you back. And today I’m welcoming Soo Chuen of the Discerene Group. Soo Chuen is based in Stamford, Connecticut. Am I right?
[00:00:49] Soo Chuen Tan: That’s right.
[00:00:51] Tilman Versch: And we’ve met through a guest of mine I had on the channel, and it was quite interesting as he introduced me to you. He said you’re his mentor, which is quite interesting. And so, I thought I would start this podcast with a question taken from this mentee of yours, and then build a pitch on the topic of mentorship. But let me first pause the question of your mentee who was also on the channel. People could guess in the comments who it was, but you will see. You’re investing globally with Discerene Group and out of Stamford, Connecticut, where you’re based. Why do you follow a global approach and not only focus on the US or certain other geographies with your firm?
[00:01:41] Soo Chuen Tan: So Tilman, thank you for having me on the channel. It’s an honour and privilege.
[00:01:46] Soo Chuen Tan: My compliance team asked me to read out this disclaimer, so I want to start by saying that our compliance policies restrict me from discussing performance in a forum like this. And our compliance team asked me to point out that nothing I say is an offer to sell or solicitation to buy any security. Such offers will only be made by private placement memorandum. So I’ve got that out of the way.
[00:02:06] Tilman Versch: Greetings to the team. My best wishes.
Choosing a global approach
[00:02:09] Soo Chuen Tan: Just to answer your question on global investing, as you know from my previous conversations, I’m a big fan of Buffett. I love value investing as a craft.
I’m a big fan of Buffett. I love value investing as a craft.
The reason for doing global is you cannot go back in history. when Buffett was managing capital in the ’50s and ’60s, the world was a very different place. We went through Pax Americana. The U.S. developed quite a bit a lot of wealth that was great. That a lot of wonderful businesses were created. Now, when I started the firm it was 2010 and it was a different place, with various trades that come down and it was a much more global place. There are interesting companies being built all across the world. Yet, you still had cultural differences, language differences, time zone differences, and informational differences.
Capital markets were not that deep in different parts of the world. They still aren’t that deep in many parts of the world. And it was interesting to me to be able to apply value investing principles across a much across the landscape where so much wealth was created in so many possibilities. Yet, there are so many asymmetries. And that was kind of interesting to me to take on that challenge to be able to paint that canvas. Given that, we now had the technology and we now had communication tools to be able to invest globally.
[00:03:19] Tilman Versch: Before we take a deeper dive into the investment approach, I would love to follow up a bit on the mentoring side and why you decide to take a role as a mentor for other investors. So what’s the reason for this?
[00:03:35] Soo Chuen Tan: Yeah, I think it comes naturally. I’ve been very lucky to have had mentors myself and just going all the way back in all our cases, our parents, our first mentors. I was lucky that my parents were natural mentors. Both of them taught physics in high school, they’re high school teachers. And in my childhood, I grew up and had so many, these students who came to our house after school just for help, help with career advice, academic advice, going through physics, going through career decisions, university decisions, and academic decisions. My dad in particular loved kind of helping high school students out, figuring things out in life and maintaining those relationships over a long period of time. One memory I remember a lot from childhood is, we would sit around waiting for him for dinner. And he still has his students in his living room, and he’d be talking, he’d be very animated. And then my mom kind of clap the plates, clap the bowls and hints that it’s dinnertime, and he would just ignore it because he wants to talk to these kids.
And he enjoyed doing that. So that natural idea of having mentors and building mentorship was something I grew up with. And then, of course, I left Malaysia, I went to the UK and then I went to the US, the whole world of business where I joined McKinsey and then investing was new to me, it’s not a world that I live in and I now live in Stamford, Connecticut, the town I grew up in it’s very different from Stamford, Connecticut. But I’ve always been lucky to have had people like say, hey, let me help you, let me coach you. Let me kind of be a sounding board. And I was a very curious person. And so I build out these very natural mentoring relationships and I’ve benefited from that my whole life. So it’s very natural now to actually kind of have those same relationships for as long as I can remember, I had that when I was younger. It was folks from Malaysia reaching out and say, hey, I want to go to college at Oxford, how do I do that, et cetera, et cetera. Later and also say, hey, I want to pursue a career in investing, how do I do that, et cetera. And then even later, it’s like I want to start an investment firm. I want to start a partnership. How do I do that? How do I think about it? And it feels good to have people travel with me on this journey that we call life.
[00:06:00] Tilman Versch: What kind of people have been mentors for you in investing?
[00:06:05] Soo Chuen Tan: Oh, there’s so many. And because I don’t think there’s a big gap between business and investing. So my earliest mentors are people I worked with at McKinsey. And they’re not necessarily stock pickers, but businesspeople, right?
So my earliest mentors are people I worked with at McKinsey. And they’re not necessarily stock pickers, but businesspeople, right?
So one of my earliest mentors was a partner at McKinsey. I worked with him when I was like 23 years old. And he gave me a… he was a leader in a very real sense. He let people from the front. He kind of shot by example. He took an interest in people and he treated people in ways that made you feel like you want to do good things for him. You want to follow him, and he does that by creating autonomy, creating circumstances where you have autonomous goals that you strive towards that are difficult but kind of achievable if you kind of applies yourself to it. Those are the best kinds of mentors, I think, and also give you the rope to kind of be creative and be your own person.
So kind of the way he liked people, the way he liked teams. It’s not necessarily an investing setting. So McKinsey was an investment firm, but the ability to lead from the front and the ability to kind of cultivate and build people was my first professional experience. In my first investing job, I work with a guy called Richard Horowitz, who still remains a friend today. He was great. He was very bright; he was very intense. He was very structured, but he also had a mentoring gene, which is great. It’s not all good investors have that. He would take time away and kind of explain from first principles why he did what he did, and how he kind of thought about it. So that the process of it how it was made and how the thinking goes was just a wonderful thing that he was able to do. And we’re friends up today and this was my first job out of business school, and I knew nothing about investing.
And then through my investing career is different people who have taken an interest, different people that I consider friends. The late Charles de Gaulle who ran IBA and kind of passed away was a wonderful mentor. We talked about investing. We talked about building a firm. We talk about a kind of entrepreneurship. We talk about how value investing has evolved over time. And the beauty about mentors is they take time away and they don’t make you feel like it’s an obligation. They make you feel like they actually want to spend time.
And the beauty about mentors is they take time away and they don’t make you feel like it’s an obligation. They make you feel like they actually want one to spend time.
And then as I’ve gotten older, your mentors become your peers. It’s not just people who are a generation before you because you’re travelling on a common journey. And we don’t have the answers to everything. Your peers, whether it’s other money managers kind of people call me mentors. I will say the same thing about them because we’re travelling on the same journey.
You share experiences. You go through good and bad times and in times when you feel like you don’t know all the answers reaching out to people that kind of can be a sounding board to you and quite a few of them. And then as we’ve gotten more LPs over the years and built generational relationships with them. Our partners, I hope they become mentors because they’ve seen so many folks, they’ve seen the good, and the bad, they’ve seen how firms feel, and they’ve seen how organizations structure. They’ve seen cultures. They’ve seen bad decisions made and they become mentors. They become some of the boards. So it’s kind of evolving the career, the people who are mentors actually kind of widens. And yeah, that’s the journey I’m on.
[00:09:43] Tilman Versch: So it is more like a flat hierarchy in mentorship or is it like a certain level of up and down or how would you describe this?
[00:09:54] Soo Chuen Tan: It’s up and down. So I still have mentors today that are kind of the generations before me, Harvard professors, McKinsey partners, and people that I work with when I was younger. And now we have 20-year relationships and more, right? And in some cases, some of the folks I work with are retired, and some of them are still but still mentors. And the benefit of those, as get a different season of your life. So you’re not just talking about professional mentorship, you’re talking about life, you’re talking about priorities, you’re talking about how you spend your time and you’re talking about kind of deeper questions on what is the good life?
