Do Concentrated Portfolios Perform Better? – Chris Lee Susanto from Re-thinkwealth
In episode #8 of Chills w TFC, we bring on a very popular investment blogger. He runs counter to the broadly diversified portfolio beliefs and has a very concentrated portfolio. But, how does he go about doing it? And can he outperform the market?
Join me as I chill with Chris Lee Susanto from Re-thinkwealth blog to discuss about the concentrated portfolio strategy. What are some key factors to look out for in a high quality company? How to hunt for high quality companies? Is valuation really that important in investing? How to evaluate whether the management and business is good? Tune in to find out!
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Chris: Can you guess if we have invested just $10,000 in Microsoft 30 years ago, how much would we have now?
Reggie: I don’t know, man. I didn’t count.
Chris: Okay. Maybe make a guess. $10,000 in Microsoft 30 years ago. It’s one of my favorite example.
Reggie: A million dollars?
Chris: No, it’s $13 million. [Laughs] Yes, of course, it’s hindsight bias, but it shows that if we invest in stocks, not from the trader mindset, if we invest in it from a business owner mindset, so technically we are also a part business owner, right. And then we really own that stock. We really own a share in the business. I think a lot of people forget that aspect.
And then the reason why a lot people sell too soon is because they fail to understand the business well enough to forward position themselves, to know that whether this business will still grow or not, whether this, this business will have earnings that is ever-growing or not.
Reggie: So broadly diversified is a thing today, right? Everybody talks about that. When you invest, you got to diversify, you got to spread your risks. You’ve got to be everywhere so that you can reduce your downside, maximize your upside, blah, blah, blah.
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Even your crypto guys, your stock pickers, they’re all talking about broadly diversified, having 30 to 40 different stocks within your portfolio, which is why I got a friend on today to talk about the other side of this discussion, creating a concentrated portfolio where you only own a few stocks. How do you go about doing this? And can you actually outperform and do very, very well in the market over the long period of time? So welcome home.
Welcome to another chills with TFC session. In this series, we hope to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker. So in our pursuit of a life we love while managing our finances well, our guest for today is Rethinking Wealth. He has been picking stocks for many years and has amassed quite a following online without succumbing to media hype.
More importantly, I got him on because he runs a counter to the broadly diversified beliefs out there. He actually has a very concentrated position in about 8 to 10 stocks at any one time. And I want him to share with us how he do it and why he does it, and how does he perform over an extended period of time?
So let’s welcome Chris Susanto from re-thinkwealth.com.
So you said Microsoft as an example, but how do you know at that point in time that Microsoft is going to be the thing. You know what I mean? Like 30 years ago, this is super hindsight bias, right? Like 30 years later, okay. Like Microsoft is the thing.
But at that point in time, how would you be able to then understand that, oh this is the thing.
Chris: Yeah. A great question. And I’ve reflected on this kind of questions for many years, right? In my investment experience. And people say it’s hard to know when to hold and it’s hard to know when to sell, but I think over time, I have an idea of knowing when to hold and when to sell.
I have this framework that’s called the 4M 1S growth framework. The first M is mindset. So the mindset, we have to first start from a business owner mindset, because if we start from a trader mindset, no matter what we know about the business, we will sell when it doubles or we’ll sell when it’s up 30%, you know, you never go broke by taking a profit.
Reggie: Yes, yes.
Chris: Might be true, but you might be losing millions by taking a profit also. So how can we know? The second M in the 4M 1S growth framework, it’s the management and business. I think this is the trick here. The third M is a mathematical sense, which is valuation. But let me talk about the second M first, the management and business.
Reggie: Yeah. How do you evaluate that, you know, it’s a good management? I think this is very hard , you know, in my view la, I’ve tried many years and…
Chris: I would say the business aspect is slightly more important than the management aspect. Although the management aspect is so very important in some situation. So how do you know that maybe 30 years ago I don’t sell Microsoft? Just let it go, right. From $10k to 13 million. Most people will just sell at $100,000 or $1 million, 2 million. Wow, right. Yeah. The key is that we must understand the business in a sense of what is the business doing? Can it move to an adjacent industry? What is the growth potential?
Reggie: What does it mean by adjacent industry?
Chris: Okay. So Microsoft started with just PC softwares, right? With the kind of business that Microsoft is in, the software business, it’s very liquid. It’s not like a cruise. A cruise is more like you cannot expand to suddenly become you make like softwares. It’s very different.
But if you start from a software PC business, you can go into many industry. For example, you can go into the app industry, like Microsoft did it with, from just a softwares to a subscription business, Microsoft 365, right. And Microsoft from a software business, go into a cloud business, which is a higher margin industry, but it’s all pretty adjacent.
So it’s not like a huge leap, not like from a cruise to a cloud, a cloud business. Microsoft from the PC software business, they move into gaming, and now they are in the cloud gaming business. So we have to know where businesses can move that could potentially power it’s next growth. Amazon, back in the days when they were just selling books, where can the business move?
