Lessons from Datuk Seri Cheah Cheng Hye

Datuk Seri Cheah Cheng Hye co-founded Value Partners Group Ltd in 1993, which has become one of Asia’s biggest fund management companies, listed in Hong Kong. Under his leadership, the firm has US$14 billion (RM62.4 billion) in assets under management at present from US$5 million (RM22.3 million) during its inception and has won more than 140 performance awards. In 1971, he started as a reporter in The Star but pursued finance in the 1980s. Today, he sits on the Financial Services Development Council of Hong Kong, which advises the government on the financial services industry, and was recently nominated by Hong Kong Exchanges and Clearing Ltd., the operator of the Hong Kong Stock Exchange, as an independent non-executive director to its board.

Background of Datuk Seri Cheah Cheng Hye

17 years with The Star from newspaper folder to journalist to selling off his bike going to HK and founding fund house Value Partners.

1st asset management from listed on main board on HKSE.

Most important thing is values: putting client first.

50% progress due to luck – simply being in the right place at the right time.

Putting aside chance and circumstance, 3 distinguishing factors:

  • Character
  • Training
  • Values

Value Partners Corporate Culture:

As a Value Partners person, I pledge to:

  • Be honest and straightforward
  • Put my pride, not my ego, into the job
  • Always strive for self-improvement
  • Put clients’ interests first
  • Be fair and responsible to shareholders
  • Keep our workplace free from office politics
  • Keep secrets, maintain confidentiality
  • Uphold our reputation for creative, high-value solutions
  • Emphasize a user-friendly, cost effective approach
  • Focus on concrete results, not excessive procedures

Large scale commercial fund management requires these skill sets:

  • Excellent entrepreneur
  • Excellent investment manager
  • Excellent fund raising
  • Excellent operating ongoing business

Success formula:

  • Expert in learning how to learn
  • Reading addict: 80% of time
  • Self starter, self motivated
  • Very time and resource conscious
  • Personal integrity “My name is my brand”
  • Training as journalist helpful in putting events in historical, political, and social context
  • Not getting caught up in money disease “Money is a product of professional dedication”
  • Strong soft skills: leadership, courage, imagination, communication (in PFS)
  • Contrarian investor: beyond conventional knowledge – the edge
  • Extreme self discipline “More demanding on myself than others”
  • No ego – the “stupid-smart” idea: eager to admit mistakes and weaknesses; never satisfied with personal achievements
  • Moves quickly from one objective to another (Despite 1/3rd error rate, correct moves quickly offset the mistakes)

 

Stock Market Investing: 5 Important Lessons

1 – Value investing is the most effective investment style

  • Based on common sense: Buy the 3 Rs
    • the Right business
    • run by the Right people
    • at the Right price
  • Remember, it’s not a stock but a business.
  • But it doesn’t work all the time – because financial markets are inefficient and emotional. So, sometimes investors don’t care about value. Stock markets have millions of investors who can do illogical things.
  • Our own experience tells us that value-investing works, more often than other styles, such as “momentum investing”, “growth”, “top-down”, “macro investing”, “chart treading and technical analysis”, “feng shui”, etc. Other investment styles may work in the short term but doesn’t work long term.

 

2 – Be a long term investor

  • Short term traders may have short term periods of strong results but over long periods, say 5 to 10 years, the majority lack the stamina to sustain the performance.
  • The house always wins.
  • Majority of short-term traders are too influenced by “noise” in the market and end up buying high and selling low.
  • Long-term investors can focus on fundamentals of the business and ignore market volatility.
  • Summary: Be an investor, not a speculator; Investing is for the long term; Short term traders speculate, easy to make mistakes.

 

3 – Prefer stocks with high dividend yields

  • Dividends may contribute 2o% – 30% of a portfolio’s total return.
  • In difficult markets, high dividends are often considered a safety net and can also help provide the investor with income.
  • In Malaysia it is net dividend as already taxed at corporate level.

 

4 – Be a contrarian

  • Be aware that what you know, most of the time, is “useless” knowledge. i.e. information and views so widely known that it’s already reflected in the price.
  • It’s difficult to make big money doing what everyone else is doing.
  • You are always a buyer or seller. If you’re buying, why is the seller selling? Does the other guy know more than you and you’re being taken advantage of.
  • People think you’re crazy. i.e. When started fund focused on China B Shares market, people thought he was crazy.
  • Investing in stocks that are unpopular or out of fashion – known as “contrarian investing” – can result in really big profits, provided you pick the right opportunities.
  • To be a contrarian requires courage, excellent fundamental knowledge, and a lot of patience.

 

5 -Strength of character is the real secret

  • Not about personal or family background. Self only high school education.
  • Killer instinct: be ready to kill (not like a HK movie whereby lots of fighting but no killing)
  • Key requirements include:
    • Be disciplined, humble, and ethical.
    • Passion for the art of investing.
    • Hunger for knowledge and learning.
    • Quick and decisive in action – “killer instinct”.
    • Strong fighting spirit, can handle defeats.
  • Decision making is an art itself.
  • A separate skill when to cash in and exit.
  • Usually exit when one no longer have an advantage – others know what you know.

 

Q&A

Q: Recently have seen a lot of capital controls due to decline in value of RMB.

A: It’s continuing but has happened before. It is a controlled economy. It’s not as serious as before as last month forex reserves increased. It on what China is to do but what USD does. As USD weakens, there’s less need to keep our currency weak.

 

Q: Look at current situation with young professionals. What are the investment focus they should focus on.

