Ep747: Chong Ser Jing – Pay Attention to What Drives Business Results

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 to win an 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. And I want to thank you for joining that mission today. Fellow risk takers this is your worst podcast host Andrew Stotz, from a Stotz Academy, and I'm here with featured guests Ser Jing Chong. Ser Jing, are you ready to join the mission?

Ser Jing Chong 00:36
Yes, really excited. Thank you for having me.

Andrew Stotz 00:39
Yeah, I'm excited to get you on and talk about what you're doing because I think it's quite interesting. So let me introduce you to the audience. Ser Jing is the portfolio manager and co founder of compounder fun, and investment fund that invests in stocks around the world surgeon graduated with an engineering degree in 2012. But having been bitten by the investing bug since he was in his late teens, he decided to pursue investing as a career. From January 2013, October 2019, serging served in Motley Fool Singapore, as a writer, as well as a co leader of the investing team. One of his career highlights with full Singapore was to help its flagship investment newsletter outperform a global stock market benchmark by nearly two times over a three and a half year period. Besides running compounded fun today with his co founder, Jeremy chia, the both of them also have an investing blog, the good investors, where they share their thoughts about investing in life. So surging monitor, take a moment and tell us about the unique value you are bringing to this wonderful world.

Ser Jing Chong 01:55
Yeah, thanks. So you mentioned the investment blog that Jeremy and I run, as well as the investment fund that we do that we run as well. So through the website for both the fun and the blog, Jeremy and I write about investing related topics that interest us, and that we hope can help readers learn important lessons about investing. Well, there's an Italian proverb that the both of us love that, when translated into English, it goes, quote, a candle loses nothing by lighting another candle and quote, in through our website and our blog, we hope to

Andrew Stotz 02:33
Alright, your microphone went out for a second there.

Ser Jing Chong 02:38
Yep. Okay.

Andrew Stotz 02:39
So you said, but let's, let's go back, you said a candle loses nothing by lighting another candle.

Ser Jing Chong 02:46
Stop on that. Okay. Yep. So I'm one to switch. And so through our website and blog, we hope to light the candle up investing for anyone who crosses our path. And the writing we do is out of passion. Now, we have no idea how many people read our work, because all we care about is sharing our thoughts. And we just want to write as many candles as we can.

Andrew Stotz 03:06
And so are you. Are you guys writers as opposed to speakers? Or what's your preferred communication style?

Ser Jing Chong 03:13
I think both of us are pretty much shy in person. So we'd much rather communicate through writing then to appearing in public and speaking with people.

Andrew Stotz 03:21
Yeah, it's interesting, because, you know, I think we all go out to the world with the, with what makes us most comfortable and I think that's, that's part of the key to this whole thing in life is figuring out what, what's your way to go out to the world. Tell us a little bit about the fun. And where's the fund domiciled? And what type of people are investing in that?

Ser Jing Chong 03:44
Yeah, so the fund is domiciled in the Cayman Islands. We run it. We are based in Singapore, but the fund is domiciled in the Cayman Islands, most of our investors are actually Singaporeans. That's because, you know, we're based in this country. That is, I think, a close neighbor to where you're based in Andrew. So yeah, so we invest in stocks around the world. It's called compounding farm, because we want to invest in companies that we think will be able to grow their businesses at high rates over the long run. And we have kind of designed the funds for its returns to be driven by the underlying business growth of the companies that we invest in, hence, the word compounder. So effectively, you want to invest in compounders. I think the word compounders has gotten a pretty bad reputation in the past few years. Because of, I think there's this big decline in the stock prices that have been seen in many of the companies that are popularly known as compounders. And so I think that this particular investment style has gotten a bad rap. But I think like what Terry Smith has said, you know, just like no cyclist is able to win every leg of a long cycling race. I don't think there's any stalling and testing they can do on all seasons. So investing styles come and go, but I think autumn La Vie over the long runs. Stock prices tend to reflect the underlying growth of business fundamentals. And that's where we want to place our focus on.

Andrew Stotz 05:09
And you know, when you say you invest around the world, there's a lot of markets around the world that may be too small or illiquid. How many markets generally are you looking at?

