1. How and why did you get started investing?
There were two reasons: I was pretty shy, and I like the intellectual exercise of investing.
I went to it partly for the wrong reasons and wrong assumptions.
As a kid, I became really shy because of my physical inferiority complex being one to two years younger than my classmates. I thought that investing is something I can excel at without learning how to deal with people. This turns out to be untrue, as you need to be good with people in all fields.
Second, I have a mind that spins continuously, and investing seems to provide a good exercise for that.
I thought having such a mind was a comparative edge, which turns out to be half true. I learned later that you need a relaxed mind so you don't get shaken out of positions through paralysis analysis.
Since I did not belong to the right circle, my path on how I became an investor was unorthodox.
At 29 years old, I was lucky to be part of a large exit when GeoCities got bought by Yahoo. I then spent one year as an artist. Afterwards, I started my CFA program and got accepted to be a member of the ValueInvestorsClub.com. I won a couple of prizes for the best ideas award. I worked as an analyst, portfolio manager and later a principal for Ibis Management, which is affiliated with the family office of Andre Meyer, the former head of Lazard Freres. After working for eight years, I went out on my own.
What is your background?
I loved math and science. I competed in the Math Olympiads when I was in high school. I studied computer science and electrical engineering at UCLA. I was lucky to be the third guy at GeoCities, which was purchased by Yahoo for $3.5 billion. I then switched to capital allocation.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?
I have two buckets: First is an almost mechanical bucket where we select from a universe of spin-offs, rights offerings. The other bucket is somewhat of a private equity operator applied to micro public equities. The analysis would be more detailed.
3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?
I spent a long time studying the filings of Einhorn from 1996 to 2004, when his performance was astounding. I noticed he did mostly spin-offs. I noticed the same thing with Dan Loeb. SAB Capital also did a lot of spin-offs. There is a paragraph by Greenblatt that said something like, “Unless you are managing more than $200 million dollars there's no reason to go outside of spin-offs and special situations.” Based on these, I thought spin-offs were what I should focus on.
I am not exactly sure when, but eventually, Ibis, the family office I worked for, dropped the other strategies and focused only on spin-offs.
So Ibis is focused on spin-offs and my friend Joe D’Ambrosio, who runs it, still stays true to just focusing on spin-offs.
The spin-offs space has become more crowded, but it is still a good source of investing ideas.
Enterprise value to EBIT, return on equity and gross margins.
4. What books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? What investors do you follow today?
The essays of Warren Buffett (Trades, Portfolio), "The Intelligent Investor," "Security Analysis," the books by Marty Whitman, the books by John Train, the books by Peter Lynch, the books by Jimmy Rogers, the books by Jack Schwager and the financial history books by James Galbraith taught me a lot.
I view many CEOs as capital allocators and investors also. The biographies of Sam Walton, Walt Disney, Jack Ma, Henry Singleton Li Ka Shing (Hong Kong billionaire), Tan Sri Lim Kok Thay (Malaysian billionaire) and John Gokongwei (a Philippine billiionaire) also inspired me a lot.
5. How long will you hold a stock and why?
There is no specific holding period. It really is a case-by-case basis.
How long does it take to know if you are right or wrong on a stock?
Same as above. It is more important to set your system up so that you are free to admit a mistake one hour or many years after you bought a stock and not feel some kind of embarrassment after you did it.
6. How has your investing approach changed over the years?
Over time I learn to believe more in understanding the value of the people and the process of a business. In some ways it takes an operator to know an operator. That is the biggest lesson I learned. I noticed many pure investors could benefit from an operating experience.
7. Name some of the things that you do or believe that other investors do not.
There are two things that come to mind. I have an operator experience and I have experience in coding, machine learning and big data analysis.
Operating a company is like going to the School of Hard Knocks. There are so many things I have learned that I never really knew when I was managing money before the experience of operating a business. Looking back, I realized how idiotic my assumptions were.
I think my knowledge in coding and machine learning is an advantage in keeping management expenses low. I believe that except for activist or private equity analysis investing, bots will continue to disrupt purely passive investment management.
I am still searching for co-founders on building a company with people, process and product that will take advantage of computing power and disrupt passive money management.
8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?
There is a big difference between a favorite company and a good stock. Many good companies are expensive. I think Amazon, Costco has a great culture. The best way to judge the quality of the management is the track record. Interviewing the people who work for them. Chemistry, amount of time they have worked together are also good indicators.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
Yes I do. Those methods are constantly changing because the minute they become popular they become less effective. I think enterprise value to earnings power is a good metric.
10. Name some of the traits that a company must have for you to invest in, such as dividends. What does a high-quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.
There is a very big difference between a very good company and a very good investment. Some of my best investments were actually very bad businesses. In some ways, you make your money at the price you buy it at.
Believe it or not, you do not need Bloomberg to get a lot of good data. AAII and Google Finance have some good APSs that can provide lots of data for screening.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard-cut rules?
I believe in checklists but not static checklists as the ones suggested by Atul Gowande in his book. I also believe that the checklist is constantly changing because investing is also a behavioral science composed of people who are adapting as well. You need a changing checklist to balance the voting machine and the weighing machine.