A: Unlike my generation, the challenge for the younger generation now is much different. AI and robots will take away many of the jobs. Even reporters are replaced with robots. Tech type jobs are going to be an important thing. Not recommending job in finance industry as there’s an oversupply of investment bankers and fund managers. With ageing demographics, health care, education and tech expected to boom in new economy.

 

Q: Sabres rattling between China and US. Political, trade, etc. How do you see this panning out.

A: I may be wrong but am not overly worried. US and China may not like each other but they are co-dependent on each other. US notorious for low savings rate and need to import capital. Biggest supply of capital are East Asian countries: China, HK, Japan, etc. No politician not even Trump will take that kind of risk. China needs continuing stability for doubling per capita income ahead. Targeting USD11k per capita income post 2020. Expect a lot of talk and posturing but no war.

 

Q: Recently a lot of Chinese investment in Malaysia. From your POV, do you think there’s justified there’s such scepticism?

A: China is the world’s biggest country (1.54b; 1 in 5). Forest City and other investments are individual decisions made by people who are sick of the pollution and also the crazy property prices in China. It’s not a “China as one body” but decisions made by individuals like you and I. Hope property developer will be lenient with the buyers.

One of the biggest problems is overcapacity. Too many factories with too much capacity. One belt, one road. Build up infrastructure at a very competitive rate as need to export.

 

Q: Your view on Malaysia’s investment and political climate.

A: Biggest factor is Malaysian ringgit. If a US investor had invested in last 3 years would have lost 25% mainly due to forex costs. Opinion that Malaysian currency has bottomed out. Oil has bottomed out and palm oil stabilised. Correct level USDMYR (from other experts) should be 3.8-4.1. If we think the currency is not going to hurt us, investors like me will be back in Penang.

 

Q: What is your most profitable and worst investment in your life in terms of value and why?

A: Worst: Oasis HK airlines invested $30m which went bust in 6 months. Approached as AirAsia of China. Stupid enough not to recognise that. First flight to Moscow was sabotaged and not allowed to land. Paid most taxes in HK that year even more than Lee Ka Shing and ego got to head that did not do usual checks.

15% of BYD listed in HK. Buffett discovered the stock and quickly sold to Buffett. Secret with the car mounds when starting out. Today BYD known as pioneer making electric cars and buses.

Another kind of success story QuoMei Electrical. Back then largest electrical goods distributor. All the fund managers were invited to attend a breakfast. Was informed of good performance. After 10 minutes, excused self to go to the washroom. But actually went to buy 5% of the company. Be fast and alert. Have the killer instinct.

 

Q: Public listed companies are not really public listed. Only small % available to public. Incredible remuneration for major stakeholders. (Corporate governance).

A: Life is unfair. There will never be a fair world. You play with the cards that you are dealt. So what you can with what you got. Don’t make a career of confronting people. There are enough good companies to get good returns. Focus on the good guys and not the bad guys.

 

Q: One of Buffett’s strategy is to buy a company. Write only a letter to the chairperson. What approach do you take?

A: Buffet operates in a different market. His fund is so enormous as the 2nd richest person in the world. He can only invest in very large and liquid companies. In US, mostly institutional investors.

 

Q: What are your legacy plans. Like Buffett or Bill Gates?

A: Will not talk too much on personal matters to a large crowd. My company is only a medium sized company compared to the largest companies in the world. 46% savings rate in China with no way to go. To some extent they are not getting it. China is in the process of opening markets and where money from China will come out and must be put to work. This is a huge industry for fund management.  A historic golden opportunity to be a world class asset management company.

 

Q: Your view on the next financial crisis? Originating source? When?

A: Significant chance to happen. Maybe 5 or 10 years. Likely worse than 2008. Likely from Europe or North America. Likely political which drives their economy. Biggest force affecting nowadays is central banks. Due to populist politics where politics say whatever it takes to get and stay elected. Even yesterday, Trump’s Ovamacare repeal failed. Western education has reached a critical stage.

 

Q: What were you reading in Penang library back then?

A: Everything. But especially history and chess. Devoted game fanatic like blackjack and poker. A systems player but not a gambler.

 

Q: Many Chinese companies coming in. Local companies threatened. Is there a cause of concern?

A: I don’t know as I’m not a policy maker. Important to not get caught in the middle income trap. Other countries that were behind have overtaken us. It’s a competitive world. Let the professional politicians find the right balance.

 

Q: How do Value Partners implement succession planning? Do you try to get your kids involved?

A: Children are too young. Oldest son wants to be a writer. Succession planning: as a listed company have strong obligations. We now have multiple generations of fund managers. I hope I will be doing less and less work. Right now work 7 days a week and want to reduce to 4 days a week gradually.

 

Q: Meltdown of stock markets expected to happen. How much (%) of funds are in cash waiting for crash to go in?

A: Theory of handling a financial crash. Holding a bit of gold but that’s it. There’s a possibility to postpone it til much later if central bankers find a way. There’s no way to invest as a fund management if you fear a crash. Mindset make 200m and even if you lose 50%, you have 100m. The way to handle crisis is to make as much as you can during summer times. So you can survive the winter.

 

Q: Foresee RM strengthening. Does it mean what you will be buying?

A: Good start for the year. Expect with RM strengthening. Right now only invest in palm oil but will be looking into other investments.

 

Q: So many funds in Value Partners. What top 3 would you recommend. And how to invest.

A: Can buy Value Partners through Affin Hwang. Or buy China value fund ETF listed on HK exchange.

 

Q: How will you defend being a small player versus international large sized investors.

A: A professional challenge in how to handle increasingly growing fund size without degrading performance. And accept lower fees but demand best performance. Exploring use of bots and mass manufacturing techniques. How to transform the skills of one sifu into a mass manufacturing factory where you need 100 sifus.

 

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