And in some cases, some of the folks I work with are retired, some of them are still but still mentors. And the benefit of those is you get a different season of your life. So you’re not just talking about professional mentorship, you’re talking about life, you’re talking about priorities, you’re talking about how you spend your time and you’re talking about kind of deeper questions on what is the good life?
And then your peers who are in similar stages of life as we are kind of work. I’m now 45. I’m halfway through life. We’re talking about, all right, we’re now at this stage of career. What do the next 10 years look like? What are the things we struggle with? And sometimes is about men kind of building an organization. It’s leading people, good stuff because I’m not necessarily a good manager of people. How do you lead people? How do you create incentives? How do you create conditions by which people can flourish and have those conversations? So those appear.
But then the people who are younger than me, who have now worked with me for 10 years and more often have a different perspective on my own strengths and weaknesses. And they can be mentors, too. Because you realize that you don’t have the answers. I mean, that’s true of anyone in life. And so if they’ve seen me make decisions, they’ve seen me make bad decisions, they’ve seen me react poorly to a certain stressful environment. And then because we have the basis of trust, they can kind of give me feedback on how I could operate differently. So over time, it becomes a multi-generational relationship.
[00:11:50] Tilman Versch: So you like open to feedback in someone who says, you, in your face that you’re wrong?
[00:11:55] Soo Chuen Tan: Oh, absolutely. So, Tilman, you’re German. Being blunt is great.
[00:12:05] Tilman Versch: We are just used to it. You’re wrong!
[00:12:12] Soo Chuen Tan: In Asian cultures can be very polite. So and culturally in different parts of the world, people get feedback in different ways. But I mean, it’s not just me. I think I think we should go through life surrounded by people who feel like they care enough about you to tell you you’re wrong because most of the time you just don’t care like you’re wrong, so what? You’re going to do with your own consequences, right?
[00:12:37] Tilman Versch: Yeah. It’s sometimes also like, yeah, even for Germans and sometimes not that easy to say someone is wrong or just like you don’t care enough that it’s an investment you do. Because also it’s not like the typical thing. If you say something good like it’s nice, but if you criticize people or like not even criticize but a few certain times attack them, it’s not that easy in the social trait.
[00:13:05] Soo Chuen Tan: I mean, you have to care enough about someone to actually take time away and say you’re wrong or here’s how you can improve and actually take that risk, right? There has to be a basis for a relationship. You don’t walk around telling people that you don’t know the wrong or mistakes they make. So almost by definition, it’s something that comes from a place where someone actually cares enough about you to do something like that.
Opportunity in crisis
[00:13:31] Tilman Versch: Imagine one of your mentees would ask you what you think about the current investment climate and how it influences the chances to find great businesses and stock picking. What would you tell him or her?
[00:13:45] Soo Chuen Tan: A mentee, I think, and I’m a value investor. So I think this is a great investing environment, unsurprisingly, for value investors. Every sequential crash of a market meltdown or sell-down sounds like a spring of opportunity.
Every sequential crash of a market meltdown or sell down sounds like a spring of opportunity.
And for obvious reasons as value investors, we think of businesses as businesses. They’re not stocks. There’s an intrinsic value to every business. And when stock prices go down the gaps between market price and intrinsic value goes up. And that’s just a natural thing. Often is the idea of the difference between the market as a voting machine and the market as the winning machine. The value of a business is the value of a business. And the business is going through good times and bad times. That’s natural. And that’s when a gap kind of opens up between the price at which this business of being quoted at. And the intrinsic value, and by the way, intrinsic value includes good years and bad years, is something to be expected. If the gaps open up, as a value investor is an opportunity to be the underwriter of the business. So you say, at this price, I’m willing to buy it, give it to me, and I’ll buy it. I don’t care if it raised that more, I’ll buy more of it. The business is the business. I can appreciate the business. And being that underwriter when there are uneconomic sellers. When there’s fear when there’s a fog of uncertainty, that’s the time when value investors strike. So short answer, a great time to be a value investor. Be patient, be contrarian, think about the fundamentals and play offence.
Advising young mentees
[00:15:24] Tilman Versch: But when would you tell the mentee that she or he could be wrong because like a crisis also means there could be value traps out there and risk that maybe you miss if you’re young?
[00:15:40] Soo Chuen Tan: Yeah. So if you’re young. And it’s a great question, I think investing is a journey. I think that a lot of folks these days will live in an age of instant gratification. You want things fast. People want to become a good stock picker quickly. People want to swing very hard at things quickly. But really, investing is a journey kind of as you go along the journey you built on your foundation, and you get better and better, right? So it is dangerous, I think, to try to swing at things if you don’t have the pattern recognition abilities, the judgment, the foundations to be an investor. And so my advice would be for folks like that, be patient like we have a long life, hopefully, all of us have a long enough life that in the fullness of time we get to be able to get better and better in our craft. So don’t be in a hurry. But for folks who have those foundations being contrarian and keeping a level head in a time like this is wonderful.
You talked about value traps. Value traps happen all the time, good times and bad times. When a market is frothy, when markets are in the dumpsters, there will be value traps. And when you say value traps, businesses that look ostensibly cheap are not actually cheap at all, right?
Value traps happen all the time, good times and bad times. When market is frothy, when markets are in the dumpsters, there will be value traps. And when you say value traps, businesses that look ostensibly cheap are not actually cheap at all, right?
So something that treats a low p stock that’s actually going to go out of business, stuff like that, those businesses will always be around both in frothy times and in good times. I think it’s actually more dangerous in frothy times. You’re more likely to get into value traps when valuations are very high, generally speaking, because when that happens, then you look at something that looks ostensibly cheap. That’s the only thing you can buy. In a time when there’s more value, generally, valuations are cheaper, you’re more likely to buy better businesses at a reasonable price because they are available for purchase at a reasonable price. So they also actually kind of in the value traps actually lure in that times than in good times. So again, the distinction is between the value which is the net present value of cash flows and the price which is what when a stock trades at.
Balancing offence and defence
[00:18:07] Tilman Versch: Coming back to your first answer on the mentee question. What is the level you have to play in this situation where you want to play offence as a value investor level, you have to take on defence? Like, how much do you have to balance offence and defence in a situation where things look cheap? Is it still first looking at a defence that you never lose money? Or is it also like, how do you balance this?
[00:18:37] Soo Chuen Tan: Yeah, I don’t think there is a balance. Meaning I think that the perspective of a value investor is that you underwrite every business you want to buy with a large margin of safety. That’s embedded into the investment. What that means is that there’s actually a free lunch, right? So when things get cheaper. The margin of safety for investment actually gets bigger. But your potential upside is also larger. It’s a little bit counter-intuitive from the perspective of modern portfolio theory, but you know that is kind of what value investors believe. So what that means is the same decision as both offence and defence. When you buy something with a big margin of safety, you’re also buying something with high prospective returns. And if it gets cheaper, if nothing’s changed on the underlying, then your margin of safety has just increased, and the odds of permanent capital impairment has become lower and so you should buy more. So it’s the same decision.
So when you’re buying more of a business, when it gets cheaper, that’s an offence because you’re trying to generate returns, but it’s also a defence because you’ve kind of baked in the margin of the safety into your investment. We don’t, generally, don’t believe that that’s an independent decision of risk management outside of the decision to figure out what a downside of a business is. And that is value investors are very aware of risks. You’re very aware of how where things can go wrong and get very aware about all the ways in which you can lose money on an investment.
