Coffee with FFN and Wan

Wan Hsin Hun, a Singaporean full-time investor, previously held positions as a business and markets journalist in regional private and global public companies, following a post as a government political analyst. He also held jobs delivering goods, manning the cash register, and serving food, aside from doing military service. Asset ownership and accumulation, the reinvestment of profits and cash flow, as well as sound personal finance, he says, are the key engines to wealth generation. He thinks the freedom to choose one’s time commitment, owing to greater financial freedom, is one of life’s greatest luxuries.

FFN: At what age did you get started in investing?

Wan: I started active equity investing at 30. Before that, my savings were in cash, insurance growth plans, and a small number of shares which my mom asked me to buy and keep.

FFN: How did you get interested in investing and who inspired you to get started?

Wan: A desire for much better yield for the cash I saved from being thrifty as well as an eagerness to apply all that I learned about businesses and markets through broad work experience, careful observation, relentless reading, and interviewing traders and business leaders – led me to investing.

I have long had a natural interest in businesses and markets, as well as global developments. Investing has allowed me to translate my assessment and understanding of what the world is like, and what its future will be, into returns from the market. At the same time, I wanted to own assets from which I could enjoy passive income and/or capital gains.

I thank my mom for taking me to open my CDP and trading accounts, and introducing me to stocks. She was not into the investing homework that we speak of here and would buy what others said were good stocks. Nonetheless, she was financially prudent – a trait I inherited. Also, from our insurance growth policies – something which she initiated, I first witnessed the magic of compound interest, before I further studied its incredible power when I took personal finance and investing seriously. I, in turn, led her and the rest of my family to proper stock investing a few years later amid the 2008-2009 crash.

As for the billionaire investors, star fund managers, renowned traders, and influential investment authors, as well as fellow investors who inspired or guided me, there are just too many to mention in one breath. I am similarly thankful to them for their selfless sharing and strong encouragement.

FFN: What was your life like before investing and how is it now?

Wan: Investing changed my life. It enhanced my financial security, enabled me to pursue a passion that generates income, and opened my mind to widely different asset classes – notably equities, and gave me an avenue to apply and test my financial and non-financial skills and knowledge. In the last three years, it freed me up from the regime of corporate life, and permitted me better control of my time – the most precious resource anyone has. The time freedom is priceless.

I still maintain a full schedule, but on my own terms – not an employer’s. Nonetheless, I am fortunate to have secured jobs that I loved and which sharpened or equipped me with many of the skills that I would apply in my current career, such as handling massive information, in-depth research, and rigorous analysis. This does not include seeing the difference between the public and private sectors, large and small organizations, and the vastly different types of people in each industry.

There has been great satisfaction seeing and harvesting the fruits of my investments, particularly when they were the results of contrarian and highly unpopular positions in the market. Apart from satisfaction with the monetary gains, I feel vindicated that my analysis and calculations were proven right.

Through investing, I also looked more deeply at myself, noticing how my emotional discipline, contrarian streak, as well as abiding interest in the subject, gave me a strong edge. In addition, having to run my own show meant developing my own processes and systems, refining my work habits, and maintaining focus and dedication. Aside from portfolio growth, investing has demanded my continuous growth in diverse learning and being on top of what is going on in the world.

FFN: How do you choose which stocks to invest in? What are some of your strategies?

Wan: Prospect and management are cardinal considerations. There is little reason to invest in a dying trade, sunset industry, or shrinking market. Declining demand works heavily against any top management. It is very challenging for even good managers to steer away from a declining sector towards a growth area. So, is the industry’s best days ahead or behind? Do the poor quarterly/annual results reflect the beginning of a long downtrend or is it just a temporary downcycle while there remains plenty of business promise? Or, if the business looks marvelous now, has it reached the height of its industry boom?

Next, the financial figures reported are only as good as the management is willing to be honest. We can talk about the numbers, but who is providing them? What kind of people are we dealing with here? What do they really want for themselves in running a listed company? Can we trust them with our cash? Trying to get to the back of their minds is critical. Without outright fraud, there are many things owner-management and boards can do that are detrimental to minority shareholders – withholding meaningful dividends while paying themselves high salaries/fees, taking dilutive action on the shares for no justifiable reason, making high-priced acquisitions of low value, and attempts at delisting and privatizing the company on the cheap – just to name a few. Even if there is a management-minority owner alignment of interests, is management actively growing, innovating, unlocking value, and willing to share the proceeds? Some are overly comfortable or conservative – preferring to do the same thing year after year and leaving company performance largely to global economic outcomes, while there are other management teams that take excessive expansion or investment risks. So, what is their track record and is there a credible strategy? These are but some questions. Hence, if the company’s business future is bright and that the management is reliable, there should be a story.