The business moved to selling everything, right? From just books to selling everything. And then from selling everything, they know that they are online and the cloud is very important to them. In terms of the data center. Then Amazon came out with AWS so that they can save costs on the cloud data site. And AWS is now one of the biggest in the world.
Reggie: Mm. They are the biggest.
Chris: Yeah, they are the biggest, and that’s how they move. Let’s share with you another example. Of course disclosure: I’m not licensed or anything, but yeah.
Reggie: This is for entertainment and education purposes only, right. If you want to have your finances planned, please look for licensed financial planner. Thank you.
Chris: Exactly. So disclosure, I have Facebook. Facebook is an interesting case because it’s facing lots of backlash now. I think a lot of, a lot of investors maybe don’t like it .
Reggie: But I love it [laughs].
Chris: Yeah, exactly. Do you have Facebook as well?
Reggie: Yes I have. Yes.
Chris: So how should we think about the business and management for Facebook? To be honest, my opinion is that it can move well into adjacent industries or other growth area that they are not in right now. Right now, more than 90% of its revenue, probably above 95%, is in advertising.
Of course, there’s a lot of hit wins if it comes to the Apple privacy thing and how it can impact their ad business, but in the future, I think it can move into e-commerce, business solutions, right? Business solutions, e-commerce they can sort of like take the whole, the whole flow, from the moment consumer know about the business to the moment consumer pay for the business, all the way to the moment where consumers get the item.
How can they do that? Right now, like a lot of business are already in Facebook advertising. What is happening now is that they click on the advertisement. They maybe go to Amazon, or they go to the company website, or they go to the WhatsApp and then get the order, right. Pay and then get the order. But right now they are paying through maybe other bank accounts and they are tracking through maybe other means, but if they can have their own payment systems, for example, WhatsApp pay, Messenger pay, and then they can have like Facebook shops where you don’t need to go to external website, you just view what is in the Facebook shops. For example, if the business sell cakes, maybe right now, they’ll be redirected to the website and then the WhatsApp the person. But if all the display are in Facebook, they can just make payment there and then maybe they can track it through WhatsApp.
So Facebook is very interesting because it might succeed or it might not succeed, but it’s a case where the business is fluid enough that you could flow into adjacent industries.
Reggie: Okay. So like you say about like Facebook, Microsoft, Amazon, these are like for lack of a better way to put it, they’re already proven successes, right? Like, same with Disney, Starbucks. Like all these other things that it can go into because they are like so huge already, right. But what about companies that are like coming up? At one point do you know that they can go into adjacent sectors? Must they dominate in their own field first? What is the kind of early signs?
Because that way of looking at things, the ones that you shared, are very exciting for big companies. They’re already very dominant as space and, you know, they, they can try to go into all these other side space, but what about of companies that are younger? Still trying to find their, you know, anchor in the business. How do you know that they are going to be the next big thing?
Chris: Hmm. Okay. So first thing first. I think the next Amazon, might still be Amazon.
Reggie: [Laughs] Okay. Okay.
Chris: So of course, if we go for younger companies, let’s say sub $1 billion market cap, the potential upside is more.
Reggie: That’s very young leh, sub 1 billion.
Chris: In fact, in fact, GameStop was sub-$500 million, but…
Reggie: We are staying away from it.
Chris: Yes. Okay. So I think one of the key characteristic for any types of companies, be it big companies or small companies, a good characteristic is the strength, the durability of the competitive advantage and how much it can potentially grow in the future. We want to look at potential first movers.
We want to look at innovative companies. We want to look at management that have shown signs of experimentation and product market fit, right. We want to see this kind of characteristic in a company, large or small. Even if it’s already a large company, for example, Amazon back in the days maybe, it’s just about maybe $100 billion, right? And like, people think it’s already very big. It cannot grow.
But actually it’s still, like, went up 10, 20 times, which is amazing returns . So we shouldn’t totally exclude the large companies, if it can still grow, but let’s try our best to look for signs for smaller companies that also have high quality. So what I’ve learned over the years is that let’s try to minimize the downside risk by looking for high quality.
Reggie: How do you define high quality? You know, like a lot of these things, right? Like I get it, right. But everybody has their own unique way of looking at something as like, oh, this is high quality. You know, like, like for me, because I work in certain sectors, right.
I was in the cloud sector for a while, you know? So I have superior understanding compared to your average retail investors, because I have been in the sector, so I know what are the pain points here, what are the problems, and which companies are trying to solve the pain points and it is like racking up a lot of customers. So it’s like on the ground, I understand these things, right?
So I have superior insights, you know, in that sense of like picking the potential ones for the future, right. But from an investor viewpoint, when you are not in the space itself, what are some key factors that you can look out for?