No investment is risk-free, no business is risk-free, but is aware of the risks and you underwrite the risk and you say what my job is do I have if I wake up tomorrow on the front page of the Wall Street Journal, everything I worry about actually happens in that state of the world, how much money can I lose? And you bake that into your numbers, you bake that into your downside and once you have that, that’s a margin of safety. So in an environment like this and often it’s not just like this, go back to 2020, go back to other dislocations. You often have a fog of uncertainty. Things happen, there’s uncertainty about public health, there’s uncertainty about the economy, uncertainty about interest rates and uncertainty about capital markets. That fog of uncertainty was always there.
No investment is risk-free, no business is risk-free.
It just becomes more vivid in those times and that kind of range of outcomes. And therefore something is baked into our downside numbers, even when that is not front and centre for us. And so then when you make a decision, it’s really baked in and then you can confidently step into the breach and say, okay, now at this price we’re willing to take those risks.
Tips on getting started with a partnership
[00:21:16] Tilman Versch: So let’s reimagine the conversation you have with your mentee. And this mentee wants to build or is already building an investment firm. And what would you tell him or her about building an investment firm in this challenging business climate we’re currently in?
[00:21:34] Soo Chuen Tan: Yeah. I started Discerene in 2010. In a perhaps even more challenging investing environment. So the advice I’ll give my mentee is the same advice I gave myself when I started the firm, which is that when you’re trying to build something over a 50-year period or more, which is kind of what I wanted to do when I started Discerene, and at the time I was 33 years old. So I thought I had 50 years and maybe hopefully I do have 50 years.
[00:22:05] Tilman Versch: Sixty.
[00:22:07] Soo Chuen Tan: Sixty. I need to work out more and eat better. But if you have those time horizons and you’re trying to build something for the long, long term, its current investing environment doesn’t matter, right? So it can be a really bad time. It can be a really good time. It can be whatever. You’re looking over a long enough time horizon to the principles are the principles. it doesn’t matter. So the advice I’ll give to anyone trying to launch a firm today or at any other time is the same which is you want to get your foundations right.
So the advice I’ll give to anyone trying to launch a firm today or at any other time are the same which is you want to get your foundations right.
So for me being very clear about the way I want to manage money. So I wanted to invest as a fundamental investor. I want to own businesses, not stocks. I want to invest for the long term. And by the long term, I mean, generationally, I want it to be contrarian. I want to be global. Can I have those things, right? Have your north star pointed in the right direction in terms of how you want to invest and the way you want to express your investment program, Don’t blow with the wind in terms of what’s the investing question of the day to create the right foundations from a DNA perspective of the firm.
So not just the investment program, but the DNA of the firm. So to me, that has three pillars to it. One, have the right partners. We forget investment firms and unlimited partnerships. It’s a partnership. That’s a GP with a general partner, and the LPs, limited partners, but they’re partners. Back in the ’50s, when hedge funds, private equity funds, et cetera were new, they were actually partnerships. People have gone into business together, and someone’s actually putting in sweat equity. But everyone was involved and it’s a real partnership. It’s not a product. You don’t buy a hedge fund product and LP is not a customer, they are partners. And we’re going to business together. And like any partnership, you want to find the right partners if no one would ever randomly and then to partnerships with a new person you don’t trust.
You want to find the right partners and you’re saying, okay, we’re in the same boat and we’re trying to do business together in commercial enterprises, the investment enterprise. And in bad times, we want to fall in, fall in, not fall out. So we want to kind of lean into those times and kind of work things through. I don’t want to act like a Wizard of Oz. A lot of money managers think that you were kind of like when Oracle, we talk about Marcus, we talk about… I’m a human being. I’m one person. I don’t know the future. I don’t know what’s going to happen. I’m going to figure out how to best navigate uncertain environments, make good decisions, make good judgment, and I’m going to do it with my partners. So that’s kind of the idea of partnership. Find the right partners and we’re very lucky we did. So, what, 12, 12 years on? We’ve gone through good and bad times with partners, and it worked out well. Our partners have been super supportive through good and bad times.
So the advice… So that’s one leg. The second leg is the people at a firm. If you’re launching a new firm, who you work with on your team makes all the difference in the world.
If you’re launching a new firm, who you work with on your team makes all the difference in the world.
Integrity, character, people who are team players, people who are long-term minded, people who want to be part of something bigger than themselves. For good or bad. We attract a lot in our industry, generally. We attract very bright people, very ambitious people. But drive, ambition, et cetera, often comes with impatience and often comes with egos. So you want to find driven ambitious people, but also patient, but also intellectually humble and personally humble. Tough combination. But if you find those people, create conditions for them to flourish. So that’s on a team, right?
And in three for us, the third leg of the stool is to partner with the CEOs and CFOs of the companies we invest with. And for those people, you want to build long-term relationships. You don’t want it to be a transaction, you want it to be a relationship, you want to get beyond the kabuki of CEOs and shareholders. When you talk about quarterly numbers, they talk about earnings, et cetera. You want to get to the point where you actually have a relationship with them to talk about your business. And you get to a point where you can help them with the business. I started my career at McKinsey. McKinsey works with companies, CEOs, and CFOs all the time in thinking through difficult business problems. And you want to get to a point where they give you permission to do that and you create those legs of the stool then you have a much more resilient investment enterprise that can go through good and bad times. So that’s one perspective. That’s my special perspective. And that perspective, I think is true regardless of the environment, regardless of whether you launch in 2010 or 2015 or 2018 in good or bad markets.
Community Exclusive: Scaling up a firm
[00:27:06] Tilman Versch: What did you learn while scaling this business from 62 to 1.6 billion? Maybe let me ask it this way. What mistakes did you do in this way and how were they helpful for you to make a better business?
Hey, Tilman here. You are sure you’re curious about the answer to this question, but this answer is exclusive to the members of my community, Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investors day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus. Just go to good-investing.net/plus. You can also find this link in the show notes. I’m waiting for your application.
The right pace of building an investing business
[00:28:02] Tilman Versch: And without further ado, let’s go back to the conversation. Is being fast a good thing in building an investment business or is being slow better?
[00:28:14] Soo Chuen Tan: I think the right answer is balance. So I think that more often the mistake is too fast. That’s our observation. Not just investment funds, but any business. Building businesses really quickly and not getting the foundations right. So as a start-up, a tech company, et cetera, you don’t know what you don’t know, you make these decisions and then it’s too late to change them. And investing is particularly important because I talked about having the foundations, right? I think that my personal belief is that you need very strong Graham Right Foundations to be a good investor. Graham Foundation. Ben Graham. It’s all about getting the accounting right, the balance sheet right, the cash flows right, and the unit economics right. There are some very basic things on kind of stacking up the business and understanding how the business works. For investing, I think that’s an important foundational thing. What we’ve noticed is that younger analysts want to skip right past that.
They don’t want to deal with accounting, they don’t want to deal with revenue recognition, they don’t deal with gaps, they don’t want to deal with understanding the balance sheet, they don’t know how to deal with working capital which is considered very boring. And they want to go straight into talking about business models and time and disruption as a chart, right? But you don’t get the foundations right. You don’t get the core right. It’s actually you tend to make mistakes when you don’t do that. The example I give in other fields is if you want to be a good impressionist painter, get your classical painting technique right.
If you want to be a good jazz musician, get your classical training right. If you want to be a good, good modern dancer, get your classical training right. That the training is really important. Then you can break the rules. Then you can figure out how you kind of make exceptions to the rules. And so your question on bits, business building for every business, whether it’s investing, whether it’s any other business, getting the basics right, getting the foundations right, getting the principles right, getting the team right, those things are important.
