Ep722: Thomas Chua – Have a Proper Sell Thesis When Investing

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community. We know that the winning investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com. Fellow risk takers, this is your worst podcast host Andrew Stotz, from a Stotz Academy, and I am here with featured guests, Thomas tois. Thomas, are you ready to join the mission?

Thomas Chua 00:36
Yes, Andrew, very true to join the mission and share insights so that other people, you know, they can get all this help on their own investment journey.

Andrew Stotz 00:45
Yeah, I'm really excited to have you on because I've really enjoyed following you on Twitter. And I think for all our listeners out there, and the viewers, just make sure that you are the links in the show notes and make sure that you follow Thomas because he's got so much great stuff on investing. And I think it's all very valuable. So let me just introduce you to the audience. Thomas is the founder of steady compounding.com, where he writes about business breakdowns, investment concepts, and Timeless Lessons for Super from Super investors. Study, compounding provides ins, Investing Insights and business breakdowns every week to 1000s of readers, all you have to do is just go to steady compounding.com To get access to that. So Thomas, take a minute and tell us about the unique value that you bring into this wonderful world.

Thomas Chua 01:38
Yeah, thanks for having me, Andrew. So for myself, I come from a background whereby both my parents weren't financially savvy at all. So growing up, there was a lot of problems, ranging from you know, meeting view payment to mortgage payment. And it's really, because of the experience that I went through, I made it a point to be financially literate at a very young age. And I practically live in a library to absorb all the knowledge that all these authors in financial planning to investing they could put out, I read it. So when I learned about the magic of compounding, and investing, you know, I just sort of went into that rabbit hole, it flipped a switch in me to learn that, you know, we could actually be rewarded grow our wealth, by learning things. And you know, since young, I've always been a person who's been passionate about learning new things, how businesses work and stuff. And so I just dive into the world of investing. And after about 1415 years of investing, what I'm trying to do now is I'm trying to make it easy for others who are on their own investment journey, by making all these investing concepts, not just easy to understand, but it also packed with insights and entertaining at the same time. So that's what I'm trying to do on Twitter and on my blog.

Andrew Stotz 03:01
And what is your I mean, when I see good Twitter feeds, like yours, but written by people like you, I always kind of wonder, like, how much time does that take to do that? And I think about what is this a side business? Is this your full business? Is this, like, what is your typical day look like? Your typical week, tell us a little bit more about yourself,

Thomas Chua 03:22
I think initially started out as like, just something I do at a site for fun. But after about one year, as I get a you know, gain traction on Twitter, the amount of people reading it went from like the monthly impressions went from a few 100,000 to four or 5 million. And more than that was when I started to do this full time. But when it comes to writing, I think it is easy to come up with a piece of content, you know, like anybody else. But what is the difficult thing is when it comes to editing, how I want to put myself in my audience shoes. So if I were to talk about a complicated concept, I wouldn't say complicated, but for beginners, it's hard to grasp, like return on invested capital, how do I make it relevant to their day to day life? What are the examples I want to use? And how do I weave storytelling and also a bit of humor to at the same time, not just deliver the insights that could potentially, you know, give them the aha moment on how they should view investment, but also to make sure they remain captivated with the article. Because it is one thing to create value in the form of writing or video but it is another thing to make sure people consume it. And I think a lot of writers or creators out there, they forget about the consumption part because I see a lot of good stuff, but they don't get the reach they deserve because they forgot about the consumption side of the equation. Like how do you make it consumable for people? Hmm,

Andrew Stotz 04:57
interesting. I was just thinking About in my course, what I do is, well, first of all, I learned that coffee roasting business is a great business to explain accounting and finance. Because we have a green beam that comes in one side, we have, so there's a raw material. And then we have a roasting machine. And then we have work, that's a fixed asset. And we have work in process. And then we have finished goods when that coffee goes into a bag, and then it goes out, you know, for delivery to the customer. And then we have a sale, there's revenue. And then we have cost of goods sold and all that. So I realized that and by chance, I own a coffee factory. So I went out there and took pictures in the factory, like, here's green coffee, and there's the roasting machine. And here's the new machine that we want to get that growth capex. And here's the work that we're doing on the existing machine that's maintenance capex. And what I realized is like, trying to make it in a way that the audience, you know, gets it is such a valuable thing. I'm nowhere near where you are, as far as Twitter is concerned, I'm kind of I'm a passive observer in some way. But now, I think that that's a great lesson for all of us is the idea of thinking about the reader, the listener, the viewer, to make sure that you're really getting into their shoes, because as you said, people underperform because they don't put themselves into those shoes.