Ser Jing Chong 05:19
Somewhere really look at companies from all around the world. Right now we have companies that are listed our headquarters, I would say, in the US, in Norway, in Amsterdam, in the Netherlands, or in Singapore, in Korea, and a couple of other countries. So it's really a, I would say a broad spectrum of countries that we like to invest in ultimately, what we're really looking for are great companies, companies that we think can grow at high rates over the long run. And we think that such companies can be found anywhere in the world, what's more important is, what kind of businesses they are in, and as the quality of the management team, so we're very happy to fish. In any part of the world, we do kind of have a slight, I would say, aversion to countries where there has been known to have a lack of respect for the rule of law for property rights. Because in such jurisdictions, if we were to invest as shareholders, we may end up in a situation where our ownership stakes in companies may not be protected by the rule of law in that particular country. So in those areas, we might tend to track a lot more carefully. So right now, we have a heavy exposure to companies in the US simply because we find a lot of companies with the traits that we want, that are in the US. So just so happens that. So I guess I can talk a little bit about the types of companies that we tend to look up to very quickly, we want companies with large addressable markets, strong balance sheets management team with integrity and capability. We want a strong track record of underlying business growth, we want high levels of recurring revenues. And we want a business model that we think can allow a company to generate strong free cash flow over the long run. And just so happens that a lot of the companies that kind of fit well with this criteria, or that we think fit well, with this criteria happened to be found in the US, at least, at least for the current moment.

Andrew Stotz 07:18
And a lot of times, when you have those kinds of criteria, you find this great list of companies and they're super expensive. Yeah. Do you think about valuation?

Ser Jing Chong 07:29
Yeah, so I think, um, in terms of, so I think ultimately, it boils down to the idea that, if a cyclical business does go over the long run, its stock will too. That's it. So if we invest in the company for high valuation, but that also has a really great business, we go in knowing full well that there could be a compression in his valuation multiple all the time. So for example, if we were to invest in a company that's trading at say, 40, or 50 times earnings today, we are not expecting it to carry the same kind of valuation five to 10 years down the road, we would expect a compression in the valuation multiples. So what that means is that if we think that the underlying business can grow at 20, or 30%, then we think that the returns that we could generate on the company could perhaps be in the realm of 12 to 15%. So somewhat lower than the underlying business growth, because of the compression is valuation multiple. But we are comfortable with that, because we will much rather be wrong on the valuation rather than be wrong on the overall trajectory of the business.

Andrew Stotz 08:26
Okay, and how do you think about foreign exchange, whenever you go investing around the world, you end up having to buy the currency, oftentimes of that country to be then used to buy the actual stock? I'm curious how you think about that. And how did you communicate that to investors? How do you want your investors to think about currency?

Ser Jing Chong 08:48
Yeah, so we are very simple when it comes to managing currency risk, we do not manage our currency risk, what we do is we depend on the underlying business growth for the companies that we invest in, to carry to bring us the returns even after factoring in any potential depreciation in the company's underlying currencies. Now, that's it, we are also wary about investing in countries that have a strong history of currency depreciation. So if we do invest in a company that is in a country where the currency has been performing really badly for a long period of time, because of, I guess, poor government policies, then we will be very careful in terms of analyzing that particular company and thinking deeply about whether or not we want to be a longtime owner of such a company.

Andrew Stotz 09:35
So basically, what you're saying is, from a currency perspective, stay away from countries that are, you know, prone to devaluation, you don't want that kind of extreme event happening if you can, you know, stay away from it. And, and generally think about currency, maybe as just offsetting against each other as you build a global portfolio, rather than feeling like you've got to hedge position against a certain currency. Also, we know that a small fund or a small investor hedging is just way too expensive anyways.

Ser Jing Chong 10:10
Yeah, no, you're absolutely right. And I think for us, there's another layer to this issue as well. And that is, we do not think we have any expertise when it comes to managing currencies or understanding the potential future movement of currencies, so we'd rather not stray into unfamiliar territory.

Andrew Stotz 10:28
And are there any markets around the world that you'd like to invest in, but you find that the costs of investing are just too high, it could be the commission, it could be tax audits, it could be anything that means more friction to trading in that market?

Ser Jing Chong 10:45
Oh, um, so I think in the earlier days of us managing the fund, we use Interactive Brokers as our brokerage, there were Interactive Brokers to have access to a number of European countries, as well as a number of Asian countries. So I think for us, the key issue would be the access that Interactive Brokers will give us. So like it's not available in Interactive Brokers, then I think it becomes a little bit more difficult for us to access the stocks of any of countries that are not on the platform. And that kind of increases operational costs to us that we have to think carefully about whether or not we want to bear.