So the mistake is, I think, too fast, but you can also act too slow, right? So I think my general kind of DNA is I’m cautious. I’m downside focus. And sometimes it means, I think too slowly. Sometimes it means let me think about this more and then think about it some more. I think about it some more and then the opportunity passes. And that’s the mistake I tend to make, and so over the last 12 years, the idea of saying it’s not perfect, I don’t know everything, but I’m going to make a reasonable judgement and trusting that judgment more it’s been an evolution for me. And so getting to the right balance between the two.
Clock speed vs. market
[00:30:58] Tilman Versch: How good is the market to manage different clock speeds?
[00:31:02] Soo Chuen Tan: I don’t think markets are pushed it clock speeds well and there’s actually a book called Clock Speed that is worth reading. And if you look at the history of fortune 500 companies and the pace at which that changes. Go back to the Fortune 500 companies circa 1960, 1970, 1980, 1990, 2000, 2010, and 2020, it’s changed a lot, right? The largest companies and a composition that is not just the largest companies but a 500s company, 1000 through that has changed a lot. Creative destruction is real. Businesses have useful lives: they grow up, they mature, and then they die.
Creative destruction is real. Businesses have useful lives: they grow up, they mature, and then they die.
People forget the last part. That’s true of every business. But markets don’t appreciate that. So what happens is that when businesses grow, they projected growth and they say, okay, if it keeps going like this for the next 50 years, look how big that business can be, right? But that’s always the exception. They are always the exceptions. Does Amazon. Amazon has got to be really, really large over a long period of time, but that is the exception. Most businesses don’t get there. Most businesses taper off quickly and then they die.
And people always forget that. And it’s just human behaviour. We have this anchoring back. But the newest data point to the vividness bias. But if you take a step back and understand the collect space of businesses, you appreciate that it’s true. It’s natural for businesses to grow mature and die. It’s just a fact of life. And therefore, when you value these businesses and figure out the life of the business so as don’t project earnings into the sky forever, it’s not going to happen. Be kind of Zen about it. Understand that all businesses have naturalized to them and value them accordingly. That requires us to be sober. That requires us to actually be balanced due to temporal excitement about the futures of businesses, knowing that naturally there will be competition, there will be change, there will be disruption, et cetera. And but that to answer your question, I don’t think markets naturally think about that. That’s why you have market caps off. In 2000, the market cap at Cisco, and the market cap of Yahoo were tremendous, right? And today it’s the same with a whole bunch of businesses because you know people tend to project the present into the future indefinitely.
[00:33:31] Tilman Versch: You already mentioned that you’ve had conversations with a lot of peers in investing. What is the right clock speed or a good clock speed to grow in investing business?
[00:33:42] Soo Chuen Tan: Yeah, we studied the concept of investing businesses and realized that this is a terrible business. So if we apply our own lens to our own business and study our own business, there are very few barriers to entering in our business. The clock speed is really fast. Very few investment firms survive, period. The top investment firms in 1960. Very few around 1970, very few around 1980. Very few are out. We don’t have to go even that far. I graduated from business school in 2004. I came out with a list of the firms that I would love to work with and that I aspire to go work for. Many of them are not around anymore. That list. It’s a fact of life. So it’s the same thing when I started a firm, I understood that, right? And I said, I wanted to invest over the next 50 years, which was very ambitious, very bold for me to say that. You have to realize that that’s not the base case. The base case is that investments will fail. Many firms that launched in 2010 with me are no longer around; 2011, 2012 are no longer around.
So kind of knowing that about our business and understanding how fragile our business is. Also means that when you design a firm and when you kind of operate, you have to kind of operate with that in mind. If you’re going into a business that’s a very difficult kind of auto against you. You have to structure the firm very, very differently from most other firms. And we talk about the duration of the capital that we have, the partnerships that we try to build, and a team you try to build from, fail for all sorts of reasons. The duration of the capital, people leave, people quit, kinds of things go wrong, and incentives go wrong. Managers and PMs like me get too big for their breaches. We think we walk on water when things go right and then we make bad decisions because we think you walk on water. So creating environments where people can say Soo Chuen…
[00:35:47] Tilman Versch: You’re wrong!
[00:35:48] Soo Chuen Tan: You’re being divisive, et cetera, delusional. You’re being delusional. Creating those conditions is really important. But even with all of that, right, creating even with all those conditions you still know that it’s a fragile enterprise. Investment firms are fragile things. Even with all of that and get crisis at the level of humility. And by the way, we get crisis on the level of the way we run the firm. So we keep our expenses low. We’re quite humbled. This is the office. This is a humble office.
[00:36:18] Tilman Versch: I saw it’s true. But the chocolate cookies are great. So if you ever ask for chocolate cookies.
[00:36:26] Soo Chuen Tan: The office is humble. I think we tend to say, look like, kind of, you operate in an environment where there’s a lot of uncertainty and you’re trying to do something over the next 50 years. A lot of things are going to happen, and you just need to be antifragile and you need to be able to cope with good and bad times. You need to have a good kind of approach to do it. You need to be patient. You need to be resilient, you need to deal with assets declining, things changing, et cetera, that’s going to happen, they’re going to deal with being wrong. And then kind of, then what I said before, learn to enjoy the journey. Learn to enjoy not just the good times, but the bad times. And that increases the odds of us actually being resilient and being able to last through the times.
Learn to enjoy not just the good times, but the bad times. And that increases the odds of us actually being resilient and being able to last through the times.
And one question I like to ask a lot of our folks is to name investment firms that have been around for 50 years, just name them. Not that many. It’s not zero. So it’s not that many. And imagine the power of compounding. So even if you compounded 10% a year for 50 years. You should get very large numbers even from our assets today. If you compound for 50 years, we’ll get to 200 billion masses in 50 years. But how many investment firms have 200 billion of assets compounded at even 10% for 50 years? You don’t see them it’s because it’s hard, it’s a hard thing to do. So anyway, the cockpit and our business are very, very, very quick. It’s a very competitive business. So anyway, I don’t know whether that answers the question.
Enjoying the bad times
[00:38:03] Tilman Versch: How have you learned to enjoy the bad times?
[00:38:07] Soo Chuen Tan: Yeah. So I think the big part of the answer is to be intrinsically motivated by the craft itself as opposed to the outcome. So going back to mentorship when folks ask me, hey, what should I do as a…? My advice… this is not original advice. It’s the advice that a lot of people have is to find your passion. Find something you’re passionate about, something you actually enjoy, something that even if you’re not picked to do so, your free time, what you actually enjoy doing.
My advice… this not an original advice. It’s the advice that a lot of people have is find your passion. Find something you’re passionate about, something they actually enjoy, something that even if you’re not picked to do so, your free time, what you actually enjoy doing.
Tilman, you found your passion. You’re doing something that you’re enjoying, I think. And that’s true for everyone. If you find something that you enjoy, you enjoy doing it regardless of what the external signal is. For example, value investing. Value investing has been out of favour for a really long time. So for many years, people talk about the death of value investing. It doesn’t work anymore as it turns, right? But if you kind of look at the craft of value investing and I love value investing, I love the craft of it, the discipline of going through the process of figuring out barriers to entry in businesses and understanding and figuring out a margin of safety, figure out what can go wrong. That’s not necessarily rewarded at a time when the markets are very frothy. Figuring out outside underwriting what can go wrong, learning about lots of businesses over a 20-year period.