Thomas Chua 06:30
Yeah, I mean, I love that example. And that coffee example, could cover so many things from inventory, turnover to margins, cost of goods. So how a company manages so many things? And yeah, I think that's a lot of underappreciated people out there. And by focusing on that consumption aspect, I think we can get a lot of more of this good stuff, to people who are looking to learn more about investing.

Andrew Stotz 06:54
And so what's the best way for people to follow you? Is it Twitter? Is it going to your website? Or what do they get? Let's say that, let's say they go to your website, and they check out what you get, what do they get from that? What should they expect?

Thomas Chua 07:09
So when people head over to steady compounding.com, I think a few things. One is, if you're a beginner learning to how to start investing, I have a 15 days free email course whereby once you sign up, you will get an email a day, about three to five minutes read, just to make sure like people, it doesn't get too intimidating for new investors. So they will get 15 of my mistakes of what has worked for me. And also like lessons I learned from other great investors out there. So that's free resource. Then another thing is I broke down a lot of businesses, so especially if you're trying to get up to speed with company like Tesla, or you know, Amazon, etc, you're able to find all these deep dives, whereby go through everything from the business model, to the mode to the financials, the reason, eventually valuation of these companies, so readers can just go there and check it out.

Andrew Stotz 08:07
I think that our next talk, we should have you break down one sample company live, that would be fun to do and get your read on something like Tesla as an example, which is such a fascinating one where you can see the economies of scale coming together over the last couple of years. And all of a sudden, it's producing the earnings that everybody had hoped. But it's just been amazing as an example, you know, as one, you know, just one thing. So I'd love to see that someday.

Thomas Chua 08:37
I don't know, it'd be awesome. Tesla was one that took me the longest to write. I think it took me two months because I was just revising it and revising it. And that one really took off. I think that was just from the article, the blog steps alone, I think there was 300, over 3000 views. And then people on YouTube, were using the research to break down Tesla and all that whatnot. So that was a pretty exciting piece that I covered back then. Yeah, I mean, we'd be happy to do so.

Andrew Stotz 09:04
Yeah, that's exciting. Well, now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be tell us a bit about the circumstances leading up to an intelligence story.

Thomas Chua 09:14
Yeah, so I mean, when I was thinking about this, it brought swept down my back because I think it's never comfortable talking about, you know, my mistakes or anybody mistakes. So I started initiating a position in this company back in 2019. You know, when it comes to businesses, so where I'm from Singapore and where you're from in Thailand, you know, this, you probably heard of this business before. Back in 2019. It had two business arm gaming and E commerce. Right. And so the company name is C limited. Back then, when I first initiated a position in this company in the market cap was about $14 billion, right? And it's to business gaming arena. It had a revenue figure of about 1.1 billion and when we look at It's operating income, it was 530 million, right. So the operating margins was high, about 50%, it was growing at 100% rate. So there was when it first came out with free Fire, you know, the company is growing like crazy. And it had another business, which was relatively new, right, they started up in Taiwan, and then it slowly moved over to Southeast Asia. And as Sharpie, the ecommerce platform, it was growing very fast, because the company management, they had their routes set in gaming, so they know how to get attention, they know how to go viral, etc. But it was wildly unprofitable, right. So when I look at that company back then, if I just look at value, the Gardena aspect of it, it was about 20 times EBIT multiple, it was a decent price comparing with what other gaming companies was going at, like, you know, when we look at companies, I take two years going at 30 to 40, sometimes even 50 times multiple. And I took a position back then, because you know, the Garena aspect was very profitable, it was growing, the valuation was okay. And yet I had Sharpie as a very good optionality. And so when it came to COVID, period, the stock took off, right? It really took off and a market, everybody on Twitter was crazy about this company. And I sort of got absorbed into the whole narrative that this company, you know, they have become invincible, like, anywhere they go, it turns into, you know, pure gold, right. And the whole thesis behind this company, as it develops, was that, you know, I always, when it comes to e commerce company, I always think of what Jeff Bezos said in his first very first shareholder letter, the whole thing about Amazon is that once they become the most dominant leader, the working capital, the profitability, everything will just fall into place, and the returns for shareholders would just be would just be great. And so the whole thesis behind C Limited was that garena had to finance the shopee until it becomes the most dominant player in whichever market they are, right. And management actually got a bit hot headed back then they started to go everywhere, Poland, you know, places, places we never heard of. And they were doing well. If we only look at revenue growth, right? If we were to look at profitability, it was getting better over time, right? Especially in the Southeast Asia, the amount of sales and marketing they spend on a per revenue basis is slowly starting to narrow down, it was on the right trajectory. But the place where the thesis got wrong, was where we went wrong was when garena start to falter. Because at the end of the day, this was a company with a single hit, it was just free Fire. So there was a lot of risk associated with just one game. And a lot of its growth was coming from developing countries like Indonesia, and India. They weren't as they weren't as huge in developed countries like the US, right. And so when it comes to these developing countries, the first crack happened when India banned free fire in the country, right, because they associated it with a China company, even though this is a company that is based in Singapore, right? Because they are the one of their biggest shareholders is Tencent. And so when it comes to regulations, India just bent it all together. And this was the cash cow there was supposed to finance this loss making business shopee until dominance, and that's where shopee can turn on the switch. And you know, they can start monetizing after you become the most dominant leader. That's where the flywheel effect of the E commerce really take hold. And another thing apart from the regulation risks. The other thing was that as COVID started to ease off, the amount of users who are on garena, also start to falter, right? They spend a bit less money, as of the latest quarter, they are show signs of recovery. So it's sort of have bottomed out and it's showing good signs of recovery. But back in 2021 22, I guess the biggest mistake was not recognizing that smaller company has a wider range of outcome. And, you know, the valuation was also at eyewatering level, right? So when the valuations is at that level, a lot of things must go right. And when something goes wrong, you know, then the stock took a tumble, right? So when I first bought the company at 30 over dollars, it went all the way up to over 300. Right? And I sort of bought into the narrative daily

