Podcast Summary
Value Investing with a Long-Term Vision: Start a long-term, fundamental, contrarian, and global value investing program, focusing on owning businesses rather than stocks and expecting to hold them through economic cycles to become the lead underwriter and final owner at discounted prices.
Sue Chen Tan, the founder and president of Disserene Group, started his investment firm during the aftermath of the 2008 financial crisis with a clear vision and philosophy. He aimed to run a long-term, fundamental, contrarian, and global value investing program, focusing on owning businesses rather than stocks and expecting to hold them through economic cycles. By investing when there's uncertainty and fear in the markets, he aims to become the lead underwriter and final owner of the companies at those prices. Despite some differences from Warren Buffett's approach, Tan's success in growing Disserene Group from less than $100 million to over $2 billion in assets under management demonstrates the effectiveness of his value investing philosophy.
Disarene Group's partnership approach: Disarene Group's success in value investing comes from their unique partnership approach, long investor commitments, aligned incentives, transparency, and openness to investor input.
Disarene Group's success in value investing comes from their unique approach to partnership and long-term thinking. They recognized the challenges of investing with a global mandate and a generational investment horizon in an industry that often prioritizes short-term gains. To address this, they structured their firm with long investor commitments, aligned incentives, and maintained a strict investment discipline. They also sought to create a genuine partnership with their investors, being transparent and open about their investment process and seeking their input and expertise. This culture of partnership and long-termism has helped Disarene Group navigate the challenges of the last decade and a half and continue to find value in the global markets.
Long-term perspective in value investing: Maintaining a long-term perspective, sourcing ideas off the beaten path, strict valuation discipline, suitable temperament, and high-quality investor base enable value investors to invest over longer time horizons, take advantage of multi-year time arbitrage, and remain patient for opportunities.
In the current market environment, value investing as an approach has become challenging for many, leading to retirements, shutdowns, and reinventions for some. However, those who have survived, like the speakers in this discussion, have done so by maintaining a long-term perspective, sourcing ideas off the beaten path, maintaining strict valuation discipline, having a temperament suited to value investing, and being supported by a high-quality investor base. These sources of competitive advantage allow them to invest over longer time horizons and take advantage of multi-year time arbitrage, which sets them apart from the industry. They also enable them to remain patient and wait for opportunities to arise, even if it takes several years. This long-term approach allows them to "sow the seeds of their returns several years in advance" and reap the benefits over the fullness of time.
Foundational Knowledge in Accounting and Economics: A strong foundation in accounting and economics is crucial for value investors to identify exceptional companies and build robust investment theories. This requires dedication and a willingness to learn.
Developing a strong foundation in accounting, microeconomics, and other related fields is crucial for young investors. This foundational knowledge will help analysts understand the financial mechanics of businesses, recognize good and bad businesses based on their financial health and economic moats, and ultimately identify exceptional companies that defy industry trends. This process requires dedication and a willingness to learn, but it is essential for long-term success in value investing. Additionally, understanding the importance of logic and epistemology can aid investors in building robust theories about businesses and evaluating the validity of their knowledge. As Epictetus once said, "Practice yourself, for heaven's sake, in little things; and thence proceed to greater things," and many successful investors have followed this advice by building their skills on a strong foundation of accounting and economic principles.
Perception vs. Intrinsic Value: Value investors believe assets have intrinsic worth based on cash flows, while perception is subjective and can lead to poor outcomes. Success depends on accurate estimation of intrinsic value, not agreement with others.
The perception of an asset's value is subjective and linked to the price people are willing to pay for it in the investing world, following the Berkeleyian conception. However, value investors believe that assets have intrinsic worth, which is the net present value of all cash flows they would generate over their economic life. This intrinsic value is objective, even if it's imperfectly measured. The most successful investors are persuasive storytellers, making money by persuading others to agree with their perception of value. Value investors, on the other hand, focus on figuring out the intrinsic value of an asset, which is a weighing exercise, not a voting one. The extent of their success depends on the accuracy of their estimation, not on how many people agree with them. Good investing skills can be learned through deliberate practice and continuous improvement, just like in sports. However, the investing landscape is not ergodic, and skipping the classical foundations of investing can lead to poor outcomes. To remain objective in an inherently subjective field, value investors focus on the fundamental analysis of a company's financial statements and economic conditions, rather than relying on narratives and public perception.