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
It is always good to talk to management. But when you talk to management, it is important to know and try to avoid the psychological tricks that you can fall into when talking to a charming person. It is always good to understand how that industry is analyzed. Ideally, he would like to analyze it as if you are a private equity buyer buying the business. Private equity buyers have a thick due diligence packet. The closer your research resembles a due diligence packet, the less chance that you will make a mistake.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap?
You have heard of the three Ps by Long Leaf Partners. I use the four Ps: price, people, process, products.
Does the company have the right people, process, products? Finally, is it at a good price?
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
Some microcaps are cheap even after assesimg the lack of qualitative issues. I like digital ad tech or marketing space, financial services and consumer brands.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
By some metrics such as Buffett's GDP to market cap ratio, the market is overvalued.
My biggest macroeconomic concern is I cannot convince myself that our society will be able to replace the jobs lost to automation fast enough.
The percentage of jobs that will be replaced by automation next few years will be so high it's scary. Fifteen to 20 million truck drivers are going to be replaced by self driving trucks. This means the fast food chains, hotels, motels and even the strip clubs along the highways will also be affected.
Of course, jobs will be needed to build the new infrastructure to build the recharging stations.
However, just as how Netflix obliterated Blockbuster in a step down vertical curve, or how Amazon obliterated Borders Group in a step down vertical curve, automation is going to disrupt a lot of businesses in a step down vertical curve. This means unless we can retrain our people with digital skills fast enough, it's going to be very hard to replace the unemployment. I have heard some really idealistic scenarios but I am more on the skeptical side.
As a coder myself, I am convinced we will not be able to transition the majority of our people to think digitally.
We may end up with a universal basic income like what Sweden is proposing. Whatever it is, I think we are headed for massive disruptions.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
Lately, I have been reading Chinese language books to improve my Mandarin. I enjoy the biography of Jack Ma and also the business books published by Singapore and China. The most important lesson I learned is that China is NOT the Commy Jungle where there is nothing you can do. China is going to be an economic and military superpower sooner than we think.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
Two things: Know yourself through psychological testing or having a coach. Coding will be a very important skill for now and in the future. Whether it is python programming or R, a programming knowledge becomes very useful as investment management becomes more digitized. Three, learn Mandarin if you get the opportunity to do so. Four, read history books, both financial and military history.
Being fast at arithmetic is important. Having a good memory is important. Having the right psychological wiring is also important. Learn to love reading and enjoy it.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I like the community messages at ValueInvestorsClub.com. I used to piggyback investors but not anymore.
19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?
My biggest mistakes were following investors with a halo effect and giving them the benefit of the doubt. I followed Mohnish Pabrai (Trades, Portfolio) into Star Gas Partners (SGU) and I followed Warren Lichtenstein into BKF. I followed David Einhorn (Trades, Portfolio) into M.D.C. Holdings (MDC) after an Ira Sohn conference. I followed some Asian money managers in microcap names that turned out to be roach motels such that up until this day, I can never get out of. LOL.
I blame myself for all these mistakes and let it be known that all of these hallowed investors are still my very good friends and I respect them tremendously.
I finally put signs of "never be influenced" on the walls of my room and tell my wife to remind me of that once in a while.
Occasionally, I still make the mistake because I am a glutton for punishment.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
Meditation, going to mass, having a coach -- all of these help.
21. How does one avoid blowups in value investing?
You never. Concentrate enough so that you give yourself a chance to outperform. But diversify enough so that one blowup does not kill you.
Unless you are [Bill] Ackman, who has a penchant for marketing, you cannot keep having one stock funds end up being mistakes, and keep raising more money.
22. If you are willing to share, what companies do you currently own and why? How have the last five to 1- years been for you investing-wise compared to the indexes?
I recently started building a portfolio again after a planned hibernation (see below). I would rather not share my positions as they are illiquid and I may sell them or buy more of them at any moment in time. And I would feel I would owe you a call to let you know in advance if my positions changed, if I shared them here.
With that caveat aside, I know a stock pick makes an article more interesting. If you are not opposed to them morally, you may want to look at the cigarette companies - Philip Morris (PM, Financial) or Reynolds (RAI, Financial). Those companies have trounced the indices long term if you can just sit and hold. It is liquid. It has been said that a famous economist held only Philip Morris in his life and he did 17% a year, compounded. It is not bad considering he did not do any more work after buying it. One can argue that Tom Russo (Trades, Portfolio) and David Winters (Trades, Portfolio) built their asset management businesses around these tobacco stocks. I am curious how their portfolios would have done if you took away the sin stocks in their portfolios.
In the last five years, I was developing my operating skills in the digital tech industry and China/Southeast Asia sector, building a network of operators and relationships in the private equity industry. I purposely did not manage outside money so as not to become unfocused.
As a result, in the last four years, I put most of my passive investments in the indices and Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), to save time.
23. Here's a fun one: What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
Haha, fun. Buffett, Benjamin Graham and Ed Thorpe are my Western heroes. I have also many Eastern heroes like Jack Ma and many ones not known to the Western world.
I learned after many years of trying to be someone else that I have to be me: unique to Mike Onghai who grew up with a different background, culture, make-up than my heroes.
With that big waiver aside, let us join the fun. I think '50s Buffett or Graham might be interested in looking at some of the net-nets like Richardson Electronics (RELL). It has some voting control issues but may be considered a net-net.