Andrew Stotz 14:53
hold on that from 30 to 300. Did you say

Thomas Chua 14:56
yeah, like around 3637 All the way almost But 10 times in two years, okay. And I, the I didn't sell today is back at around 30 something, right? The interest rate went up, cost of capital went up, it became more difficult, it became harder to raise money. garena, which was the thing that was providing them the cash to get the is still very profitable is to bring in a ton of cash. But it doesn't have the growth rate it once had. Right. And so the company flip a switch and went into profitability mode. So right now, it has three business segments. And all three business segments are profitable, right, but it doesn't have the growth in ones. Right. And so investors didn't like it, they punished the company, right, and the share price went all the way back down, I think to if I'm not wrong, it's about 38 $39. Today, yeah, so. So that was a while right. And looking back, I really should have come up with a better sell thesis for this company.

Andrew Stotz 16:08
So I want to talk about what you learned. But before we do that, I just want to talk about how great this investment idea was, which was, I found a company that has a cash cow, they're generating excess capital. And rather than pay it out as dividends, they are investing in creating another really great business. And this is you don't have to be a genius to see that an online selling platform is pretty, you know, it's a good business. And we can see Amazon as an example. So it's not like they came up with something, you know, hey, we're gonna, we're gonna do hydrogen, you know, as fuel or something like that, like Toyota is trying to do right now as an example. It was a pretty, you know, straightforward thing. So, from that perspective, it seems like it was a great investment thesis going in. So now you're going to talk to us that tell us about the lessons that you learned. And I think what you were gonna say is about the cell thesis. So go for it. What are the lessons?

Thomas Chua 17:11
Yes, so I think the biggest mistake, or the biggest lesson to take away is, I have always been a big fan of not selling a business just because something has gone wrong. And that I attribute it to, you know, learning from a lot of great investors like Buffett, and he has paid off very well, for a lot of these businesses. So for example, like Netflix, it could be meta or Google, you know, when Google first had the AI scare, not not first headed, or the reason AI scare, or Netflix, when he face, you know, a few snowed out here and there holding on to these companies has turned out to be great or even meta, right. But that was largely because these companies are, you know, way larger, the range of outcome for these companies is also narrower. And when I track a lot of this matrix, let's take Mehta for example, even when you know the share price dip to over $80. A lot of the company's quarterly earnings, right? Yes, revenue slowed down. But when I look at the quarterly active users, you know, it is still rising, people are still using all the applications of metal platform, right. And you don't forget a lot of these companies having a more resilient, be more resilient against pressing the sell buttons probably paid off. But when applying that, you know, that don't sell mentality to smaller companies with you know, that is that that isn't still the dominant leader. Or rather, they are still growing in that growing phase might not be that good thing to do, right. And the key lesson here is really to have a proper sell pieces when it comes to investing, especially for smaller companies. So right now, before I invest, I always write down not just why I buy certain companies, but also what will cause me to sell them because for a company like C limited, back then it was obvious to everyone that you know, the thing that was powering garena and us the E commerce operations was free Fire, right? And for shopee to even reach that most dominant place, eventually, free fire must be there to supply the cash. And when that fall through the cracks, probably I should have reduced the position or you know, assess my position or sell out altogether, right, because the valuation was extremely high. Back then already when everything was going well.