Andrew Stotz 11:27
And so with interactive brokerage, is it actually a fund or an ETF? Or are you managing accounts like sub accounts? Or how does it work with Interactive Brokers?

Ser Jing Chong 11:42
Oh, do you mean how am I managing my fund through Interactive Brokers?

Andrew Stotz 11:47
Well, you mentioned that you use interactive brokerage. Is that only for the trading aspect of your fun? Right? Oh, yes. Okay. Okay, got it. And the other question I had is, how many stocks do you normally hold? Like, what would be an average holding?

Ser Jing Chong 12:04
Yeah, so before we launched the fun, my partner and I, we have been investing for a number of years individually, myself, I've been doing it, I was doing it for nearly 10 years before I launched the fund. And at that point in time, when I had more than 50 companies in the portfolio, so when we launched the fund, we were quite comfortable holding some somewhere between 30 to 50. Companies, it's not a very scientific number, it's just a number that we think it's helps us to serve two purposes. One is helps us to diversify. So that like, because we think that when we invest, we are very clear that we are not Warren Buffett, we do not have the mental capacity, or the mental bandwidth to be able to know minut details about the company such that we can be certain that if we will the whole, like, say five stocks, that all these five stocks will end up doing really well. So we can't and so we diversify. So that's one reason why we are happy to hold like 30 to 50 companies. And the other reason is actually, I think, somewhat related. But by having a large number of a relatively larger number of companies, we think that we can spread our bets and increase the surface area of positive law, working in our favor. So sometimes, you know, you might invest in a company that you think is like the next Netflix or the next Amazon, for example. But it may not, it may not turn out to be the case. Right? And so having a relatively large number of holdings in the portfolio, I think allows us to kind of increase the chances that we can find companies like that.

Andrew Stotz 13:37
And how do you handle waiting? Let's say you have 30 to 50 stocks, are you then saying okay, we're going heavier weighting into the ideas that we liked the most? Or you equal weighting it? Or how are you doing that?

Ser Jing Chong 13:48
Yeah, so um, we kind of kept it simple. When we launched a fund, we came up with like three or four buckets where we say, Okay, this is these are companies that deserve a slightly higher weighting. So say around 4% each, and then there's another bucket that's about two to 2.5% each, and then another bucket is about one percentage. And so how we thought about those buckets would be like the valuation of the company and also like the business risk than we perceive the company to have. So obviously, the riskier the company are, the higher the valuation, we tend to have a lower weighting, and the ones that we think are really stable or that have a low valuation, we give them a higher weighting. So that was how, how we started. And then the way we manage the portfolio is really, we are firm believers in letting our winners run. And so over time, the weightages have changed simply because some stocks have gone on to increase or some stocks have gone on to decrease. And so the way they just have changed over time, and so we kind of let it sit. We are not trying to manage the weights of these holdings to too much. In fact, there's this phrase that I really like I can't remember who I heard it from but it goes something like portfolio management is like a boss so You know, the tighter you, the more you handle it, the likelier the bar is to fire off your hands. I'm kind of butchering the quote, but it goes something along those

Andrew Stotz 15:09
lines. And do you look at things like I don't know correlations? Or they'd say, Oh, I love that stock. But it's just so highly correlated to an other stocks in my portfolio that I don't want to be overexposed to any particular factor, like interest rates or something like that? Or is that not really a critical thing, when you're building your portfolios?

Ser Jing Chong 15:31
It's not really a critical thing. That's it. So, for example, we have a pretty heavy exposure to like digital advertising and E commerce. So like, if we do find attractive opportunities, in companies that are also in similar space, we may think a little bit harder about whether or not we want to include that such a company to the portfolio. But um, it's not as, but I guess, there are no like hard rules that say that, Oh, you know, we have reached a certain allocation for for particular sector, and therefore, we no longer want any more exposure to that particular sector.

Andrew Stotz 16:02
You know, one of the best and worst things of investing is benchmarks. And on the one hand, you think, well, everybody needs a benchmark, so we know how they're doing. But on the other hand, once you become really expert in this world, and you've had a lot of experience, you realize it best benchmark is just, you know, is so problematic, and that you get a distorted message. And it starts causing you to make decisions based upon what's happening with the benchmark. But I'm just curious about how you think about benchmarking and what benchmark you use.