Chris: So we like to look at predictability and high certainty, and we like to see whether the business has stickiness and whether the business have a good growth potential in terms of maybe the total addressable market size.
As a young company, you might want to look at the total addressable market and you look for customer reviews, customer satisfaction, you look for Glassdoor Ratings of the management.
Reggie: Mm. Like Venmo?
Chris: Yeah. I don’t know much about Venmo, but I think they’re also very specialized in their specific industry. So the clearer aspect of high quality is actually, for example, certainty in revenue. That’s why subscription business are priced at a premium because those businesses have more higher certainty of revenue.
Furthermore, you want to look at, for subscription business, you want to look at high retention rate. So what’s the churn rate, right? For example, ServiceNow , I don’t have a ServiceNow stock, but it’s a company that is in the workflow solution, I’ve been looking at it. It focuses on more of the slightly medium to bigger size Fortune 500 companies. And their retention rate is something along the line of 98-99% .
And not only that, their revenue is growing, man. It’s growing at like what? 20, 30 plus percent every year. Even at the current market cap of $100 billion, which is already quite the, like quite a decent size company.
Reggie: Yes. Have you looked at this company called Zendesk?
Chris: Not yet actually.
Reggie: It is it exciting company, okay. You must go and look at it. Because I think from the backend cause I run my company, right. So for customer servicing standpoint, it is a very complex ecosystem at the back, right. From calling, because, you know, when you, it seems like a simple contact page, you know, “contact us,” or like there’s some problem, like a Grab, then you want to like contact the customer service, right? So it seems like a very simple touch point, but before that, right, there were like a wide array of all these providers from call lines to call centers, to service support, and all these things at the back.
So this is actually very complicated, but they systemized the whole thing to become, you know, an API, right. So you can literally just, you know, run a website and just API Zendesk at the back . And then you can go to the Zendesk interface to do all the, all these complicated stuff. So they call it customer centric servicing.
Chris: Awesome. And Zendesk is, relatively speaking to the universe of stocks, the market cap is still sub $20 billion as of today.
Reggie: Yes, it is a very small company. Yeah. And I foresee a great future for them. They don’t have any other competitor. There’s one guy that’s competing with them called Fresh Desk, supported by Google, Google invested in them, and that’s it? So it’s these two guys playing the game . And the retention is very high. Retention is very high.
Chris: Yeah. So I think what you just mentioned are some of the signs of potentially high quality company, right. Which is growing, which are needed, which has a huge temp, right. And the thing is just, I mean, if I invested in such companies, here are the things that I’ll look out for, right. So maybe we’ll just have to monitor maybe every like quarterly and we put a sum that I feel comfortable putting it for a long time and we basically grow with the company.
So potentially the trick is this. I think a lot of people who, again, go back to our Microsoft case just now, if you invested $10,000 30 years ago, now will be worth 13 million.
But if your $10,000 become a 20,000 and then we go by the rule of, take out my capital caught, you will lose the opportunity cost of $6.5 million. That’s a huge sum for your $10,000. You want 6.5 million or you want $10,000 back then? So of course this in hindsight, but again, it goes back to understanding the company.
So if I’m invested in such company, I’ll just be a long-term owner, as long as it’s still sensible to own this business. And for example, Zendesk , could it go into any other industry?
Reggie: Of course, man. Like the whole customer journey in itself is a very complex process, from email pushes to, you know, contact lines, to like contact us forms to, you know, smart algorithm to kind of help you auto reply your customers. You know, your FAQ’s, everything. Those are very complicated. It used to be different, different guys doing small little, little things on their own, but if you can streamline the whole thing into one platform, which is what they did, right, they are in for a ride. Love the company. Sorry ah. Advocate.
Chris: Yeah. Yeah, no worries.
Reggie: But not recommending you guys ah. It’s for education and entertainment purposes only [laughs].
Chris: Yeah. So, I mean, like, I don’t know much about Zendesk , but I will look into it more for sure. We are always on the hunt for quality companies.
Reggie: Yes. So how do you go about hunting? This is one thing that I find very tiring, you know? You know, it’s like, where do you start hunting for good companies? How do you do that?
Chris: From many sources, with friends, like when I’m talking to you, “Huh? Zendesk?” I’ve never even looked at it, right. Okay, let’s put it in our watch list first. So for the viewers who likes investing, one of the thing that I will share with my members, have a routine, your investment routine. So maybe like two hours a week, what day, what time, you know, be very firm about it and to read up on companies to learn more about investing. Just something easy going don’t even need to buy something.
So from many sources, including news. We have to choose our new sources carefully, right? [Laughs] So some of the new sources that I like include, for US companies, Wall Street Journal, Financial Times. It’s good, you know, it’s good. It’s, it’s not too biased, you know, it’s pretty balanced. Pretty balanced is good enough in today’s world.