But if you’re actually motivated by the craft, you’re motivated by kind of understanding the business better and then sending them got better, et cetera, then that is the reward in and of itself. It’s not what kind the external kind of drivers are. And if you do that and then the rest of the craft building a team, building a culture and building relationships with CEOs, getting to know them better. If those things, the inputs are what kind of makes you kind of, what drives you, then it’s much more likely that when you go through bad times that you don’t go forget about it or I don’t want to do this anymore or, you know, the team breaks down because people don’t want to work together anymore et cetera because it’s about the craft. And by the way, what I’m saying is probably true because I’m a big tennis fan. Federer just retired, and Serena Williams just retired. I don’t know them, but it’s probably true for them. Like, why do they keep doing what they’re doing? It’s because they actually genuinely enjoy the sport. Both of them had careers of more than two decades. At the age of 40, and 41, why keep doing what they’re doing? Because they enjoy it, I think. I’m projecting though, but I think.
Finding the right investors
[00:40:56] Tilman Versch: How important is it to like, how have you felt when building your business about the investors you want to win and how important is it to get the right investors?
[00:41:08] Soo Chuen Tan: Yeah. So important. I think it was probably the most important thing. And like I said, one of the things that we’re most proud of going back to is investment partnerships being fragile, you can walk around and say, I want to invest for 20 years. When you have capital that’s very short-term, it can be pulled at any time, right? So and I knew that. So when I started the firm, I said I really want partners who think who are like-minded or generational partners who, you know, Buffett says that my favourite length of partnership is forever. And that was really important. Now you can say, I want a long-term partnership. You just can’t demand it. You have to earn it, right? Earn the trust of the people that you want to be partners with.
Now you can say, I want a long-term partnership. You just can’t demand it. You have to earn it, right? Earn the trust of the people that you want to be partners with.
So one of the things that I’m glad we did is to be very, very slow in building these relationships. It wasn’t like, oh, give me money. He has the check, go wire it. But it’s building relationships. It’s building that trust and getting to know each other better. And if someone was too quick in saying, okay, I want. You slow it down and say, hey, just make sure we understand kind of what we’re doing here. And then after that, continue to earn their trust, right? So trust is not built in a day or even a year. We have partners now that have been with us for 10 years or more.
You have to earn the trust every day. And not by saying, by doing. Your actions speak a lot louder than your words. And so I think the proof is in the pudding. We’ve been rough for 12 years. We have had good times and bad times. For example, in COVID, when things were selling off, we had big drawdowns, we called capital and all of our partners fund it. So we were able to deploy a lot more capital to work. But there are times when things are not cheap and we say, look, things are not cheap. We’re going to give back capital. We did that in 2018, for example. And so it kind of, we behave in a way that is all about investing. And people reciprocate, right? So that’s I think that’s so important. I don’t think we would be around today if we didn’t have the partners that we do. We could have blown up many times over the last 12 years. But here we are.
[00:43:28] Tilman Versch: So how much capital do you already have given back or like what percentage? Maybe if you don’t have a lot?
[00:43:34] Soo Chuen Tan: In 2018, we give back 30% of the capital that we had in the main fund. But obviously, we give it back with the right to call it back because we went into capital commitment pools and we’ve called it back, right? Because there have been investment opportunities since and obviously now, we’re a lot bigger than we used to be. So we’ve had a lot more net inflows beyond the capital that we would give back.
[00:44:04] Tilman Versch: I think if you think about edge as an investing firm when I studied your approach have been some of the edges come from knowledge of Southeast Asia. Let me dive a bit into this. What does the common investor usually get wrong in their perception of Southeast Asia?
[00:44:25] Soo Chuen Tan: Yeah, I don’t think that edge is just an interesting question. I don’t think that we necessarily actually have an edge in Southeast Asia. I’m Southeast Asian, but Southeast Asia is a big place. There are many countries. And so I think it’s too easy to say, hey, I have an edge there. I’ll talk about the edge, and I’ll talk about Southeast Asia. I think our edge if you ask me to go to name an edge I think is a few things. So one, we do kind of what sorts of other people do or are willing to go around the world and kind of with these companies that may not be so well-known. And what interested me in looking at them. Two, it’s about time for arbitrage, right? Having perspectives that are truly long-term perspectives and truly mean it when we say we want to invest in the long term often allows us to take advantage of dislocations. Three, we have mental models that are different. We look at the structures of businesses. And so now the clients, when we analyze a business are different from others, just simply because of the perspective of time. Four, we have price discipline. So we are value investors. We’re proud of it. We always don’t want to pay up for businesses. Again, there has been a little bit out of favour in recent the idea of looking for bargains. We look for bargains. And that discipline of not overpaying I think is quite helpful as an edge.
Five, psychologically, being a value investor means being contrarian. So it’s in times like this, you play offence you’re not afraid, you don’t freeze up, you buy. And the opposite is when things are really good, you get fearful. You say, okay, maybe I should give back capital, maybe I don’t want to chase this. Maybe this is not an environment to be a hero. So just being psychologically wired to be a value investor, there’s a certain level of delayed gratification in that. You may remember the marshmallow tests or what the Mitchell people who give the kid one marshmallow that kids are able to sit on their marshmallow and then consume for the whole recess and get to the end of it, that the ability to delay gratification, I think is so. And six, we talk about partners, our LPs, they help us punch above our weight because they’re big networks, they’re very sophisticated, they’re very thoughtful, they’re very partnership-minded, it’s just an unfair advantage. So I think those… that’s the edge. Now, let’s talk about Southeast Asia. So I mean.
[00:46:42] Tilman Versch: Let me reframe my question. What role does Southeast Asia play in the development of your firm?
[00:46:47] Soo Chuen Tan: Yeah, So Southeast Asia is where I grew up. I understand I kind of grew up in Malaysia. When you grew up in small countries. You look out. So when you grow up in a big country, you don’t actually have to look out. It’s kind of America as a continent, the power, you can live in the states and be perfectly fine. When you look out, you have a different lens through which you look at the world. When I’m in Malaysia, you kind of read about all these countries, and you learn about all the licenses. You look like you worry about big neighbours. You worry about a lot of things. You grow up in a developing country where things are changing quickly. You see how an economy moves when it’s kind of low income and in middle income and the structure of the economy changes. You see how the structure of business has changed from family-owned businesses to corporations, et cetera, right?
So you have a different perspective. Effectively, you have an emerging markets person perspective of global capitalism. You also have an outsider’s perspective on culture. Cultures are different even from country to country. Southeast Asia is not one place. It’s many different places. You can have the different histories of the Philippines or Indonesia, Thailand or Cambodia or Myanmar. And then and then you see how things change. When I grew up in Malaysia it was a very different place. You walk outside of my house; you see rice fields. It’s farming, right? We have mosquito nets to go to bed because otherwise most mosquitoes kind of feast on you when you sleep. But they kind of now rolls back the clock. You go back to my hometown; it looks like a different place than the country has developed there are more paved roads and more kinds of industrial industries.
There are more commercial buildings, there’s tourism, et cetera. So you realize that things change and that things develop and wealth gets created a lump in so good in bad times. So, it gives you those perspectives and it gives a perspective on cultures. So I’m actually ethnic Chinese. My grandparents came from China, so even within Malaysia, I’m an ethnic minority. It’s not the main culture. You see different cultures and different ethnic groups. You see the kind of life of a diaspora in a particular country. So going back to investing, what that tells you is that we’re not Southeast Asia specialists. I don’t hold myself as a Southeast Asia expert. We don’t have lots of investments in Southeast Asia and elsewhere. But that perspective of looking at cultures in this specific context and history and et cetera I think it’s helpful. It’s helpful everywhere you go. It’s helpful in South Africa, it’s helpful in Brazil, it’s helpful in Korea.
Attractive markets to invest in
[00:49:32] Tilman Versch: What are the most attractive markets than for looking for opportunities in your eyes?