Ser Jing Chong 16:33
So with benchmarking, we kind of kept it really simple. So because our fun is, we cannot do the to invest in stocks around the world. So what we first start off us, okay, we need at least some kind of gauge to figure out our performance relative to a collection of stocks around the world. So I guess so for us naturally, we just start off what is like the most well known global index. So in our case, we thought the MSCI World Index is probably a good representation. So and when, as we were launching, as we were building the fund, we kind of also knew that there'll be heavy kind of wastage towards us listed companies. And so we thought, okay, if that's the case, we should also kind of have a gauge to see how we are doing against a broad based US market index. So for example, if we will be outperforming the MSCI World Index, then if we are comparing ourselves against the US index, maybe we can at least see if our performance is simply due to a rising tide in US stocks. Right. So in our case, we thought the s&p 500 is a good representation of, of a broad collection of American companies. So that's just how we thought about it. I don't think we did not put a lot of AV thinking into what is a good or useful benchmark? I think, ultimately, for us, it's, um, can we generate a return over the long run that we think that we hope will be superior to like a broad collection of stocks that individual investors can gain easy access to?

Andrew Stotz 18:00
And maybe you could just talk about how you talk to investors about how they should look at returns and risk of your portfolio. And maybe just talk a little bit about what performance looks like?

Ser Jing Chong 18:14
Yeah, so maybe I can talk about performance. But so it has been really bad. So we launched in July 2020, we started investing for the fund in July 2020. And we are down since inception by slightly over 20%. Whereas the the s&p 500, and both yet, and the MSCI World Index, both are up, like 20 or 30%. there abouts. So huge kind of huge underperformance by us. So that hasn't been fun. But when we launched the fund, we kind of paid a lot of attention and put in a lot of effort to communicate what we were trying to do to our investors. And so earlier, I said that we kind of designed a fund for its returns to be driven by the underlying business fundamentals of the companies that we own. So that has been kind of like the North Star, when we think about how poorly or how well the fund is doing. Of course, the stock price returns matter. But if the underlying business fundamentals are moving in the right direction, then at least we know that we are more or less in the right direction. And that over the long time, we will get to our destination, the journey can be really rough. But if the underlying business fundamentals remain sound, that we will get there.

Andrew Stotz 19:24
Yeah, and it's interesting, because if you started a fund, you know, in 2020, and you didn't invest in the top seven, you know, info tech companies in America, and you say, Well, I'm gonna go for something that's less expensive. You know, there's a lot of good quality companies in America that are making great returns and the market just didn't reward those. In fact, you could argue that we're in a recession in America already in the market, if you exclude the huge moves that's happened in just the top seven or so you know, tech stocks, so I would say that that's something that that I'm assuming that your investors, you know, they understand that and they probably have some exposure in those areas anyways. So

Ser Jing Chong 20:08
yeah, so it's interesting that you mentioned. So we do actually have a pretty decent exposure to some of these large tech companies. So companies like Microsoft, Amazon, meta opera, this is a Microsoft Yeah, so these are all companies that have a decent or heavy weightage in the fund. But we also do have a large collection of like much smaller caps, as well as companies that when we invested had pretty high valuations. So as far as example, like we have companies like Shopify, that hasn't done well since we invested, partly because it had a high valuation when we went in and then when his business was growing really well. And then this is business growth kind of slowed down because it had some food forwarding because of COVID. And I guess, there was a in that, and the market got really worried about Shopify, future growth. But the way we see it is that I think that's a really interesting chart about e commerce retail sales as a percentage of total retail sales in the US. And you can see that in 2020, early 2020, there was a big spike in that particular percentage, and then it went down. But now it's starting to grow the trendline. Again, and I think that when that I think that this particular chart kind of is a good representation for quite a large number of the companies that we have in our portfolio. So when it became kind of clearer that there was some form of COVID Pool forward, and the growth rates, so they were still growing, but the growth rates declined. I think like, there was seem to us at least, that there was a huge overreaction to like their potential growth opportunities, but like as, as is the case now with like, how the ecommerce industry is growing, these companies are still continuing to grow. And they have resumed their trendline freak pandemic trendline. So, that's how that's how we, how we see it, we think that a lot of our companies are facing a similar situation is like what ecommerce as a whole has gone through, during before and after the pandemic.

