Archive for September, 2013



The Tay US Fund returned 41.24% for the Financial Year 2012, outperforming the iShares S&P 500 Total Return Index by 25.79%.

The iShares S & P 500 Total Return Index returned 15.45% in the same time period.

Over the past 2 years, the value of $10,000 invested in the Tay US Fund would have grown to $15,633, a rate of 25.03% compounded annually – or a cumulative return of 56.33%.This represents an out-performance of  6.05% annually, or 14.76% cumulatively compared to our benchmark.

A similar investment in the iShares S & P 500 Total Return Index would have grown to $14,157, a rate of 18.98% compounded annually – or a cumulative return of 41.57%.

While there is much satisfaction to be had from our performance this year, we do not expect a repeat of it in the years to follow.

We have positioned the fund to earn a satisfactory long-term return for shareholders, and it is neither within our interest nor our ability to aim for short term out-performance. As such, a minimal period of at least five years is needed for investors who wish to benchmark the performance of our fund against the S&P 500.

The Marco Picture:

While we do not attempt to predict what the future will look like, it is important to know where we stand today. I read with much surprise that we have been in a bull market for the past few years (I wasn’t the only one).

Still, markets today reflects an optimism that the world is in a much better position than we thought it would be 5 years ago.

The fund first began its operations in tumultuous times – shortly after the United States lost its AAA rating, and when the future of the Euro Zone was in doubt. Since then, market conditions have improved dramatically.

The USA:

Equities, in our opinion, are fairly valued. The abundance of cheap stocks that existed at the end of 2011 has now disappeared, so finding stocks that fit our investment criteria has become much more difficult.

Unemployment has fallen significantly, banks are well capitalized after undergoing years of painful downsizing and lay-offs, and recent financial reform has led to greater stability within the financial system. The housing market, which underwent a depression, has shown signs of bottoming out and improving.

The impending end of Quantitative Easing is in our opinion a good sign. The Federal Reserve has indicated that its willingness to taper will be linked to the improving economic situation.

The warped expectations of the market, whereby investors are praying for a deteriorating economic situation thereby forcing the Fed’s hand in printing money cannot be maintained indefinitely.

In the end, all things must revert to the mean and rationality will over. We continue to remain unleveraged, as while we are certain that tapering will eventually take place, we remain unable to predict with enough certainty and confidence as to the date.

Yields on the 10 year treasuries have spiked from 1.8% to just under 3.0% in the preceding months. It is our firm opinion that most bonds are highly overpriced and should be avoided by investors.

The Euro Zone:

The Euro Zone appears to be on the mend. However, of great concern is the financial health of the financial institutions, which in comparison to their peers in the US, are poorly capitalized and under-equipped to weather a storm if it should so appear.

Nonetheless, there remains a large amount of businesses trading at significant discounts, and Europe remains a wonderful hunting ground for the astute and enterprising investor.

We have for the most part avoided investing Europe except for select ADRs like BASFY, due to the language barrier, and excessive transaction and tax cost.


The effects of tapering have been dramatic on the economies in Thailand, Indonesia and India to name a few. The availability of cheap credit fuelled a massive rally in almost all asset classes within the region. As the saying goes, a rising tide lifts all ships.

Its only when the tide recedes that you see who’s swimming naked.

Companies that opted to take advantage of cheap rates and to borrow in US Dollars are now suffering the repercussions of their actions. They have been hit by a triple whammy: a deteriorating Chinese economy, higher interest rates, and the weakening of their respective currencies, which have led to reduced profits and increased borrowing costs.

While we do not expect a repeat of the Asian Financial Crisis, we have been careful to avoid firms that are capital intensive, or have leveraged business models like commodity trading companies. We remain poised to take advantage of deteriorating conditions if they continue to persist or worsen.

Of great concern to us is the multitude of financial products that meet the desire of investors to “reach for yield”.

Record low interest rates have spurred investors to invest in REITs, perpetual bonds and shares, and to take advantage of low borrowing rates to double down on their investments to magnify returns.

Having personally examined some of these products, we shudder to think of the consequences when credit conditions tighten. Banks in Asia are paring back on lending, and will be far less generous with their terms if conditions do deteriorate.

Investors will, in my opinion, do well to ask themselves one simple question: If it’s such a good investment, why aren’t banks opting to invest in their own products?