Sometimes you read up on companies, then you think, oh, this is quite interesting. Let’s put it in the watch list, let’s read up on it later. You can also use stock screener. There are many stock screener in the market, including Finvista .
Reggie: Yeah, popular. I see all the screenshot everywhere.
Chris: Yeah. Oh, finvista.com, including like, I think CNBC might have some screener, I’m not sure. I would say that there are many ways that we can source for ideas and there are many opportunities in the market, but in general, I would just let them come to me. So let the ideas come to us, take our time.
And there’s the Warren buffet baseball analogy, right. In investing it’s a good game. It’s a good business, because you don’t have to invest in everything that the market throws at you. There’s nobody that tells you that you must invest today. So you must wait for the sweet spot where you can hit the home run. So just wait for the ball to come to you in your sweet spot, and then you invest.
So I would say that that’s the approach I like to take. Just let the ideas come to you, but be patient.
Reggie: Yeah. But when we talk about sweet spot, right. Then, you know, as a value investor, there’s always this thing about valuation. In a lot of people, that is the sweet spot, finding “the right price.” How important is that part to you? As a value investor.
Chris: Right. First of all, let’s talk about value investor. I think the term value investor is used too widely. I’ll say that. I would say that right now I’m more of a business-like investor because value investors, sometimes you may think that you’re only looking for value or like depressed companies or cheap companies.
But why do people invest in any company if it’s not them knowing that there’s some value in it? So I would say let’s focus on the business, right. And by focusing on the business, which means that we are looking at good growth companies, potentially like Zendesk , or we might be looking for depressed companies that could potentially turn around.
Reggie: Like Gamespot. [Laughs]
Chris: Like Gamespot. Or we might be looking for a cyclical company that are in a down cycle. Like of course disclosure, I have Micron. I’ve been invested in Micron in the thirties range. Now it’s about 70 plus. So at the 30s range it’s the memory down cycle. The memory prices was very bad, right? And as the up cycle is coming, the price naturally goes up.
So we focus on the business, which also relate to valuation. I think in general, it is always better to own a business at the reasonable price, but that business give you highest certainty and you can sleep well at night and the business can grow and naturally the price would grow. So valuation boils down to, again, what company are you looking at.
Different companies should be valued differently. On a both relative basis and also on an intrinsic basis. So a relative basis is the simple things like price to earnings ratio, price to sales ratio, enterprise value to revenue, et cetera. And you’re comparing it to history and competitors. That is relative valuation, right? So that’s one side.
Reggie: So you want to kind of make sure that you’re paying a fair price across the board, like for people that are similar, like Nike, Under Armor, that other kind of guys, is it, is that how that works?
Chris: So we would want to buy at an attractive mouthwatering price.
Reggie: What is a mouth watering price?
Chris: Yeah. So relative valuation is one factor. Intrinsic is another factor. So one of the ways that I like to look at is for example, your discounted cash flow, et cetera. Then you can have different assumptions. So you can have the bare case assumption. You can have the base case and you can have the bookies.
So you should have some assumptions. After all investing is art and science. There’s no right answer. Like there’s no one way to know that this is a hundred percent worth this, and it’s definitely undervalued, right? So, for example, we have three different assumptions. Then we can have a range of the company valuation.
If the company is free cashflow positive and is growing, then we can use discounted cashflow method, right? If the company is still in a negative earnings or negative free cash flow, very young stage, right? Should we stay away completely? I think we shouldn’t stay away completely, but we should also not get into the hype too much.
For those kinds of company, I like to look at things like price to sales and EV to revenue, this kind of metric because this kind of companies…
Reggie: Have no cashflow.
Chris: Yeah. But that doesn’t mean that these companies are not doing the right thing also.
Reggie: Yes. They’re burning cash to grow, right?
Chris: Yeah. Yes. Yes. So the revenue, instead of flowing down to a positive net income and free cash flow, they might be reinvesting in things that strengthen their competitive advantage further. We want to look for signs of how are they using their revenue.
Reggie: Yeah. Also, one of my friends actually look at things from a calculated standpoint, in a sense that some companies in the growth stage, right, they have negative cashflow, because they are spending money more than what they are making. But he will look at the breakdown of how they spend and remove all the things that he thinks are part of growth, like R&D you know, like all the upscaling of your capacity and he’ll remove all these things.
And he seeks for the net zero, which means like, if all these growth elements are out of the way and the revenue meets the cause and there is a positive cashflow, then he thinks that the company is a good company. Like, you know, it’s ready to turn into a good company in that sense.
Chris: Yeah. This, I mean, that’s perfect. I think that makes a lot of sense. That makes a lot of logical sense. After all, like part of my 4M1S framework is that we have to focus on the management and business. Because sometimes people are looking at things from a first-level point of view.