[00:49:37] Soo Chuen Tan: So we like to own companies, not markets. So it doesn’t matter where the companies are. If you own a really good business with a good management team sitting on it, it can be the toughest market and the company would still do really well. And we’ve had so many examples of that. We own a company in Turkey and I’m not going to name it but you know we’re big fans of them. Good CEO. Tough, tough, tough environment. You know Turkey is in a tough economic environment.
[00:50:09] Tilman Versch: Inflation of 80% or whatever?
[00:50:11] Soo Chuen Tan: Yeah, I mean, it’s not easy. His job is not easy. He’s done a really good job. And you can see the share price reflects that. So the stock market is not doing well. The economy is not doing well. The currency is not doing well, but companies are really well. It’s a good business, not just good management teams. Structurally, it has a moat around the business. It’s a good business. So it’s not just that it’s all about execution. It’s about the structure of the business and a good management team. And you get a good outcome because of that. And it’s true everywhere, right? So our modus operandi is usually going to find these companies and find them usually when the markets are not very benign. Anywhere. Whether it’s Turkey, whether South Africa, whether it’s Greece. During the eurozone crisis, we were looking at investments in Portugal and Greece and Ireland. Today you have dislocations in Turkey and communications in other countries. So often you want to find these really good businesses when they’re not doing well, not when the economy is doing well.
So it’s almost the opposite, right? So going back to being contrarian. One thing to do to buy good businesses when they’re out of favour is required you to be contrary from a macro perspective. I mean, again, quoting Buffett. Buffett likes to say the best time to sell hurricane insurance is right after the hurricane. It’s the same perspective with investing in companies.
One thing to do to buy good businesses when they’re out of favor is requires you to be contrary from a macro perspective. I mean, again, quoting Buffett. Buffett likes to say the best time to sell hurricane insurance is right after the hurricane. It’s the same perspective with investing in companies.
Understanding countries when investing in businesses
[00:51:45] Tilman Versch: How much knowledge, for instance, on the example of Turkey or pick another example, do you take besides understanding the business besides also understanding the country specifics and the country risks your underwriting?
[00:51:58] Soo Chuen Tan: So we always do bottom-up. So you start with the business and then when you study the business, obviously, then you go to the level of the industry, right? Because the business doesn’t operate in a vacuum. So that’s an industry. So you have to understand the industry, you have to understand the regulations, you have to understand the industry, you have to understand the competition that makes it. You need to understand the ecosystem and then after that, you have to understand the economy, because the industry doesn’t operate in a vacuum, right? Any business.
If you study just to make up the business, you study the kind of beverages, you don’t sell beverages in a vacuum. You sell beverages to people. You sell so the economy matters. The composition of the disposable income. Where people shop, you know behaviour, consumption behaviours matter. And then you go, okay, then, of course, monetary policy, of course, you know, kind of trade policy, these things affect the economy.
So, but you start from the bottom up and you learn about the ecosystem from the perspective of… first the business and then, you know, upwards which is completely different from someone who says, okay, I like this country, I don’t like this country, I’m going along this particular geography, I’m going to go shop. That particular geography is a completely different lens. But at the end of the day, you can’t ignore the macro. And if the macro is back, then bake this into your numbers. See, the macro is going to be bad which should affect your earnings. That should affect disposable income, that should affect in the purchasing power of consumers, that should affect costs of businesses. It will ultimately be baked into your expectations of the cash flows of the business.
Meggitt case study
[00:53:39] Tilman Versch: Let’s move to an example of a company we want to discuss in this video podcast. We already had some conversations out there. We will link them up here so people can find them. You brought Meggitt with you, Meggitt is a UK company if I’m right. And what does the company do and why and when did you get interested in it?
[00:54:06] Soo Chuen Tan: Yeah. Great. So before I dive into it, again, quick compliance disclaimer. So our compliance policies restrict me from talking about specific performance, numbers, et cetera. And we’re picking one company, Meggitt, to discuss simply as an indication of investment approach, not for any other reason, just deliberately picking the example of investments that we’ve now exited so that it’s not something live or portfolio, et cetera. So it’s just a case study. We talked about kind of what we said about macro dislocations and that it gives us the opportunity to buy good businesses. This was a prime example of that. We bought Meggitt in March 2020 in the depths of COVID. And you can imagine it was very contrarian because Meggitt is an aerospace parts manufacturer, they make braking systems and other parts on planes, a small part from planes. You can imagine that that industry was going through an incredibly difficult time in 2020 because there were no planes flying. But going back to understanding microstructures, the business is stopping there. So Meggitt’s parts are very small. In total, all Meggitt parts come from 0.15% of the plane. So they’re very small. But if you know anything about kind of aerospace parts, these parts aspect into the plane, the FAA, for example, inspect passenger planes.
And what that means is everything you need to replace a particular brake. You have to go back to the specific manufacturer in the case of those brakes, Meggitt. More than 70% of Meggitt parts are sole source which means there’s no other manufacturer for the specific part. What that means is one spec into a particular platform. Every time you need a replacement, you can again go back to Meggitt and buy that part. And this going back the clock speed. The clock speeds of aerospace platforms are very low. A particular plane, the platform going to be like 20 years. The planes are going to be around for 20 years. What that means is that once inspecting the pot, you have a very good line of sight for the next 20 years, what the aftermarket cash flows are going to be. Now, it’s a really profitable business. operating margins are about 18%, so just under 20%. And the pre-tax return on invested capital ROIC on an unleveled basis is 20%. Which is actually very healthy for the manufacturing business. Twenty percent unleveled ROIC means if I build a plant to manufacture parts, I get my payback in five years. So and so a business that’s able to reinvest at 20% ROIC. This is wonderful. And if you find any investment firm that can reinvest 20% of compounded returns, that would be wonderful, too. So it’s the same when we find a business like that. Twenty percent ROIC is very, very healthy for a manufacturing business.
Now, importantly, Meggitt, unlike some other aerospace companies. Think about themselves as an engineering firm, there’s a culture and a DNA and the firm is an engineering firm that the CEO, Tony Watt, came from Rolls-Royce. And what that means is they reinvest a lot in R&D. So they keep coming up with new parts. They try to win RFP, they try to win parts in planes. Just to give you a specific number, ship set, the platform is about 1.7 X, which means as planes go from an old platform to the new, 70% more parts are on the new platform versus the old platform. And that’s very healthy. What that means is once I win all these parts in a new platform for the next 20 years, as the parts get replaced, I’m going to get a cash flow, right? So you have a very good line of sight. And that is in sharp contrast to other aerospace companies that often, actually, they’re roll-ups, they just bypass. They find out all the R&D, they find all the sales, and then they just raise prices. There’s no machine for winning business organically and Meggitt does, right? So we like the way Meggitt is run. They also run quite conservatively from a balance sheet. So net debt that was just under two times, so less than two-thirds and that at EBIDTA which means that in the downturn is antifragile going back to looking at a downside, you know if you don’t have a lot of debt, you can have a very tough economic environment and can still survive through it because you’re not going to blow up, you’re not going to go bankrupt. You don’t have bonds that become you. So you are quite antifragile.
So for all those reasons, we thought Meggitt was a really good investment. But of course in during COVID, the stock traded down 70% and we bought the business well, nine times earnings. It made up earnings for a business that had 20% ROICs and you know. And it goes to what we’re talking about. It’s all about time arbitrage. Obviously, stepping into the breach and buying an aerospace company in March 2020, when no one knew when trouble was going to come back. No one knew whether there was going to be a vaccine. So we could have been in lockdown for two years, right? Remember in March, there were, I mean, in the metro area, there were ships parked in New York to become makeshift hospitals because we ran out of hospital rooms in New York City. So it was a very difficult time. There was a lot of uncertainty. We didn’t know what was going to happen. Meggitt didn’t know what was going to happen. The CEO and the CFO didn’t know what was going to happen. You talk to them and it was very, very stressful for them during that time. All of us are stressed. It’s not like we knew, you know. But because we knew that this was actually a really good business, with very high ROIC through cycle economics and in a downturn had the balance sheet to withstand the difficult times. It gave us confidence and took the playoff. So we end up buying a lot of the stuff. We ended up buying 2.2% of the company. We became one of their largest shareholders.