Housing in particular is a chief concern of mine. In Singapore, investors have been swept up in a craze. It terrifies me to read in the newspapers that investors are buying flats as insurance policies against rising housing prices.

Advertisements spurring investors to seek alternative locations in Brazil, London or Australia serve to further worry me. We certainly hope that these places do actually exist seeing that the majority of international investors will never step foot in them.

Real estate investors are making the following assumptions:

  1. Property prices will continue to trend upwards, or at least remain level with their current prices.
  2. Demand will keep pace with record increases in supply that are about to come online, and this will neither dampen rental yields nor their ability to rent out the flat.
  3. Interest rates will remain low, especially since the longest time you can fix your borrowing rate is for 5 years. After which, it will be pegged to the SIBOR.
  4. The economy will continue to look pretty much like it does now: record levels of low unemployment, increased or maintained levels of wages and there are no bumps along the way – ignoring the 1994 housing bubble, 1997 Asian Financial Crisis, 2001, 2004 (SARS), the Great Financial Crisis of 2008 and the Eurozone Crisis.

While we may sound overtly pessimistic about the situation, we do not expect a dramatic fall in housing prices. However, at current prices, the risk-reward ratio is heavily skewed against the investor, and caution is urged.

Review of Investment Operations:

It’s best to get pass the bad news right away, and review the major mishaps and mistakes made; investments which fit right in our circle of competence, but in which we failed to pull the trigger on.

Some of these mistakes do not appear on our balance sheets, for they are mistakes of omission. Although they aren’t reported, make their cost to us was very real indeed.

Hewett Packard (HPQ):

We initially took a small position in HPQ. We felt that the market was giving too readily to the idea that the company was heading to irrevocable doom. HPQ had significant cash generating ability from its legacy businesses, such as printing and enterprise. Although it was not as profitable as it once was, it was still generating significant amounts of free cash flow.

Unfortunately we got drunk on our own Kool-Aid, and ended up increasing our stake significantly when prices continued to drop without conducting further research. This proved to be a costly mistake. HPQ’s ill-fated and extremely expensive acquisition of Autonomy was revealed to be a dud, and an illuminating presentation by Jim Chanos highlighted the questionable accounting practices of its acquisition.

While we do not think outright fraud was committed, it was clear that we had sorely misjudged the situation. We immediately pared back out stake to a far less significant position at close to $16.

While costly, David Einhorn had the right idea when he said that the moment one realizes the reason for us entering an investment is wrong, it is never a good idea to find another reason why we should stay in the market.

Seagate (STX) & Western Digital (WD)

Concerns about the decline in the PC market, and the effects of the flooding in Thailand, and a poor outlook of the hard disk industry led to STX and WD trading at record low valuations.  They operate in a closed industry (they make up 90% of the market share), and have significant cash generation ability with little debt.

Since then, prices have rallied by more than 100%. We unfortunately missed the boat on this one, and this was very much a business well within my circle of competence. Previous unfounded fears and the lack of research led us to avoiding them despite the facts.

What Has Worked:

After reviewing our first year of operations, we realized that our frictional costs from trading, exiting and re-entering positions prematurely had cost us significantly (1%-2% in performance).

We have since corrected that, and engage in far less trading than before. We have also obtained a substantial discount to our normal transactional cost from our brokerage.

While it may seem trivial relative to the size of the fund, we believe it is the most cost reductions that will eventually snowball into bigger returns in the future.

Bank of America (BAC) & American Insurance Group (AIG):

Investments in these two businesses have been a tumultuous ride. Fortunately, the wait was well worth it, and we have pared back our positions significantly at close to 100% profit.

While we still maintain positions in AIG and BAC, they represent a far smaller portion of our portfolios than before as more attractive investment opportunities presented themselves.

Over the two years, we held stakes in other financial institutions like Wells Fargo (WFC), JP Morgan (JPM), Aflac (AFL) and the Bank of New York (BK). On average, investments in these firms has worked out favourably, yielding a return of 40- 50% each.

We initially hedged our positions in all these firms with put options. While it was costly, the situation in 2011 was far less clear, and I felt strongly that downside protection was critical.

We structured the investments in such a way that if right, we stood to make a significant return in a short period of time (50% in 2 years), and if wrong, our downside would be capped at 20-30 % of our initial investment.