One of the concepts that I like to think about is let’s think thing of things from a second level point of view. It is like this, then means what? So what your friend did, I think it’s amazing because he’s looking at things from a second level point of view. He’s like saying, okay, it’s negative now, but what are they spending at? If it’s negative now, but if you remove all the non-growth aspect and you separate the growth aspect and like, it makes sense, then it could potentially be something to invest in.
And that is an example of someone who is focusing on the business and looking at things of what could happen instead of what have happened. Because if you look at Amazon back in the days, so many people said that it’s overvalued, right. 10 years ago, 15 years ago. But I think the smart people are those who realize that, hey, actually, they are investing in things that will further strengthen their dominance and could make them more sustainable. And could have an ever-growing revenue and earnings for the foreseeable future.
Reggie: Yes. And I know, okay, I know you don’t like to give stock tips. But we’ve already talked about specific stocks, a lot of specific stocks today. So are there some of these companies that you are looking at in this space of like, they are not exactly positive cashflow.
They’re not like a value play, you know, but they’re like more high growth. That you are you actually looking at that it’s very interesting that we can all, you know, have some thoughts about?
Chris: Sure. Of course again, this no financial advice, it’s only for education purposes, right. But I would love to talk about some of the stocks that I have in my portfolio. Hope that it can be some of…
Reggie: Some examples for us to kind of understand, you know, put your thoughts into a context.
Chris: Sure. So for example, there’s one company that I’m vested in. It is sub 1 billion market cap and in a valuation sense, right, it’s in a value investor “traditional sense,” nobody will invest in such company. The company is called Gan Limited.
Reggie: Gun limited. They sell guns?
Chris: No. G-A-N. So they are a company that does cloud gaming, online gaming. So I’ve also heard of this company from a friend a long time ago. I’ve been building like small position, you know, bit by bit. So it does online gaming.
So it partners with like traditional casino, like Win. So they have like fire contracts and they basically use their infrastructure and tech stack. So there are like online gaming tech kind of company. So they do both simulated non-money gaming and also money gaming. So in countries where the laws doesn’t allow, in the US , so this is a US company. In the countries where the laws doesn’t allow money like online money gaming, they can do this legally by making sure that it’s not like money, right?
It’s basically like, you pay, I think you cannot withdraw. So it’s just for fun. And then in the future, if the state allows, then they can transition very easily. So it’s a very tech online gaming kind of company and they’ve been growing well. They have transitioned from a previously not in NASDAQ then now they have transitioned to stock in NASDAQ , you know.
Reggie: Dude, you bought them that young?
Chris: No, I didn’t. I mean, we don’t have to actually.
Reggie: Yeah. So let them prove themselves first. You don’t need to rush into it.
Chris: Yeah. Yeah. But of course, if we can, then there’s better la, but what I’m saying is that even if we invested in Amazon, you know, 10 years ago, we’ll be doing very well now, right. So for these kind of company, I look at things like price to sales, EV to revenue. And then we compare with historical. And I don’t mind paying premium. It’s actually quite expensive. The price to sales is over 10 from what I know. But it’s a company that I’m comfortable with.
Reggie: What is the percentage growth for sales numbers?
Chris: If I’m not wrong, I have to double check, more than 45%, might be more than 50%.
Reggie: Wow. Okay. Two years they will double. Every two years they double.
Chris: Yeah. Yeah, yeah. They are quite a leading player in the industry. Of course, there’s the competitors like the highly hyped Draft Kings.
So this is one example and I also like to look at special situations. So for example, there have been the crazed hype about SPACs, right. So SPACs are a special purpose acquisition vehicle where a company can go into the stock market, not through the IPO traditional way. They could merge with a SPAC who is already in the stock market. SPAC has been, there’s lot of hype in it, because I think in the last one year, there have been over 300 SPAC in the market.
So SPAC could potentially be very risky. It’s a company where we can not value it because it’s still nothing, right. It’s like a blank shell, then there’s a merge. So I invest in SPAC, but I look at the manager properly.
Reggie: Of course, that’s all you look at actually in a SPAC. Who is the manager? Who has connections here?
Chris: Exactly. So for example, one SPAC I’m vested in, also not a big stick, but okay, it’s called Pershing Square Tontine Holdings.
Reggie: Pershing Square, okay. I know them.
Chris: Yes. Bill Ackman. He’s a value guy. He’s a smart guy, right? He’s a guy who don’t gamble. He’s like a decent investor, very smart guy. And basically his SPAC is the world’s biggest right now.
And yeah, and he have a good track record of SPAC also. Did you know that about more than five years ago, I think, he did a SPAC. And that merged into restaurant group, which own like, if I’m not wrong, Popeye’s, Burger King, et cetera. And it has compounded like maybe close to 15, 20% over the last five years.
Yep. So, yeah, so these are some of the names.
Reggie: So, but then when you go into the market, you know, and what you say is, you buy a little bit of this, a little bit of that. So they probably don’t form the bulk of your portfolio, right. It’s like, it’s like, they’re a little bit la, right?
