Hello everyone, I am James here, founder of SmallCapAsia.com.
Today I have the honour of inviting Ernest over for a short interview.
Holding both a CFA® charter and CA Singapore designation, Ernest is an avid investor, trader & remisier. He provides his readers with in-depth insights into SGX listed companies and his writings and comments have been featured in various mainstream & online media such as Bloomberg, Business Times Invest, The Edge Magazine, Straits Times, Lianhe Zaobao, FM95.8 and Channel NewsAsia.
You can also check out a lot more of his value-added services at his website @ http://ernest15percent.com/index.php/about-me/.
Without further ado, let’s get straight to the Q&A.
Kindly tell us more about yourself.
I am from an average family. My parents are Chinese educated with minimal – average education. My dad is the sole bread winner and my mum is a home maker. Both do their best to raise a family of four kids.
When I was young, I would eat less, or walk a few bus stops, instead of taking public transport, just to save the extra few cents. From young, I understood the concept of delayed gratification. Before I buy things especially large ticket items for myself, I will evaluate whether it is worth it; i.e. costs vs benefits and whether do I need it now.
At home, when I was young, I typically moved around to either study in the kitchen, or the living room, as I have 3 siblings and being in a 3-room flat, there was not much space available. I slept in the living room.
Notwithstanding the above, I am happy with such an upbringing where it teaches me to be prudent, down to earth and careful with investing and trading. Since young, I aspire to be in the financial world and (hopefully) be wealthy.
What got you started into investing?
I have always been interested in the stock market since Sec 1. I was actually inspired by the show “The Magnate 叱咤风云” starred by Li Nanxing in 1994. He was poor but managed to make his mark in the stock market and business. This relates well to me.
Due to my above family background, I strive to be wealthy. Wealth provides us with more choices. I opened my 1st trading account when I was 21 years old (That was the earliest we can open at that time).
Where do you usually get your investment ideas?
I usually get my investment ideas through
- Interactions with investor relations; analysts; fund managers; listed companies’ management; high net worth clients and sophisticated private investors;
- Reading analyst reports and industry reports. Many retail investors believe that reading analyst reports is a futile attempt as analyst reports typically lag or do not reflect the actual share price performance. For me, analyst reports do provide a trove of information especially factual information / industry information. In other words, we have to know what information to use from the analyst reports.
The above only gives me some investment ideas. After I get the investment ideas, I will invest time to do my own research.
What is your investment strategy and what do you like about it?
Over the years, I have refined my investment strategy. This is crucial as everybody is different, in terms of risk profile, returns expectations, portfolio size, core competencies, investor psychology etc. Hence what works for Mr Warren Buffett may not be 100% compatible for me (However, his principles of investing form a basis of my strategy too. See Q8). I typically focus on small mid cap stocks where I believe I get the most “bang for the buck”.
In my opinion, 6 must-have characteristics of small cap out-performers
- Presence of near term catalysts with clear significance and time frames
E.g. Company specific factor; turnaround / discovery play (such as first site visit in years). Presence of potential near term catalysts is very important as a stock can remain undervalued for ages. There should be potential near-term catalysts for the stock to re-rate if such catalysts materialise.
- Understand the company and the basis of owning the stock
Peter Lynch once said, “Know what you own, and know why you own it.” This is important as some of my clients like to ask whether they should continue to hold / buy more / sell their stocks. I will usually inform them that one of the key considerations to the above question is to evaluate their initial basis of buying the stock. Generally speaking, if we just view the stock as one sole investment without considering macro and overall portfolio aspects, if the basis is still valid, they can consider holding or buying more. If the basis is no longer valid, they can consider taking profit or cutting loss.
- Access to management
Similar to any other retail investor, whenever I read company financial results, prospectus, annual reports, industry reports, analyst reports, I usually end up with more questions. Access to company management through 1-1 meetings, or at the very least, investor relation from the company is extremely useful as I can clarify my queries with them.