Andrew Stotz 22:07
It's such a challenge. I know, I have a few strategies that I do here in Thailand that are ETF strategies, and one of them particulars, you know, not done well. And it's frustrating, and it's it's, but I also, you know, as I tell my clients that, you know, the most important thing is that you stick to what you believe, and you stick to your method, and you stick to your model. Because everything, nothing as you've already said, Nothing performs, you know, outperforms all the time and you're gonna go through periods of underperformance. And if you're, if you're switching out of things at that period of underperformance, you end up losing a lot. And I just love what MEB Faber talks about. He's got his show that he does, and he talks about how long can somebody go, you know, how long should you go with, with your strategy underperforming? And he says 10 years? He's just like, like, it's not unusual for a good strategy to underperform for 10 years. I'm like, That is crazy. I mean, nobody can. But his point is that, you know, it's longer than you think. And you know, and med was a guest on the show his he was episode 165. And his title was avoid the physical pain of loss by sticking to your investment plan. So some good advice there. I think

Ser Jing Chong 23:34
that it is. Yeah, thanks for sharing that. I think it makes total sense. I think switching out our strategies, when you're facing a drawdown is, I guess, one of the worst things that can be done. But that's it. It's also tricky, because you never know if like this drawdown is something that's permanent, because your strategy just happened to have had a purple patch previously, right. And then you're thinking, Oh, I guess this style of investing or this strategy actually works, when it's actually when it was actually able to work only in a very specific point in time with very specific circumstances. So that's actually something that I thought about quite a bit when I was launching the fund. So I mentioned earlier that I was investing for about 10 years before I launched the fund. And so the way that I invested individually, and the way that I'm investing for the fund right now is identical. So I thought a lot about half my, so I did pretty well, when I was investing individually. My portfolio was I think, generated a return of one 19% compounded over that over that period. So that's like October 2010, to around June 2020. So about 9% compounded slightly, was having had a pretty healthy margin over the s&p 500. And so I thought, kind of I was thinking had my performance been a stroke of luck, purely a stroke of luck, or is it like due to my skill and I believe that performance has both an element of luck. and skew, and I was trying to determine which was behavior element. And so I came to the conclusion or rather, I kind of derive comfort that perhaps there was a key element of skill involved in there. Because throughout those nine and a half of roughly 10 years, I was very consistent in how invested so I was looking at stocks as a piece of the business, I was holding very long term. I kind of so for some perspective, like, by the time by June 2020, I still have stocks that I invested in in October 2010. There were stocks I invested in 2011 2012 2013, there was still in the portfolio by June 2020. So I invested for a really long run, I was focused on business performance, I did not aware of what was happening around the world, but I did not use that as a basis for making my investment decisions. And so when I thought about that, I thought, okay, maybe there is some element of skill important there, huh?

Andrew Stotz 25:57
Well, I appreciate you sharing all about what you're doing. It's interesting. It's exciting. So, you know, for anybody that wants to learn more, I'll have the link in the show notes. But now it's time to share your worst investment ever. And since no one goes into their worst investment thing here will be tell us about the circumstances leading up to then tell us your story.