Like, oh, okay. I think this is fine. We can try a little bit, 1%, 2%, we just play around and just kind of see if it, if it creates a miracle, right. For lack of a better way to put it. Because you want to sleep well, right. So most of, most of your capital, will be in established companies with growth potentials and you know, that’s kind of the main chunk. And then these guys probably are the small guys, or at least that’s what I’m guessing, right. So how do you then manage your portfolio accordingly in terms of like deploying your capital? Like how do you deploy them?
Chris: Yep. So part of my 4M 1S framework, which is the fourth M, is something that goes along the line of money and portfolio management. So managing our cash and our portfolio. From Benjamin Graham’s teachings in The Intelligent Investor, I think he said that…
Reggie: I mean, it’s a good book, but it’s so hard to read. So old school. The English is so bad.
Chris: I did a book summary. You can check it out in my blog [laughs].
Reggie: I’ll read the books summary, yes, yes.
Chris: Yeah. So I think he said that it’s okay to speculate. There’s nothing immoral about it, but we have to be clear if we are speculating or we are investing. So he said that we can have like mad money account of 1 to 2% in our portfolio, right. For, you know, see what happens, you know, it’s okay because it’s 1 to 2%. So I think that in general, I always like to invest in high certainty.
That I think is high certainty la. I don’t know what would happen, right? So like even the example of SPACs and Gan Limited that I shared with you, a few, I invest definitely more than 1 to 2% or not. It’s not a gamble for me. It’s something that I’m quite confident about. So I only put money when I’m confident about it.
And if I’m confident about it, I like to put as much as I can. So I’m a concentrated investor. So I don’t diversify a lot. So maybe 6 to 8 stocks. Yep. In fact, the lesser the better, but in general, if I find a new idea, right, then I might want to allocate a little bit into it.
But a little bit is also more than 1 to 2%, because it should be of an okay size because after all it is something that you are certain about, right? Because for me, if you are not certain about it, if you want to play, play, or like, you want to see what happens, then 1 to 2% is okay. Okay. Yeah, see what happens. But if I’m certain about it, I want to put more than 1 to 2%. But, but maybe not a lot, like, you know, especially if you are still building your position .
Reggie: But 6 to 8 companies is very little, you know, super concentrated.
Chris: Yeah. So, so again, depends on our style.
Reggie: Yeah, yeah, yeah. Share with me more, like, your style because I hold about 30 companies. So I have the big boys, the big bulks, right. And then, and then I have one of a few of those, like I’m interested, but I’m not particularly sure what’s going to play out. Because like, they are they in the growth space, but you know, when you’re in the growth space, then sometimes the big boys come in and they will fight you out. And those kind of guys, right. So, so I, I have a little bit of about 30 companies in my composite, but you have 8, man. Tell me why you do the 8 guys.
Chris: Sure. Yeah. Okay. So let’s go back to the first objective of stock investment. Sleep well at night, that’s the first objective. So we have to take the first criteria first.
So no matter 30 stock, 40, 50, 6, 8, or even 2 or 3, as long as you can sleep well at night, then that’s okay. If I’m not wrong, the previous director of Morningstar in the US, I think his name might be Pat Dorsey, he has his own fund now. Think he managed about $300 million. He said that last time his stocks, only has one stock. His whole formula is just one company.
Reggie: What did he buy?
Chris: I don’t know what he buy, but even his fund now is quite concentrated, I think, less than 10. But we have to take the first bracket, sleep well at night, because if we cannot sleep at night, we will not make rational choices. When we make emotional choices, no matter what’s our position like, we’ll likely not do well.
So go back to the money and portfolio management, the third M of the 4S 1 M framework, it’s that I’ve always believed that if let’s say we make 100% in this stock ah, but we only have 1% in it, as a portfolio we’re only up 1%, you know, so that’s why I like to position myself the best that I can.
Only invest when I have high certainty. And if I have high certainty let’s try to invest decent size, because high certainty is hard to come by. But when there’s high certainty, why I like concentrated is that when I’ve high certainty, I invest in that. If I’m right, then in terms of the portfolio outperformance as compared to the market, it will be more, it will be easier.
Reggie: Of course. Because you’re very concentrated.
Chris: Yeah. If I have like 50 stocks, I need overall all the 50 stocks to outperform or like, yeah. So, I mean, if you think about it, business owners, let’s say, the owner of Haidilao or the owner of Far East Holdings. If you think about it, they only have one stock ah. [Laughs]
How they become so rich ah, it’s just owning that one stock, their business. So if we come from a view of a business owner, right, as like stock investors, then I think if we can sleep well at night, it doesn’t matter how much stock you invest in. As long as you have confidence in that particular stock. So, I don’t know. I hope I answered your question. The reason why 6 to 8 stocks is because I’m comfortable with that.