This is the kind of trades which we favour the most. When the outcome is heavily skewed in our favour, where the upside is significant and the downside capped. These opportunities are rare. Our fund maintains 5-10 % of our portfolio at all times to take advantage of these situations as they arise.

Finally, we chose to make our investments in AIG and BAC through the TARP warrants issued in the financial crisis.

We rarely make use of leverage, but the situation in this case was to our favor:

  1. Long dated expiry in 2021 & 2019 respectively.
  2. Generous terms to investors, such as the downward revision of strike prices if dividends above a certain threshold were declared.
  3. Relative illiquidity that led to significant mis-pricings.

We only make use of long dated non-recourse leverage at cheap borrowing rates – a rare event. However, we were able to make use of it this time round to magnify our returns at very little downside risk to our portfolio. It has worked well for us in this situation.

We do not expect such generous terms to appear to us in the significant future, and this remains a one-off investment.

Ending Thoughts:

2013 was by all standards a good year for us. We kept our mistakes to a minimum, and hit enough pitches to generate a satisfactory return of our shareholders.

While the markets are inherently unpredictable year to year, we have always maintained that an investment policy founded on rationality, logic and good business principles will always triumph in the end.

Global conditions as always remain uncertain, but we will stay the course and keep conviction of only investing in businesses that we understand well and trade at significant discounts to their true worth. We will remain focused on what we know best, stick to our circle of competence and do our best to add value to our shareholders.

Thank you for your continuing support.

Tay Jun Hao
Managing Partner
Tay Associates Partnership
20 September 2013

Summary of Holdings as of 20 September 2013



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3 Lessons I Learnt from Investing

So, as a prelude to our review for the 2nd financial year, I thought that I would post some thoughts about what I’ve learnt while investing for the past 4 years.

Due to professional commitments, I will only be updating this blog semi-annually.

#1: Focus and Grind

One of the main reasons why I became competent in investing was focus. Finance is exciting; there is nothing quite like it in the world: It never stops, there is always something new happening, and providing that it is done right, it can be immensely profitable. Nothing gets people more excited than the idea of getting rich, and there are an abundance of people willing to sell you the latest system to help get you there.

When I started out, I was extremely suspicious of all trading strategies. But with time, I have come to change my stance on it.

You can make money investing in almost ANYTHING. That’s the truth. There are people who make plenty of money trading commodities (Jim Rogers), using a global macro strategy (George Soros), or in real estate (Donald Trump).

The point is whether YOU can do it. The 80-20 principle holds true in any field of investment that I can think of. If there is a market, someone is making money.

The question is not whether they can make money, but whether YOU can.

Everyone I know who has made significant sums of money investing in shares as a common trait is extremely FOCUSED on one field of investment. People who are great in forex stay within forex, people who are great in real estate stay within real estate, and people who are great in investing in businesses stay within that area. It’s only when they venture out of their competence that they get burnt.

Malcom Gladwell repeatedly talks about the “10,000 Hour Rule” necessary to become the top in one’s field. Think about it for a moment: if you tried 10 different investing strategies over the course of 5 years, how good would you be compared to the guy who honed in on his skill of investing in businesses by reading a thousand annual reports?

Admittedly, it’s much easier to talk about starting a bunch of different new things compared to actually honing in on our skills day in, day out. It’s exciting to talk about the potential rewards, to get hyped up about the changes and impact that it’s going to have on our life… but reality slowly sets in after we realize it’s much harder than we thought, and we soon move on to the next project.

This cycle repeats itself, and soon we find ourselves becoming a jack of all trades yet the master of none.

Grinding isn’t glorious or exciting to talk about over the dinner table, but it is a necessary trait that all famous people have. Every leader in their field is famous for one thing to which they dedicate their life and passion to – Steve Jobs, Michael Jordan, Bill Gates, Henry Ford, and Rockefeller. The greats are great because they became great in their field, and the only way to become great in investing is to focus and grind relentlessly in one specific field.

#2 Nothing Worth Having is Free…

…and this is especially true for anyone who is trying to dominate their field.

There isn’t a shortage of free information – it’s available everywhere. Like your average Asian, I’m out for a good deal just like everyone else. But I can say with conviction that the last place you will ever want to save costs is on your education to becoming a competent investor.