Andrew Stotz 19:50
And I'd say my biggest takeaway. I mean, there's a lot of things. The first takeaway I would say is that there's a reason why big companies are big, and there's a reason why they can be expensive to buy. But as you said, the range of outcomes that they have is generally going to be much more narrow, they're going to, they're going to produce earnings within a certain range. The second and that, that leads to the second thing, which is be careful about just trying to build up a portfolio of the future, you know, small or medium sized company, that's going to be the next big thing. Because the outcomes are can be very, highly variable. And the third thing that I take away is that, you know, I use stop losses, and I've used them for a long time. And I know that for most fundamental investors, it's like, it's a no, it's a no, no, but I would challenge challenge anybody to say, when you get that first inkling that maybe I should sell, pick a number 10% of the position, let's say, when you get a feeling that you need to sell, or you that sell 10%, because it opens up an emotional pathway that you can sell if you if you decide that this is really changed. And so that would be my those would be my three things that I take away from your story. But anything you would add to that?

Thomas Chua 21:19
No, I I find that idea very intriguing. Because for me, I am always very resistant towards selling, right. And a lot of times, I think just by doing something simple, like selling a little bit, you know, might cost the brain to flip a switch and think from another viewpoint. And I want to emphasize on another point that you touched on earlier, which is very important when investing in small to mid caps, it is very important not to concentrate your portfolio with any single company, right, because the range of outcomes is just so wide. And I think the concern I have with investors who base their portfolio on, you know, very concentrated in these few companies is that sometimes they feel that by doing a lot of research, knowing everything about the company, even tracking, like you know, where the management is flying off to by tracking their plane number, you know, they go to very, very deep extent to do this research. It gives people a false sense of control, right? But the truth is, when it comes to investing, we don't know what we don't know. And we always have to respect that element of unknown, right. And so, when investing in companies like this, always make sure that we are adequately diversified, right. So we don't risk any serious permanent loss of capital when that happens.

Andrew Stotz 22:42
So based on what you learned from this story, and what you've continued to learn, what's one action that you would recommend our listeners to take to avoid suffering the same fate?

Thomas Chua 22:52
I think the most important thing is to start journaling writing down not just why we buy, but also conducting pre mortem, like what would cause us to think that this investment is actually you know, it's the thesis is busted, and I have to sell, right, because I think the biggest mistakes I have with this was applying that don't sell mindset to every single company I own and for a company with a much wider range of outcome. Sometimes, you know, it would have to trigger that sell button to reduce the position in the company. And so really is to start writing down what would cause you to sell the company to assess the risks and also to prepare yourself for the future.

Andrew Stotz 23:42
Any advice? What's a resource of yours or any others that you'd recommend for our listeners?

Thomas Chua 23:49
I think like for people who want to read about this celiac disease on mine, actually publish it on my blog. So if you want to go back, or you just run a Google search daily compounding ceiling, readers can probably find that. And I think if you want to, you know, just read about investing concepts in general, learn about my lessons more of my mistakes. My website, steady compounding.com is definitely a place where you can find more about this

Andrew Stotz 24:19
rate. And I will put that in the show notes that blog so that people can follow it. Last question, what is your number one goal for the next 12 months?

Thomas Chua 24:28
I think my number one goal is to reach out to more people because I think there's a lot of noise on social media. And a lot of this messaging that goes viral is about speculation about trading. And it sort of turns the stock market which could be a very powerful to for wealth building into a giant Casino. And what I'm trying to do is I'm trying to take a lot of sound investing principles and try and get that message out to as many Many people as possible,

Andrew Stotz 25:02
right? Well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, Thomas, I want to thank you again for joining our mission. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Thomas Chua 25:26
Yeah, so when it comes to investing, always keep investing in knowledge, learning and understanding what you own. You always got to do your due diligence because you can't do well in the stock market on conviction. So always do the work. Learn how to value companies. And don't let short term market movement affect your long term investment goals.

Andrew Stotz 25:47
And that's a wrap on another great story to help us create, grow and protect our wealth fellow risk takers, let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your words podcast hos Andrew Stotz saying I'll see you on the upside.