Reggie: So how often do you then rotate them? You know what I mean? Because 6 to 8, kind of means like, you really don’t hit a lot, you know, like most of the guys that will pass by, they literally just pass by you. You will not pick them up, right. So then how often do you, do you rotate them?
Chris: Yep. So part of my 4M 1S framework, the S is actually the strategy. The strategy to enter, to hold, and to exit, right? So in terms of rotation, I like to also think about it in a relative term of what stock I have now. What is the opportunity that I’m looking at? If let’s say the opportunity I’m looking at is much more attractive than what I have now, either I will sell all or I will sell some to put into that new opportunity that I have.
So whether I want to sell or I don’t want to sell– but I try not to sell because patience makes the big money, I think there’s the concept, right? It goes back to whether have your thesis been playing out, what kind of stock it is. If it’s a cyclical stock, then you might want to consider, is it at the up cycle already. Then you sell.
So how often I rotate depends on whether the story and the valuation have been playing or not. And how attractive is this opportunity that I’m looking at that I could potentially transfer. Yep. And the reason for 6 to 8 or maybe 6 to 10 or whatever, right, is that the lesser company that we look at, the more focused we can be, and, I would like to say, it might not be true, but I like to say that the higher probability of us making the right decision. Because we are only focusing on so little companies.
If we focus on 50, oh, then you are looking from the angle of broad portfolio management. Maybe you’re looking at quantitative, you know, those who have like hundreds. And that’s fine, you know, that’s okay. But that’s just not my style. Different strategy.
Reggie: Yes. Yeah. I know. I totally get what you’re saying. ‘Cause with like 20, 30 companies under my belt, sometimes I’m like, I just can’t keep up with all of them. So at first, when I first started, I will read every quarter, right. Quarter financials, right? Nowadays it’s like annual report. Really, I only read annual report. [Laughs]
I have no time! Partially because podcast is picking up. So life is picking up and, you know, back then I was just traveling. So you know, I have a lot of time to just kind of keep reading, keep updating, and you know, whatever I think it’s interesting, I’ll pick it up, but you know, now it’s like, I have no time and I’m like a solo guy doing this thing, so yeah. So, yeah. I only read annual report and investor day.
Chris: I mean, that’s perfectly fine. As long as it tick your first checklist of sleeping well at night.
Reggie: Yeah, I sleep very well.
Chris: That’s awesome. Yeah. Then that’s great. You know, knowing ourselves is the first step to investing, knowing our character.
Reggie: Yes. So on that basis of like building your portfolio and owning the small little amount of stocks, right, then how do you then keep buying more into your positions? You know, you’ve got to generate cashflow to do that, right. What are some strategies do you use to generate cashflow? Is it from like your business or your work, or what do you do to kind of make the extra money to keep adding position onto your 6 to 8 companies?
Chris: To be honest, I don’t really actively try to add positions into my companies. I would just let this go. You know, be like water, right. And in investment it’s true, you know. Just let it come. You know, some stocks may have increased, then you can sell some to buy other stocks, or you can sell some to add to your other position that the thesis haven’t played out yet, possibly.
But of course I have my business on the education side, et cetera. There might have some cashflow there and we can potentially add more into our portfolio. I think if I have a career I’ve work, then you know, our salary, we can potentially add more into our portfolio, but I’m not an advocate of just adding for the sake of adding positions. Yeah.
Reggie: Tell me more, tell me more.
Chris: Yes. I really liked to look at really company specific. So this company: where is it at? Where’s the business at? What’s the management doing? What’s the valuation now? Is it still on the mouthwatering side, or is it on the fair side, or is it on the expensive side?
If it is on the mouthwatering side then I might, I might be more active in buying more. I might sell other position to buy this more or I might add from my education business or from other sources, right. I think that’s the way it should go. I’m not a very systematic guy, like add every month to these positions, blindly.
I like to see where is this company at. Yeah. So that’s why, again, if I have like 50 companies, I cannot, but if I’m only looking at, I mean, if I’m only looking at a few companies, 6 to 8, 6 to 10, I still can. Because I’m very focused. I try to be as in-depth as I can, I try to be looking from a business owner, looking at its future, then, you know, you kind of have a sense of whether it makes more sense to add, or it make more sense to sell some, to add into others, it’s easier that way for me.
Reggie: Yeah. Fair fair. I get that. So essentially you don’t believe in the whole like DCA thing.
Chris: I believe the whole of DCA thing, and I think DCA works for a lot of people. The reason is very simple. Because some people, maybe if you’re not so passionate about investing like me, you know. I’m quite obsessed with like, I don’t know…
Reggie: I see your social media I’m like, hmm, this guy is obsessed. [Laughs]
Chris: Exactly. Exactly. So like, if you’re not obsessed like me, like, you know, everyday you just read news, read about companies, then DCA makes perfect sense for most people. And that’s great, you know, because the reason is simple.