Ser Jing Chong 26:19
Yeah, sure. So my worst investment ever can actually be traced back to the time I bought my first ever stocks. So earlier, I mentioned October 2010. So back then I bought six stocks at one goal. And two of them were at oceanics, and National Oilwell, Varco, or mov. So Edward was an owner of oil rigs for mov supply parts and equipment that helped keep oil rigs running, I thought it would in September 2016. And that position gave me a loss of about 77% and OB are sold in June 2017. And it was down about 31% in that position. So the loss is actually pretty big 77% decline. But it's actually not even the biggest loss that I have faced in the stock market. But nonetheless, I consider an OB both to be my worst investment ever, because I had no idea what I was doing. So I invested in them because I wanted to be diversified according to sectors. So I thought that oil and gas was a sector that was worth investing in, since the demand for oil would likely remain strong for a long time. Turns out my view was actually right, that the demand for oil would be strong for a long time. But I was only right to a small extent. And I was actually wrong in hindsight on two important areas. So the first is that there are some sectors that may not be worth investing in for the long run, because their economic characteristics are actually poor. So for instance, there was this study by McKinsey, I think published in 2006 was 2007, or something that show that the energy materials or transport sectors have historically produced very poor returns on invested capital over a long period of time. So that's the first kind of area where I got wrong. And then the second thing is that the global demand for oil actually did indeed grow quite strongly from 2010 to 2016. So the annual consumption of oil actually increased from around 86 million barrels to around 97 million barrels in that time period. But our prices also fell significantly over that timeframe. So from around $80 per barrel to around $50 per barrel. So it turned out that I actually currently still have very little ability to predict the price level for oil. And when I invested in Edward and Ovie, I had completely missed out on the important fact that the price of oil would have an outsized impact on the business fortunes of both these companies. So like, if I were to look back at, for example, its revenue and net income in 2010, were about 650 million US dollars. So the dollar, the dollars that we'll be talking about will be us in the US dollars. So it was revenue and net income in 2010, are about $650,000,000.02 150 $7 million, respectively. By 2016 is revenue, it actually increased to a billion and its net income is the income was unchanged at about 265 million. But the important thing here is that its return on equity has actually fallen from 21% to 9%. In that timeframe. And that happened while its balance sheet worsened dramatically, because of its total debt Edwards total debt actually ballooned from about $230 million to $1.2 billion. So and if you look at mov so from 2010 to 2016, is revenue actually declined quite significantly, from $12.2 billion to $7.2 billion. And his net income actually collapsed from a positive $1.7 billion to a loss of 2.4 billion. So their business fortunes were heavily affected by the price of oil, even though the demand for oil remains strong. So that's my worst investment ever.

Andrew Stotz 29:51
And how would you describe the lessons that you learned from it?

Ser Jing Chong 29:54
So I have a few. So the first one is something that I had shared earlier that there are some sectors that may not be worth investing in, because they tend to historically generate poor returns on invested capital. The other lesson is actually to pay careful attention to the drivers of a company's business results. So what I learned was that there are companies whose business fortunes do not depend on the price movement of commodities. And then there are those who do buy. And that is a really important distinction. And if I were to be looking at a company whose business fortunes are heavily linked to price movement of a commodity, then I need to be honest with myself about my ability to understand what drives the actual price movement of that particular commodity.

Andrew Stotz 30:38
Yeah, and you may even be better off just buying the commodity.

Ser Jing Chong 30:42
Yes, in some cases, yes, absolutely.

Andrew Stotz 30:45
This reminds me, I'll share a couple of things. This reminds me of Episode 597, which was Lance to Pugh, and Lance bought a company called Trans ocean back in 2006. And that company was oil rigs and stuff like that, and servicing. And he basically wrote it up for a while, and then he wrote it all the way down close to zero, you know, very close to zero after so many years. And he got out of it in like 2020, something but you know, 2020. And after, and Lance, I knew him in Thailand, he lives in the US now. But you know, I knew of him. And we knew each other a little bit in Thailand. But the point is, he was a very smart analyst, and a smart fund manager, very smart guy. And I had a title that one you're going to lose despite your best efforts. And I realized that here's a guy that really understands oil and rigs and servicing those and oil prices, he understands that completely, and he still struggled. And so that's where these types of companies that are impacted by these external drivers. When I teach valuation to young people, I try to teach them about external drivers versus internal drivers. And, you know, I like you like a company like I don't know, let's say McDonald's, where they're opening up next, the internal drivers, how many branches or how much revenue per branch, those are internal drivers. And there are external drivers like you know, what's happening in the global economy and stuff like that, the price of you know, meats, or the price of potatoes, or whatever, but those aren't going to drive it that much compared to companies that are totally driven by external drivers, like shipping companies like oil companies, like commodity based companies, and they're just you've got to be on top of those. And you've got to realize that they're, they're just extremely volatile, and that you just got to get out of them at times. And that's kind of I guess, my biggest takeaway is just the understanding the difference between internal and external drivers, as you mentioned, the word drivers, which is a great, great word, and a great way to understand what's driving that business forward. And if it's a lot of external drivers, be careful. And then you add to that,

Ser Jing Chong 32:54
nothing to add, I think.

Andrew Stotz 32:58
So let me ask you, based on what you learned from this experience, and what you've continued to learn, what's one action that you'd recommend our listeners take to avoid suffering the same fate.