Industry is important because most industries have business cycles which take time (usually in years) to pan out. If you buy stocks which are at the early stage of a multi-year decline, you may incur potential capital loss and opportunity costs. Furthermore, it is certainly easier to find a GOOD company in a GOOD industry so as to increase the probability of a profitable investment.
Generally speaking, buying at relatively lower valuations offer a larger margin of safety (i.e. reduce the probability of making significant losses).
If all the 5 points are positive, the chart should support the thesis above. If pt 6 is negative where the other 5 points are positive, then I should check my basis and the above five points carefully. The chart serves as a last check and a timing tool for me.
Have you measured your CAGR (%) over the past years? Does it come close to what you set out to achieve?
Since I started my portfolio in 2002, average portfolio return is around 15% p.a. This is why I named my website as ernest15percent.com.
So here is the golden question – Can you tell us your Best investment and Worst investment since you started investing?
Over the past 15 years of trading and investing, the market has been generally kind to me. There are many stocks which have performed well over the past 15 years. Although my 2017 year to date performance lags that of STI and FTSE Small Mid Cap index, I remain confident of my strategy which should still generate a consistent return of 15% p.a. over time.
There are two interesting ideas which I have been trading in and out and deem to be worthy to mention. This is because I have invested meaningful amounts into both stocks, as compared to my (modest) overall portfolio size.
- GSS Energy
I have started to initiate positions into GSS around Jul – Aug 2016 when it was trading around $0.05 – 0.06. (See one of the earlier write-ups HERE). I have taken profit as it started to re-rate in 1Q2017 (At the time, I exited as it has shot up too much and any newsflow on their oil business may only materialise in 4Q2017). Recently, I started to initiate positions again in Aug 2017 when it traded below $0.140 (See link and basis HERE)
I have been following Sapphire for some time and have traded in and out. I like the industry which it is in and the management has shown their capability to turn around the company from a loss making to an up and coming infrastructure player of significant scale. Last Wed, HKICIM just took a stake in Sapphire via a share swap. (See my latest write-up HERE)
The worst investment is Capital World.
Capital World is a RTO from the previous Terratech. This is an ill-timed trade as I underestimated the potential share overhang from the legacy shareholders and other party. Nevertheless, Capital World is still posting respectable results. Although there are risks in this stock (among other things, market is likely to be waiting for its Capital 21 project to be up next year), I am still vested.
However, fortunately, this stock is the smallest in term of allocation in my portfolio but it still posts a significant drag to my overall portfolio.
Caveat: I am still vested in the above stocks as of now.
Do you have a role model and what have you learnt from him?
No, I neither have a specific role model nor a mentor. I learn best by myself, via reading, coupled with introspective reflection. Reading works best for me as I like to know and understand a particular idea in detail, and combine with my own thoughts, or strategies or core competencies. Generally speaking, I believe the devil is in the details.
Is there a particular book you will recommend for our readers?
One of the best books is The Warren Buffett Way where Mr Robert G. Hagstrom outlines Mr Warren Buffett’s tenets of investing. This forms one of the important foundations of how I formulate my strategy above.
Lastly, any advice or words of encouragement for fellow young aspiring investors??
For fellow aspiring investors, they should consider the following
- Know yourself. Your investment / trading plan should be set in line in line with your risk profile, returns’ expectation, investment horizon, portfolio size and expertise. If you target to invest in undervalued gems and aim for a >100% return, (assuming that it is possible), you still have to consider that it may take some time before the market recognises your view and value the stock according (if it ever does). In other words, your investment horizon should tally with your investment plan;
- Write out an investment / trading plan and back test with examples. Thereafter, practise it and review it regularly over time to improve it. For example, my portfolio has lagged vis-à-vis STI and FSTS this year due to some ill-timed trades. Thus, I need to review the basis of why I traded the stocks and what I could have done better to improve my performance;
- Recognise there is no holy grail. Regardless of how robust your investment / trading plan is, there will still be occasional unprofitable trades. Such unprofitable trades should spur u to fine tune your strategy so as to make it more likely to be profitable the next time.
Thanks Ernest and hope you all have enjoyed our interview series at MyTwoCents. See you next time!