In terms of strategy, I cannot overemphasize the importance of understanding the business. While most people who buy into stocks hardly research the fundamentals, many of those who do often make a call just based on its most recent set of financial numbers and news, with little understanding of its business nature. Is a high P/E ratio necessarily bad? Is a high ROE always a good thing? Are businesses with thin margins not worth investing? Does trading below NAV/NTA mean a good buy? Is zero debt and no gearing always desirable? Do high dividend payouts equate to good management and good value for shareholders? It all depends on the type of business, what recently happened, who is running it, and where is it going. Familiarity with the investee is critical if a good portion of an investor’s funds are to be put into it for a long time. The more I invest money in it, the more I would need to invest the time to know about it.

Quarterly results and financial ratios also do not usually show things such as brand value, customer base size and market share, the depth and worth of the distribution network, and management team talent. Moreover, could the impressive reported numbers be the result of one-off items or fair value gains?

A business may be classified under engineering but be more service-based in nature than being a fabricator, while a retail name may be getting more revenue from its property than its brand name suggests. Therefore, know the business and company, its rivals, and the industry. Grasp the dynamics and economics that affect it. Even after thorough research, I usually only understand a company very deeply after one or two years of owning it. Furthermore, meeting management is a significant part of my strategy. What they reveal or refuse to reveal in person, about themselves or the business, is infinitely more valuable than the press releases they can issue.

In addition, correctly identifying the appropriate counter for one’s investment or trading aspirations is consequential. Expecting a major blue chip to rise multifold within a short time or desiring high, sustainable payouts from a small cap with unstable cash flow is unrealistic. So is attempting to flip low-beta, illiquid counters or buying into a highly cyclical sector as a defensive play. What kind of game does the market participant want? The vehicle, or stock, has to suit the game. The different counters are all classified under stocks but can be worlds apart. Some are suitable for long-term ownership, some for short-term holding, while still some for active trading. It is a whole spectrum.

I will not go into price versus value, margin of safety, durable competitive advantage, cash flow or assets as they are now well documented and widely known to those who bother with fundamentals.

FFN: What are some of the stocks in your portfolio currently?

Wan: Some of them are Overseas Union Enterprise, Kingsmen Creatives, Second Chance Properties, CSE Global, and Boustead Singapore.

FFN: Where and how do you look for companies to invest in?

Wan: Trends and themes are a key element. In a world of constant change, what are the obvious trends or megatrends that are almost unavoidable? We would like to ride on these developing themes. I would pay attention to the listed counters that I am confident will benefit from the coming tide and buy in at a reasonable price if they also meet my selection criteria and strategy. This point also ties in with what I mentioned about prospect.

If we believe in the Asian consumption story, which would be a few counters that we think could benefit well from this theme while meeting our selection standards, risk appetite, and time horizon? I choose from among stocks which I have built an understanding over time. If the counter with good potential is an unfamiliar one, then I will have to spend even more time studying it.

Despite bright prospect and good management, some businesses are difficult in nature, perhaps due to low entry barrier and stiff competition, high costs and risks, or unfavorable government regulations. I may avoid them or not invest as much in them.

My investment ideas can also come from my network of fellow investors, media publications, online investment fora, websites, and blogs, television programs, fund manager letters to clients, and stock exchange filings, among numerous areas.

I usually favor Singapore-listed counters for the tax treatment and my greater familiarity with them. Unlike some countries, there is no further tax on dividends and distributions once they are in the hands of shareholders, no capital gains tax, and no estate tax. There is also a level of certainty and stability in the regulatory and political environment. It is not a stretch to say that the business of Singapore is business.

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

Wan: Buying into a fallen stock that appeared cheap in relation to the previous FY’s earnings, before the realities of an economic crisis caught up with its business and financial statements. When the topline and bottomline continued falling over a couple of years, it was not so cheap anymore. It did not help when the dividends were cut as well.

Some stocks were value traps that seemed cheap, but were stagnant counters with flat results, paid little dividends, and had owner-management that had no intention to unlock value. There was also little or no interest from funds because of their illiquidity or small size. At the same time, there was no other catalyst for the business or share price.

One of the most valuable lessons here was that of opportunity costs; the same capital could have been deployed in another counter.

Not selling or taking profit at all, as I did not think the stock was overvalued. A decent paper gain became a paper loss when the next market correction came by. It is fine to take some money off the table. This is especially important if the counter is not a significant source of dividends or distribution. We can still keep a certain portion after selling, anywhere from 10 to 90%, without missing out on good opportunities if and when they come by for the stock. Taking profit is even more important for cyclical and high-beta counters.

Apart from opportunity costs, the other valuable lesson here was that of capital preservation.

Another mistake was not having a foot in the door of very good businesses because they were not selling that cheaply. They eventually got privatized at a much higher price. They were missed opportunities.

FFN: What psychology do people need to succeed in investing?

Wan: If I may choose only one, it is being a contrarian. It covers going against everybody else’s analysis, being daring enough to buy when market confidence is lowest, and taking positions of conviction when there is no light at the end of the tunnel.

FFN: How has the investor in you evolved over the years?

Wan: With experience, I have become more open to buying into stocks that may not have such a neat balance sheet but which are good companies with value that management is likely to unlock.

Although a stock’s business fundamentals are vital, it is the broader market sentiment that drives its biggest price gains – this is something I have taken better note.