Ser Jing Chong 33:08
So I remember that one of the big investing topics in the second half of 2022, was about how the supply and demand dynamics in the oil market could lead to sustained high prices, oil. And around the same time, I also came across a relatively small water and gas company named unit Corp is listed in the US. The company had three business segments and upstream business where it produces oil and gas. It also had a midstream pipeline business, transporting oil and gas and had a downstream business where they owned oil rigs. So back then, when I came across unit costs, that will be like in the second half of 2022, he had a market cap of around 567 million US dollars. But its upstream business was worth around a billion, and his downstream business was worth around $400 million. So even without considering the midstream business, unit Corp upstream and downstream businesses already had a combined worth of around $1.4 billion, which is significantly higher than its market cap back then. And moreover, the company had a net cash balance sheet. So it looks like a really interesting value opportunity, right. But the value of unit corpse upstream business was calculated based on oil prices of around $50 per barrel. And the downstream business value was actually based on oil prices being around I think it was $90 per barrel. So this got me thinking back about like what could actually drive oil prices. And so I remember our record my previous experience with Edward and OB, and I know I have a very little ability to predict the movement of oil prices. But at the same time, you know, the commentary on the supply and demand dynamics in all markets sounded really reasonable. So I decided to look deeper at the history of oil prices, and what actually influenced them. And what I found really surprised me. So the first thing I realized was that over the past four decades, there were about five episodes where oil prices suffered a major crash. So like the first was 1980 Do not 86 when oil prices fell from 13, to 10, and then there was 1990 to 1984, where prices fell from 40 to less than 14. And then there was 2000 in 2009, when oil prices fell from 140, to around 40, and then 2014 in 2016, when prices fell from 110 to less than 33. And then there was 2000, when oil prices actually fell from 60 to negative 37. right first time in history. But throughout this, the interesting thing here is that I managed to find data from BP, or I think British Petroleum, which is one of the largest oil producing companies in the world. And the data completely show that from 1981 to 2021, which was the past four decades, demand for oil was actually higher than supply and every year. And so in other words, the five major crashes that I mentioned had happened, despite demand for oil been higher than supply every single year. So I actually share this with one of my friends, Eugene Kumar. Thank you, Kelly recently, and he noticed that the US Energy Information Administration, or the EIA has its own database resource for long term oil consumption and production across the world. And yeah, the EIA is data was actually similar to Dell or PPS. So Eugene actually reached out to the EIA, and they responded, and what they said was that it actually could be errors with the data and they share some examples with us. I can't remember what those examples are top of my head. But basically what the EIA was saying is that the demand and supply data could have some errors. But in any case, even after knowing that the data could contain errors, I still can't tell. But the actual demand and supply dynamics of oil work during those five major pressures that happened over the past four decades. So in other words, I could not develop any form of confidence in the commentary that I saw about the supply and demand dynamics of oil, and how and how this could lead to a sustained high level for oil prices. And because of this, I also could not develop confidence in the thesis for unit Corp. Right? So this is a kind of, I guess, a long winded answer to the one action that I would recommend listeners to take based on my experience with my worst investments ever. And that is to really look deeply at what has historically driven the price of a commodity, you know, if they're trying to invest in a company whose business results depend on the price of the commodity.

Andrew Stotz 37:23
Yeah, it's just, there's so much work to be done on that. And then what you find is that commodities are driven by all of these crazy factors like country, you know, or the OPEC trying to pull back or, you know, just perceptions of economic growth and all that. By the way, ladies and gentlemen, you can hear Eugene goons episode that's 677. The title of that one is keep playing the long term game of investing. I know you guys think a lot on like, so let me ask you, what is a resource that you'd recommend for our listeners,