Of one fundamental fact that I think a lot of investors would agree with me. The market is unpredictable and in fact, a company itself in the short-term, less than one year, it’s quite unpredictable in general, right? So how does DCA come into play? DCA is that you take advantage of the fact that the market is unpredictable.
You stay invested for the long run. There will be some times where the market might be on the high side. There’ll be sometimes that the market is on the fair side. There’ll be some times where the market is on the depressed side. But if you DCA, what’s going to happen is that you get the average cost over the long run, which is better than if you stay at a high cost.
Of course you won’t get the bottom, but you will get a decent average cost. And from what I know, the past a hundred years, for example, the US market, the S&P 500, the STI index, or the VOI index, if you have exposure to the S&P 500, through the world war one, world war two, it has increased about 10% a year for the past hundred years.
So I mean, 10% is really better than the bank. So DCA that way is for someone who, you know, my life passion is not in investing, it’s in art, it’s in science, is in podcasts, is in my business. And that’s great because everyone is different and DCA works well for that I think.
Reggie: Yeah. Awesome. I agree with you. Yes. Yes. It’s like, I always tell the guys look, do your broadly diversified index funds and all. I don’t do that, you know, because I’m passionate about it — these days a bit be busy. Very hard to passion ah.
But broadly speaking, if your passion is not in stock-picking, not in investing, not in trying to analyze companies, then don’t do it. Just go and pick your broadly diversified funds and just DCA along the way, right?
Chris: Oh yeah. I would like to add a one note. Oftentimes I see in social media, when people DCA , and when do you do like robo-advisors with the goal of something more passive, but sometimes I see a lot of people are still actively looking , and then they’re still very like emotional and then, you know, with the purpose of DCA but they still like try to withdraw in and like, that is very… And that goes against the whole philosophy of DCA.
A lot of people do that. And I think, althoughyou DCA, you must manage your emotions and understand a few concepts. You know, like, concept like DCA, is because you understand the market is unpredictable and therefore don’t be emotionally affected by the ups and downs and don’t withdraw in.
Reggie: Yes, yes. I get what you’re trying to find a monkey while you’re DCA. Like what the hell are you doing? So, yes. So, so then last question, okay. I think you shared a lot, but for people that are trying to kinda pick stocks, right. Who do you think will fit, you know, this way of investing? I think that that’s very important because like you said, not everybody, you know are passionate about it and should do it right.
So who, who then would have an added advantage are probably should consider stock-picking?
Chris: Right. So, first of all, it’s all about decisions. In our life is all about making choices and decisions. I think anybody, if they put their mind to it, they can achieve more in the goal with regards to what’s their decision.
So with regards to stock picking, first of all, it has to be someone who say, okay, I want to be more serious in stock-picking. I want to be more serious in investing. More serious as in let’s try to understand and not follow. First of all, it has to be someone who says that, okay, every week I’m going to set aside two to four hours. However busy I am, two to four hours, let’s set aside to do anything investment-related, can be reading, can be whatever.
Once you do that, then it goes into habits. So it has to be someone who already have started to have the habits of reading news and reading books, you know, on like the proper way of investing.
Some of the books I recommend include One Up on Wall Street, You Can be a Stock Market Genius by Joel Greenblatt, which is the mentor of Michael Burry. You know, there are many good intelligent investing books out there. Not only just The Intelligent Investor. So it has to be someone who are energized by reading these books and not someone who, aiya, I don’t want to read la.
In investing, we cannot stay away from reading. So if you are a reader, that helps, as compared to someone who is not a reader. And if you’re a reader, try to read critically. So that means that when you read annual report, you don’t read every single word. You should Ctrl + F and then you find the things that you want to read up on. So you read critically, you know what’s important.
But I’ll say it should be for someone who is motivated to want to be a serious investor who wants to invest in a business like way and not in a gambling method, because it can be easy to get sucked into the emotional aspect of investing, especially with social media nowadays, with all the threads, you know, I think, people can be sucked in easily.
Reggie: Yes, #wallstreetbets.
Chris: Exactly. And we should not get sucked into that because it can be dangerous. It may affect our emotions and subconsciously affect our action. And we want our action to be as rational and as intelligent and as businesslike as possible.
Reggie: Okay. Cool. Yes, thank you. Thanks for coming on the show. Thanks for sharing all this good juice.
Chris: My pleasure, my pleasure.
Reggie: Thank you. Awesome.
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Hey fellow coconut, so today we have come to the end of the theme of investing. Wow, that’s the last episode for this month. I think we’ve got a lot, a lot of good feedback this month. You know, people really like the investing kind of content and we will want to do more for it, but, you know, we’re trying not to flood the whole feed with just investment only and ostracize everyone else that’s just starting to learn and go about, you know, building their knowledge and understanding about personal finance.
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