It has been said that the bull climbs the stairs while the bear jumps out the window. The stock market indeed drops much more swiftly than it takes to climb a wall of worry. I have been more conscious of readying at least some cash before the next pullback. In a market correction, there will always be more good ideas than we have cash. There will be more attractive buys than not.

I have also become more conscious of the mistakes and lessons described earlier.

I still keep a core portfolio of stocks that I do not sell at all or do not sell completely. The ones that I more actively rebalance or take profit are usually in the non-core.

I am not above the occasional speculative trade during times of high market volatility, engaging in it only if I am familiar with the counter and that the odds of a successful trade are high.

FFN: What advice would you give for beginners who want to start investing?

Wan: People usually just want to make fast money, hoping that the small sum of money they throw into a venture will reward them hugely the next day or week. Overcoming that thinking is a key first step for beginners who want to invest.

Doing one’s homework is a must. Even if there is someone absolutely reliable helping to manage the investments, it is necessary to know what one is investing. Many people who buy into stocks actually spend more time researching on what to have for a simple lunch than on a stock transaction that easily costs a hundred or a thousand times more.

Anyone who wants to build wealth has to combine sensible personal finance with investing. For most investors, it is necessary to compound the gains for even greater gains. It is the same cycle for businesses: there has to be investment and reinvestment to grow. Spending most of the gains away will hold an investor back from maximizing portfolio growth. The investor, beginner or not, should be more and more financially savvy over time.

Know about cash flow, compound interest versus simple interest, the Rule of 72, good debt and bad debt, and behavioral finance.

In terms of equities, beginners could invest in dividend-paying blue chips at reasonable prices to build confidence. It will be good as well to buy into familiar brands that are low risk businesses, so that they feel a sense of ownership and pride when they or other people use or buy its services or products.

Information is now freely and widely available, unlike 20 years ago. It is now more of whether someone bothers to check on a listed entity. There are annual reports, company websites, analyst reports, newspapers, magazines, investment websites, blogs, and fora, not to mention industry publications and trade exhibitions. As opposed to difficulty in getting information, the present-day investor is flooded with information and has to be discerning.

Stay focused and do not invest in too many counters from the outset. Know the portfolio well before adding new counters. Also, the investor must be able to explain why he or she is investing in any asset.

Time is an investor’s biggest ally. On the investor’s part, he or she should invest the time to do tons of homework. On the investee’s end, it should be left to grow and compound with time.

Have a proper investment system and keep records. Review things every now and then.

Seek mentors and get to know other experienced investors who care to enlighten.

FFN: What do you think is the biggest misconception people have about money?

Wan: That if they can get a huge pile of cash quickly, they will be rich and stay so. They may be rich for a while, but lose their substantial wealth if they do not possess the right mindset and skills to manage it. There are countless examples of famous entertainers and athletes, as well as ordinary workers, losing the bulk of their fortune after becoming very wealthy in a short time. It is also not uncommon for lottery winners to end up poorer. At the same time, the Chinese saying that wealth does not survive three generations does accurately describe many families.

Wealth has to be properly and skillfully managed. People are generally focused on earning the money but are unsure what to do with it, or become careless with it, after it is in their hands. There is always something more expensive to buy, something more to collect. Wealth also attracts borrowers, business proposals, invitations to invest, swindlers, requests for donations, and more of those who want in. There is also the continuous lifestyle upgrade that entails increasingly higher expenditure if one chooses it.

I’ll share another misconception:

That passive income is a secondary income stream that is subordinate to one’s salary; and having a higher salary is what leaves one richer. Maybe passive sounds unimportant, but passive income from asset ownership is what allows the very wealthy their way of life. They are not reliant on trading their personal time for hourly wages or monthly salaries. Jobs come and go, while good assets can even be passed on from one generation to another.

Passive income is what helps make people’s retirement secure. A retiree with some cash savings and regular passive income will probably feel and be more secure than another with double the amount of cash but no passive income. Every employee will face one of the 3Rs eventually: resignation, retrenchment, or retirement. This does not include possible serious illnesses and accidents that may prevent him or her from work. If there is no financial backup in the form of savings, a regular passive income stream, an insurance plan, or help from family members, then the affected individual will have to keep downgrading his or her lifestyle and even need to ask for outside help. It is probably better to want income security, rather than job security.

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

Wan: Leaving little to chance – it is the one needed thing that helps ensure investing success. It is as much an attitude as it is action to be taken. The investor has to cover all bases or as much as he or she can, making reasonably certain that there is an all-round understanding of what are the things that can result in failure, from temperament and emotions within self to poor knowledge of the asset and its environment, or being misinformed and trusting the wrong people. It also means being actively involved in looking after one’s investments. Nonetheless, there will always be good or bad surprises. If we are not that sure about an investment opportunity, then it is better not to invest so much money in it. There are no guarantees in life, but we try to ensure that the odds are overwhelmingly in our favor.

FFN: A parting shot for the readers…

Wan: We live on borrowed time. Allocate it wisely.