And then we began to build a really good relationship with the management team, kind of, Tony Wood, the CEO, is someone we’ve come to respect and we knew that it was going to be tough. We didn’t know things when things are going to recover. But we thought that was okay. Because over a multi-year period the business would have been fine. So that was the thesis. Obviously, what we didn’t know was how quickly things were going to recover. We didn’t know the vaccines were going to happen. We didn’t think that if that was going to print as much money as it did, the costs kept the markets recovering so quickly. And then, of course, we didn’t know that Parker-Hannifin was going to make a tender offer for it, but it did. So a company tended for Meggitt eight pounds a share. Average cost us 2% change. So there was a kind of big premium. And Meggitt is now being taken out. And so it turned out to be a very profitable investment for us but obviously, at the time, the thesis wasn’t always going to be taken out. It’s all there was no catalyst. It was just owning a good business with a margin of safety. That could reinvest capital at 20% ROIC. And we thought that was very attractive.
[01:01:03] Tilman Versch: It sounds like you turned around a lot of stones to get to this level of knowledge on the company and the business.
[01:01:10] Soo Chuen Tan: Absolutely. I mean, that was the only aerospace company that we bought, right? So we understand the entire aerospace ecosystem. But we didn’t buy any of the other companies flying by Boeing or Airbus. We didn’t buy any airlines. We bought Meggitt because we thought that was the best company to own through a difficult time and the valuations were very, very compelling.
[01:01:35] Tilman Versch: Can you maybe walk me a bit through the research process you took on to get to this deep knowledge?
[01:01:41] Soo Chuen Tan: Yeah. So the research has to be done way before the investment. So we study aerospace businesses way before Meggitt, way before we became shadows of Meggitt. So just a little bit about a research process we call our research process Peacetime Process. A Peacetime Process is a process where you’re learning about a business. You’re not making an investment. A Wartime Process, or when you’re actually going to make the investment. So you have to sharpen your pencils. You have to kind of make sure that your models are tight. You do the balance sheet. At Peacetime Projects, you’re just studying businesses. Most of the time, we do peacetime research, not wartime research. Because most of the time. We’re not making investments. Daily investing is again an exercise in patience. You sit around, you sit around, you do nothing, you do nothing, you do nothing, and you find something you like, you make an investment. But that’s very seldom for us. So most of the time we’re doing peacetime research. So going to Meggitt in aerospace in general, we’ve studied the aerospace ecosystem. You understand the rhythm at which pots get specked into planes, the rhythm at which kinds of platforms get built. And we study the clock speeds of platforms and kind of understand the ecosystem of tier one, tier two, and tier three.
And we understand both the civil kind of ecosystem and the military defence ecosystem kind of military defence, the rhythm of contracts, and the final act which is a trust and negotiations act. How Meggitt and other aerospace guys work with kind of the Department of Defence, et cetera. So, you know a lot of that, not just with this business where every project requires kind of two parallel streams of research. One is scuttlebutt, obviously, talking to competitors, customers, suppliers, et cetera. A lot of people do that. We do that. But the focus of our question sense to be more structural, just on the incentive structure of the business. Longer-term trends around the business, competitive dynamics, game theory, et cetera. So we’ve done that across the ecosystem. Doing scuttlebutt gives you a little bit of a composite picture of the business. But I like to describe it as a picture. It’s a still picture. It’s not a movie. It’s a picture. Because by definition, when you’re talking to people, you’re talking to people at a point in time. So you kind of develop a perspective at a point in time.
What we then also do is get very long data series about the industry, about prices, about volumes, about changes in the composition of the pots. And that’s data and data gives you not just a picture, but a movie, because it takes you back in time. And if you just talk to people. You lose the perspective of history. And so we kind of went through the data for the industry and all the parts and volumes and prices, et cetera, of different competitors and across different platforms. And that kind of gives us a sense of how the industry actually works over a long period of time and marrying the two that the scuttlebutt and that data helps us get a picture of the business. And then it’s getting to know management teams and kind of understanding the cultures of different businesses, how people make decisions, et cetera. So all that work was done way before we became shareholders, and we never knew whether we were going to be shareholders or not because it depends on price, it depends on like I said, we are quite price disciplined. So the fact that we like a business doesn’t mean we like the price for it. We won’t pay any price for a business. We believe that it’s a fair price for every business. And so you need to wait for times when prices come to you. And it’s usually during times when a business is not doing well and the macro is not good, and then we get to become shareholders.
[01:05:30] Tilman Versch: Is there any method or tool you use where you sometimes wonder why not many of the investors use this method or tool to research companies?
[01:05:41] Soo Chuen Tan: The short answer is no. I don’t think that we have any superpowers. I think that investing I wouldn’t.
[01:05:49] Tilman Versch: I would call it a trick, not a superpower in this case.
[01:05:52] Soo Chuen Tan: Yeah, I don’t think that there are any tricks. I think that investing is a super competitive industry. Everyone’s very bright, everyone’s very hardworking, and everyone’s very motivated. I don’t think we have any special tools or any special skills. As I said, I think where we’re different is things that may not have anything to do with us which is one we’re willing to tunnel with a lot of stunts in different countries, right? So other people can do it, too. But kind of not everyone does because I think we tend to think very long term. That’s a habit. That’s a skill. It’s like, what does this business look like in five years? What it look like in ten years? Other people can do it too, but actually hard to do because then you need a length of capital to do that. So, for example, buying Meggitt, I think most people will agree that it’s a good business. It’s not just us. I think very few people would be willing to buy Meggitt in the middle of COVID when there were huge amounts of uncertainty about what earnings power is going to look like in a year, maybe two years, maybe three years. So the ability to think long-term about a business gives us the advantage there.
And then having the partnership is to say, great, buy more. Go buy more and increase down by even more. Big drawdowns are fine. We’re going to take that risk, et cetera. These are structural advantages that are harder to replicate. Now on the business analysis itself, I think sometimes we do come up with differential insights on businesses. They’re not actually that common, but they usually come because you have the luxury of thinking about structures of businesses over longer time periods than other people, and we have more time to do that. So anyway, I think those are the advantages. If there’s any one superpower that we have it’s neoteny. Neoteny just means arrested development. You act like a child. So we look for people with a childlike passion for investing. So we’re all adults. But the idea of still looking at the world like a child, being passionate about all learning about things. You remember when you’re a child, the world spreads out before you with wonderment, right? So everything’s new. Every experience is new. You’re so curious about everything you ask a lot about. Otherwise, if there’s any special superpower at Discerene or it’s not any, it’s just being passionate about learning. And that’s not a special skill. It’s not a special trait. But it’s a perspective on the world that allows us to keep learning. And if there’s anything that I would call a superpower, it’ll be that.
If there’s any one superpower that we have. It’s no telling. No telling just means Arrested Development. You act like a child. So we look for people with a childlike passion for investing. So we’re all adults. But the idea of still looking at the world like a child, being passionate about all learning about things. You remember when you’re a child, the world spreads out before you with wonderment, right? So everything’s new. Every experience is new. You’re so curious about everything you ask a lot about. Otherwise, if there’s any special superpower at Discerene or it’s not any, it’s just been passionate about learning. And that’s not a special skill. It’s not a special trait. But it’s a perspective on the world that allow us to keep learning. And if there’s anything that I would call a superpower, it’ll be that.