The average person will spend tens of thousands of dollars on a college degree, spend endless hours of their time studying and building up a spotless CV to get a great job, yet when it’s time to spend a couple of dollars to buy books, or go to meaningful conferences (not seminars that are out to grab as much money from you as possible), they suddenly extol the virtues of saving money and their lack of time.

If you treat investing like a hobby, you are going to get the same results. The people you are up against include:

1) Professional Fund Managers are some of the best paid individuals in the world who do this FULL-TIME for a living, and they still have a notoriously hard time beating the market.

2) Investors like Warren Buffett, David Einhorn or Seth Klarman have spent decades perfecting their art.

3) Investors who live and breathe the market, and love to do this day in, day out.

The odds are stacked astronomically against you, and the last thing you want to do is to make them worse. In order to become great at anything, we all have to pay our tuition fees one way or the other – be it in time or money. While it is possible to learn from your mistakes, why not learn from the mistakes of other people? There is a sheer treasure trove of information for value investors out there.

If you decide that this is not for you, fair enough. Buy a market index fund and rest easy at night. But if you want to become the best in this field, make sure you realize the commitment you need to make to dominate it.

#3 Build a Great Supportive Network

This is my favorite way of short-circuiting my learning process in any field.

A great network is primarily divided into three groups of people:

Mentors: While theory and personal experience is essential, I learnt the most by sharing my own mistakes and successes with my mentors to see what can be tweaked. There is always room for improvement.

I have had the privilege of meeting an incredible group of people willing to share their own experiences with me.

I truly believe that most people want to help others succeed. We are innately programmed to do so. They might not always have the time, or be in the right place to help you, but you have to be persistent, and you have to keep looking. The moment you start looking, I guarantee you that you will find people who will take your game to the next level.

Peers: People who are on the same journey can be a great sounding board for ideas and informal sharing. I was very lucky to meet an incredible group of people heading in the same direction that I was, and I have learned a great deal from every one of them.

Even if you can learn just one thing from someone, that to me is a great relationship. People talk to me all the time about different companies, and I have learnt about industries or businesses that I wouldn’t have considered previously, or viewpoints that I would never have considered.

As Steve Jobs said, the dots only connect when we look backwards. Some of my best investment ideas have been the result of a dozen different experiences and interactions combined, and it’s quite amazing to see how it all comes together at the end.

Friends and Family who Believe in You:

This is the most important group. Getting great in any field requires a lot of dedication and persistence, and you are going to fail a lot to get there.

Having a great group of people around you who believes in you when you struggle to and who can help you return from any setbacks you may need to overcome.

You can’t get to the finishing point on your own, and the people you hang around with the most – your close friends and family – are, I feel, so important in helping you stay on track.

My thoughts on building relationships:

According to Buffett, Graham said that he wished to do something foolish, something creative, and something generous every day. The last part had a huge impact on Buffett as it did on me.

The fact that a man of Graham’s ability shared his knowledge so freely astounds me to this day.

A mentor I had once taught me, relationships aren’t about taking, taking and taking. It’s about giving without the need for anything back. People are naturally helpful and want to help you if they can.

So every day, I try my best to be helpful to someone else, even if it’s in a small way. People appreciate the small things as do I. This I believe is the key to great relationships and it ensures that both parties grow as individuals.

Each of us has our own talents and strengths, and thus something of value to offer to everyone. So if you want to build up a great network of people, always remember to give before asking.

Final Thoughts:

This has been an especially long post, and I have tried to keep it as relevant to someone starting out as possible. There are a few great resources that I recommend as I feel that they will help anyone build a solid foundation if you want to get a good grasp of fundamental analysis and value investing:

The Intelligent Investor – Benjamin Graham

Warren Buffett Biographies (Both Versions)

Berkshire Hathaway Annual Shareholder Letters

Finally, I want to give a special mention to the Manual of Ideas, which is run by two extremely talented individuals – Oliver & John Mihaljevic.

I believe that they have done something quite remarkable in bringing top notch information to the masses. Imitation is the finest form of flattery, and in profiling top investor holdings (with write ups), I have learnt far quicker by understanding how the best in our field think about an investment.

The many Value Conferences (also by them) have also been a joy to participate in, and I was lucky enough to be a participant in the first one ever organized. Howard Marks, an investor who I have nothing but the utmost respect for, is a frequent speaker at it.

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