Ser Jing Chong 37:57
but my recommendation would actually be Robert Shiller's historical database on US interest rates, US inflation, and validation price and dividend data for US stocks. So the database actually goes back to the 1870s. And so that's about 150 years of data. And the best thing is that it's completely free. You can google Robert Shiller data and the first few results that pop up will probably be What brings you to that particular database. So Robert Shiller's data has nothing to do with like what I've been sharing earlier about, like my investments with Edward and all the oil prices, or whatnot. But I find it to be a really wonderful trove of data for investors to learn about market history, so that they can have some base rates about how stocks, interest rates and inflation have performed in the past. So like examples of things that I've learned while playing around the data, so I learned just how common it is for stocks to decline by 20% or more, you know, even as they are on their way to generating decent long term returns. So a 20% decline happens about once every one or two years. So sometimes, you know, people freak out when they say, Oh, the stocks are down by like 20%. But it is common. And I came to learn about this because I was playing around with the data. And one other interesting thing I also learned is that the valuation ratios for stocks or US stocks, have actually also increased over long periods of time, where interest rates have risen. Right. So the general idea about interest rates and stocks is that when interest rates rise, valuations will compress. But the history actual historical data kind of shows otherwise. So I think this is important to note, because I find one of the worst mistakes that investors can make is to, you know, make what I call A then B kind of decision. So it's basically saying that if A happens, then B would happen, but I think investing is seldom so clear cut, you know, there are a multitude of factors to consider. So like going back to like Robert Shiller theta. So I know if someone who were worried about interest rates and high tech stocks, I think it was helpful If you had paid the data, the price, you realize that while actually interest rates do not affect stocks in such a clear cut manner as what conventional wisdom would do is a

Andrew Stotz 40:10
great resource. That's an econ.yale.edu/~silla/data. And I'll have a link to that in the shownotes. I go through that data all the time. And I've just done so many different research out of that, to try to understand the history. And I think that's a good lesson for all of us is understand your history, you know, one of the things that I respect about you is I'm looking at your books, you can't help but see all those books behind you. And I see a lot of the similar books on the bookshelf as I've had. So that's great. But it just reminds I think, all of us to continue to improve. And I, I think that's, that's what's really the exciting thing about investing is that you're constantly improving. Last question, what is your number one goal for the next 12 months?

Ser Jing Chong 40:54
Well, I'm actually more of a process person rather than a goal oriented person. So I do not have any goals for the next 12 months, or like, for the future, what I have, I guess, just processes in place that I think can make me a better person and a better investor. So like, just simple things, actually. So it's like, having a process for eating cleanly. getting plenty of exercise, having occasional periods for meditation, and just, you know, having long periods of time throughout the day for reading and thinking. So just simple things that I'm doing, that I'm putting in place in my life, that I hope I can make me become a better person investor.

Andrew Stotz 41:33
Yeah, that's good, good, good ideas for people out there to think about the process the inputs, because if you get the process and the inputs, right, eventually, you're gonna get the outputs. Right. I know, I have a mastermind group I do with a group of people in every Friday, and we do an hour long thing that we go through our prior week, and we plan for the coming week. But what we focus a lot on is our daily habits. How are we on our daily habits, because that's part of process. That's part of building into your daily life, what you want, what what what you willing, what you're going to do to get the results or the goal that you're aiming for. So totally love them? 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 surging, I want to thank you again for joining the mission. And on behalf of ACE Dance 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?

Ser Jing Chong 42:41
Yes, I do. So this podcast is actually about our worst investment ever. And I think most people will think about their worst investments, we'll think about stocks, they bought that then go on to fall tremendously in price, maybe because of say a high initial valuation right. But I think a timing component also needs to be brought into picture when thinking about this issue. So I'm going to very quickly run through the history of a real company, right. So if we go back to August 1972, this company had a stock price of four cents, and a P E ratio, that's height of let's call it 55. By December 1972, the stock price has sunk to sorry, December 1974, the stock price has sunk to one cent, so there's a 75% decline. And the P E ratio also fell to around seven. So the story ended here. This can probably belong to like the word somebody's worst investment ever. Episode, right. But the story didn't end here. By the end of 1989, the company's stock price had reached $3.70. So that's around 90 bagger from the August 1972 price, which equates to a 32% annualized return. And from 1971 to 1989, the company's revenue and earnings per share grew by 41% and 31% per year. So the stock price can actually follow the business's growth very closely despite a huge drawdown in tourism. And so I think knowing all of these will this, this company no longer looks like the answer to somebody's worst investment ever. So that's my point of view. Right? And so the company I'm talking about, it's actually Walmart, and I think that's a good place to finish my parting word.

Andrew Stotz 44:11
Yes, excellent. And Walmart is a great example also of a family business. So that is a wrap on another great story to help us create, grow and protect our well 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 worst podcast hose Andrew Stotz saying, I'll see you on the upside.