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Contrarian approach towards investing
05 Dec 2022 (204 views)  

The recently retired CEO of Temasek Holdings said that the fund adopts a "contrarian" approach towards investing. She made this reference in reply to questions about how TH decided to invest in FTX.

I do not understand what she meant by being "contrarian" in that context. 

I adopt a contrarian approach in my investing strategy. Let me explain how my approach works. 

1. By being contrarian, I do not follow the general trend in the market sometimes.

2. If a stock that I invested in had dropped significantly due to market sentiment, and if the price is now below what I considered to be its underlying value, I keep the stock. I may even buy more shares at the depressed price.

3. I do not consider investing in risky startups and highly valued stocks to be "contrarian". I consider it to be speculative gambling. I do speculate in some of these stocks, but I do not describe it as "contrarian".

I wish to share this example of being "contrarian". 

Prior to 1997, many large blue chip companies have the local and foreign tranches of the stocks. The local tranche could only be held by local residents and institutions. The foreign tranche could be invested freely, and could be bought by foreigners.

The price of the foreign tranche were about 50% higher than the local tranche. Many fund managers, including those managing funds for local institutions, preferred to invest in the foreign tranche, as they appeared to be giving better investment gain.

I was the CEO of a large local insurance cooperative. I set an investment policy to invest sole in the discounted local tranches of the stocks. They get the same dividend as the highly priced foreign tranche.

My decision was contrary to the prevailing thinking of the asset managers at that time. I was being "contrarian".

When the government decided in 1997 to merge the foreign and local tranches into a single tranche, the value of the local tranche stocks went up about 50%. My fund made a large gain of over $300 million. It represented many years of the normal profits of the fund at that time. It was a large gain that put the fund into a strong financial position that lasted for several decades.

This is my "fundamental" approach towards investing.

1. For each stock, I make a best estimate of its earnings per share (EPS).
2. I consider a multiple of 15 times of the EPS to be a fair value, i.e. PER of 15 times.
3. If a stock trades below this benchmark, I consider it to be undervalued. If it trades above the benchmark, it is overvalued.
4. I do not worry if the stocks drop significantly below its fundamental value. I consider that some investors had to sell the stock for their own reason, e.g. liquidity, and that reason does not apply to me. 
5. I hold a contrarian view by refusing to sell stocks that are grossly undervalued, nor to invest in stocks that are grossly overvalued.

Tan Kin Lian

 


Contrarian approach towards investing
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The recently retired CEO of Temasek Holdings said that the fund adopts a "contrarian" approach towards investing. She made this reference in reply to questions about how TH decided to invest in FTX.

I do not understand what she meant by being "contrarian" in that context. 

I adopt a contrarian approach in my investing strategy. Let me explain how my approach works. 

1. By being contrarian, I do not follow the general trend in the market sometimes.

2. If a stock that I invested in had dropped significantly due to market sentiment, and if the price is now below what I considered to be its underlying value, I keep the stock. I may even buy more shares at the depressed price.

3. I do not consider investing in risky startups and highly valued stocks to be "contrarian". I consider it to be speculative gambling. I do speculate in some of these stocks, but I do not describe it as "contrarian".

I wish to share this example of being "contrarian". 

Prior to 1997, many large blue chip companies have the local and foreign tranches of the stocks. The local tranche could only be held by local residents and institutions. The foreign tranche could be invested freely, and could be bought by foreigners.

The price of the foreign tranche were about 50% higher than the local tranche. Many fund managers, including those managing funds for local institutions, preferred to invest in the foreign tranche, as they appeared to be giving better investment gain.

I was the CEO of a large local insurance cooperative. I set an investment policy to invest sole in the discounted local tranches of the stocks. They get the same dividend as the highly priced foreign tranche.

My decision was contrary to the prevailing thinking of the asset managers at that time. I was being "contrarian".

When the government decided in 1997 to merge the foreign and local tranches into a single tranche, the value of the local tranche stocks went up about 50%. My fund made a large gain of over $300 million. It represented many years of the normal profits of the fund at that time. It was a large gain that put the fund into a strong financial position that lasted for several decades.

This is my "fundamental" approach towards investing.

1. For each stock, I make a best estimate of its earnings per share (EPS).
2. I consider a multiple of 15 times of the EPS to be a fair value, i.e. PER of 15 times.
3. If a stock trades below this benchmark, I consider it to be undervalued. If it trades above the benchmark, it is overvalued.
4. I do not worry if the stocks drop significantly below its fundamental value. I consider that some investors had to sell the stock for their own reason, e.g. liquidity, and that reason does not apply to me. 
5. I hold a contrarian view by refusing to sell stocks that are grossly undervalued, nor to invest in stocks that are grossly overvalued.

Tan Kin Lian