[01:09:00] Tilman Versch: Do you also then look for management teams that are like this, that are curious like a child, or what role does the management team play for you generally in underwriting a business?
[01:09:12] Soo Chuen Tan: Yeah, I think that’s a wonderful trait when you find it in anyone, including management teams. To be fair, not all CEOs think that. I think CEOs have different drives and different passions. We’ve met very different CEOs in our life. Some CEOs are really passionate about the thing itself, really passionate about the business, the engineering of a business. A CEO of a car company can be very passionate about the car, the engineering of the car, et cetera. Some CEOs are driven by other things. Some CEOs are driven by one thing to build a culture they’re proud of. Some CEOs are frankly driven by economic success and financial success. Some CEOs are driven by the recognition of their peers. Some CEOs are driven by the mission of an organization. So different drives and different people are different. Sometimes it is a combination of things. Understanding what drives CEOs and business leaders is a fun activity.
We pretend to be armchair psychologists and read the minds of the CEOs that we’re partnered with. Here’s the thing about driving. Whatever the cost of the drive, whatever the cost of motivation of a CEO, it can change over time.
Here’s the thing about drive. Whatever the cost of the drive, whatever the cost of a motivation of a CEO, it can change over time.
So if someone’s driven by financial success or recognition for others, that can change whether or not you achieve it. Maybe you don’t achieve it and then your drive changes and maybe you do achieve it, and also the drive changes. All right. So either way, the motivations of people can change. That’s true for someone who wants kind of a sense of mission, someone who wants to make a change in the world. You’re driven by some idealism that drives can also change. Your life circumstances can change. You can come up with personal tragedy. You can experience something in the family where your priorities change and your perspective changes regardless of what kind of driver of someone can change. So meaning purpose, drive, what makes us do what we do, and what gets us up in the morning. For all human beings is something that’s dynamic and can change over time.
Allowing thesis change
[01:11:23] Tilman Versch: Coming back to change. And the original thesis, when you invest in a business, how much thesis drift and thesis change do you accept when underwriter security and how do you keep track between the original thesis and the changes in this range?
[01:11:40] Soo Chuen Tan: Great question. That is one thing that I think we also pay quite a lot of attention to. For us, a thesis is a thesis. It must be able to be disproven. So a thesis is a statement where you can go right or wrong. If a thesis cannot be disproven. It’s not a thesis, it’s religion, right? So and so when we express our thesis, we try to do it. Where there’s a null hypothesis and then that’s, that’s you can discount from the null hypothesis, right? And then we revisit it. I’ll give an example, right? If you say a business has a positive externality that creates a positive feedback loop. So scale begets scale to get scale and you can create winner take all dynamics. If that’s the thesis, then you should see that it should be gaining share over time. It has to. As it gets bigger, it has a positive externality, positive feedback. Look, you cannot just say, oh, it’s growing and everybody’s growing and kind of it’s fine. It has to gain a share. If it doesn’t gain share, it’s disconfirming evidence about positive feedback. Look, this is actually very hard to prove the thesis as it’s much easier to disprove the thesis. But yeah, so looking for the empirical evidence that would disprove your thesis. And if this proves it, you have to go back and say where was I wrong? You have to have that intellectual honesty.
[01:13:03] Tilman Versch: Where do you see the borders of like… saying, okay, I’m wrong here or this is changing to something that’s acceptable or changing to something that’s bad?
[01:13:19] Soo Chuen Tan: Yeah. So we’re often. So quite often investing is quite humbling. So the question is when is it acceptable? It goes back to what you impounded in your expectations, right? What is wrong in both directions? Sometimes businesses work out better than we thought and in a way that we don’t expect. And we’re wrong if our thesis is X and it works out and the business evolves into something and it’s better than we thought was still wrong, right? Now in those cases, you go, we’re lucky. So it’s better than we thought. We didn’t expect that. It’s not what we model our numbers out just very different because, you know. Of course, this is acceptable, right? So great. It’s actually better than we thought. And here’s why. And this is what we miss, and we learned something from it. The other cases were we’re wrong because the macro environment was different from what we thought. So we modelled something and then the macro environment is a lot worse. So you have to take the numbers down because the macro environment is worse. You didn’t expect a pandemic and then there’s a pandemic and cash flow. You have baked in your numbers. And your DCF changes.
But then the stock price may also change, and you go, okay, at this price, it’s good. So that’s fine. What’s not fine is when you have certain theories about the structure of a business. The moat around the business, a competitor that is kind of et cetera. And it turns out not to be true. It tends not to be, and you go, okay, well, I thought through cycle economics, also X and Y, and it’s because of this thing that I miss. And then you have the sale, right? Or people kind of say this is a management team. I trust this a CEO that I trust, et cetera And the CEO does something that you go, oh, it’s discomforting evidence on that, then that is not acceptable. Obviously, it’s easy to describe. What I just said, but obviously, when you face facts and circumstances, it’s not always so clear-cut. And that’s where judgment comes in. But it’s really important to be able to articulate what it is that you’re underwriting and what this begins not underwriting.
Reasons to sell
[01:15:48] Tilman Versch: What are the reasons for you to sell then, besides the ones you already mentioned?
[01:15:55] Soo Chuen Tan: Yeah, so there are three reasons to sell. One is you’re wrong, you should sell regardless of whether you’ve made money or not made money, something’s wrong and we’ve made money right. And you’re lucky but you should sell. Two, we sell when something has gotten to our estimates of intrinsic value. So it’s not that cheap anymore. Prospectively, returns are not going to be good. So we do that. And three, we sell when there’s something better to buy. That’s actually very seldom for us. Again, we’re lucky that we have destroyed our structures. We can call for more capital if we want to buy something. We don’t actually have to sell something that we own to buy something else that we like, which is different from most public markets funds. So that third one is very seldom. It probably happens more now today than it’s ever been because we have so we have more investment ideas than we have capital. And so in those times you actually have to sell something to buy something. So at that time. You’re picking on your children, and you like all your children, but maybe you want to of children more. So you have to sell one to buy another. So that’s the third reason for selling.
[01:17:02] Tilman Versch: How long are the stocks staying in your portfolio? Like, how old is the oldest child?
[01:17:09] Soo Chuen Tan: The oldest is as old as the firm. That’s the first stock we ever bought that is still in our portfolio. So it’s 12 years. Yes, almost a teenager. I would guess that the average holding period is seven, eight years is the average time that we hold investments. And hopefully, as we get older, that average goes up. So, yeah.
Thoughts on Value Investing
[01:17:37] Tilman Versch: Maybe it’s one of the closing questions. How likely is it that I will find a high-growth stock in your portfolio if I ever could have a look at it?
[01:17:46] Soo Chuen Tan: Very likely it’s so it’s all about intrinsic value. So a company is growing really fast. You can do a DCF of that, right, like any other company. And if you get a big discount to that number, then it’s trading in a big discount on the intrinsic value and we’d love to own it. So especially, given the current market environment. The answer is extremely likely that you’ll find that because there are some very high-growth companies that are selling off very aggressively. And the good businesses. So why wouldn’t we own them?
[01:18:21] Tilman Versch: That’s a good point for the end. Is there anything you want to add we haven’t discussed in our conversation you find important for the viewers and the audience?
[01:18:32] Soo Chuen Tan: No. I think we covered a lot of ground. So I appreciate your thoughtful questions. And this has been a really fun discussion.
[01:18:41] Tilman Versch: I tried my best. Thank you very much. And thank you very much to the audience for staying ’til here. Bye-bye to you all. Bye-bye.
As another video. Also, here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we’re doing here are no recommendations and no advice. So please always do your own work. Thank you very much.