Conformity and Epistemic Angst in Investing: People's tendency to conform to others' opinions, even when incorrect, can impact investing decisions. Long-term focus and courage to state beliefs are essential to avoid this pitfall. The investment industry's short-term focus and misaligned incentives further complicate matters, emphasizing the need for a long-term perspective.
People's tendency to conform to the opinions of others, even when it goes against their own observations, is a powerful force. This was demonstrated in a psychological experiment where participants consistently identified the wrong answer when surrounded by confederates giving the incorrect answer. This phenomenon, known as epistemic angst, can be particularly prevalent in investing where the truth may not always be clear. However, it's important for investors to retain the courage to state their beliefs and not conform to the group, even if it goes against the popular opinion. Another key takeaway is that the investment industry, including both investors and management teams, often fails to think long-term. This is due to misaligned incentives, with executives and money managers being rewarded for short-term results. According to a study by Malcolm Salter and other researchers, the average pay duration for executives is just 1.22 years, which is absurdly short for leaders of ostensibly multi-decade institutions. This short-term focus can lead to suboptimal decision-making and missed opportunities for long-term value creation. Therefore, it's crucial for investors to maintain a long-term perspective and not get swayed by short-term market noise.
Short-termism in business and finance: Misaligned incentives, a traderly culture, and reflexivity contribute to short-term focus in business and finance, leading to decreased discretionary spending, atomized businesses, increased market turnover, and a focus on short-term expectations over long-term value creation
Misaligned incentives, a traderly financial culture, and reflexivity have contributed to short-termism in business and financial markets. In a survey of CFOs, 80% reported decreasing discretionary spending to meet earnings targets, and 96.7% preferred smooth earning paths. Misaligned incentives, driven by short CEO tenures and the desire of investment managers to minimize risk, have led to an atomized business landscape, with companies shedding critical functions and creating fragile, illogically valued businesses. The traderly culture, exacerbated by Gresham's law and the overavailability of information, has led to increased market turnover and a focus on short-term expectations, rather than long-term value creation. Reflexivity, the idea that past success does not guarantee future results, further complicates matters, as markets constantly adjust and the world changes. Companies must navigate these complexities to create sustainable value for shareholders.
Value Investing: Value Investing involves buying businesses at a discount to their intrinsic value, focusing on management and capital allocation, and avoiding value traps with a long-term focus and a margin of safety
Value investing, as practiced by Disserene and inspired by Buffett and Munger, is about more than just buying low-priced stocks or those trading at a low price-to-book ratio. It's about buying businesses at a discount to their intrinsic value, focusing on who runs these businesses and how they allocate capital, and avoiding value traps. This approach, which demands a margin of safety and has a long-term focus, has been empirically and logically sound over multiple years and various market conditions. Charlie Munger's advice to "avoid crazy at all costs" is a guiding principle for Disserene, encouraging intellectual honesty and the courage to call out unsound investments publicly. To learn more about Disserene and their investment approach, visit disireen.com or connect with them on LinkedIn.
Intellectual property rights: Respecting intellectual property rights is crucial for creators to earn a living and continue producing valuable content. Ignoring these rights undermines incentives for innovation and creativity.
Importance of respecting intellectual property rights. The Investor's Podcast Network has copyrighted this show, and it is not permitted to be syndicated or rebroadcasted without written permission. This rule applies to all types of media and content, not just podcasts. Respecting intellectual property rights is essential for creators and content producers to earn a living and continue producing valuable content for audiences. By ignoring these rights, we undermine the incentives for innovation and creativity. It's important to remember that content is valuable, and creators deserve to be compensated for their hard work. So, always obtain proper permissions before sharing or distributing copyrighted material.