Riding on coattails

Here’s a list investors and/or investment firms I have respect for, from whom I seek investing ideas. Why do every ounce of heavy-lifting when there are people way smarter than me giving me a hand in terms of  investing ideas and wisdom?

  1. Adam Wyden of ADW Capital
  2. Scott Miller of Greenhaven Road Capital
  3. Douglas Foreman of Kayne Anderson Rudnick
  4. Bill Nygren of Oakmark Funds
  5. Robert Vinall of RV Capital
  6. Sean Stannard-Stockton of Ensemble Capital
  7. Morgan Housel of Collaborative Fund

If you want success, figure out the price, then pay it

I want to gain financial freedom thorough investing. The price is to create a system to turn over enough rocks, and to have discipline in investing correctly and consistently.

By saving and investing over the past 8 years, I’ve accumulated about S$250,000 in cash and stocks. The first milestone I am working towards is S$500,000 followed by S$1,000,000.

To get to S$500,000 in the perfect world, I would need 3 years.  In 2021 by the age of 35, compounding my investments at a 25% rate and adding all the cash savings accumulated should get me there with some buffer. From S$500,000 to S$1 million, with the same rate of compounding, it would take me another 3 years and theoretically get there by the age of 38 in 2024.

I know I sound naive. It took me 8 years to get to S$250,000 and I expect to get another S$250,000 in less than half the time. Oh and 25% compounded annual returns? Wow, I must think I’m better than Warren Buffett. It is a tall order and to achieve this would, in my definition, be success. I know the price of that success and that is why I need to pay the price. Today will be the day I throw guesswork out of the window and really work consistently on the system to get myself where I need to be – Financial freedom through investing. This will be my very own experiment which I need to track and ensure its success.

Let me lay out everything first as a form of record keeping and for accountability purposes and I’ll get up and running.

  1. Most of my investments are held under Interactive Brokers (“IB“) so my performance recorded on IB since creating it about 3 years ago in April 2016 is a pretty good proxy of my investment returns. I love IB for a variety of reasons but especially for the fact that it can easily generate reports of my overall portfolio returns in a single click unlike other brokerages. I can now know exactly how good or lousy as an investor any time without guesswork. Happily, so far, from the time I created my IB account, I fared pretty well vs the benchmark. I’ve included the screenshots of my performance as extracted from IB below for reference. Fortunately, my compounded investment performance over the past 3 years was been decent at about 28.6%. I know for sure it will be hard, if not next to impossible to maintain that kind of returns, which makes it even more urgent for me to get serious about having an investment system in place.

    1 Apr 2016 – 31 Dec 2016

    1 Apr 2016 - 31 Dec 2016

    1 Jan 2017 – 31 Dec 2017
    1 Jan 17 - 31 Dec 17

    1 Jan 2018 – 31 Jan 2018
    1 Jan 18 - 31 Dec 18
    1 Jan 2019 – 12 Mar 2019
    1 Jan 19 - 12 Mar 19

  2. I’ll be transparent about the names of the stocks I have in my IB portfolio, for accountability purposes and in one single view, provide ease of reference of my holdings at a point in time. You can visit the link to my portfolio here: https://leithstreetblog.wordpress.com/myportfolio

Book I’m reading currently – A Man For All Markets (Ed Thorp)

I haven’t been writing on Leith Street for a couple of reasons as listed below:

  • Lack of good investment ideas
  • Busy with my day job
  • Busy with my entrepreneurial pursuits

Of the 3 , the lack of investment ideas is the key reason for not writing as often as I should.

That said, I do post short tweets on Twitter alot more often, particularly on thoughts I have about business, investment and interesting quotes I read. The tweets are on the side bar of the desktop version of Leith Street. Unfortunately, they are not viewable on the mobile view of the site.

My favourite pastime of reading has slowed down considerably in the last 6 months to a year, but I’m slowly trying to adjust myself back to the habit. With nothing much to be excited about in the market given the lack of buying opportunities, I am hoping to shift into higher gear with reading if time permits on the day job end.

I’m currently reading the book, A Man For All Markets by Ed Thorp, the father of Blackjack card counting. It’s a long read but a fantastic one and I recommend it, even to those who have heard of him and know of his methods. Beyond the field of gambling – in which he beat the the casinos at Blackjack and Roulette – he made a fortune through stock market investing. Ed Thorp and his Princeton Newport Partners hedge fund was the original quant fund that precedes Jim Simmons’ Renaissance Technologies and Ken Griffin’s Citadel. Interestingly, he tried his hand at beating the casinos even though plenty of great mathematicians before him and the conventional wisdom on the street said it can’t be done. Eugene Fama and gang said the same about the stock market. Ed Thorp and Warren Buffett didn’t buy conventional wisdom and look where it brought them.

I guess the moral of the story is to never take conventional wisdom at face value, trust but verify and that the biggest money is almost always made from taking a calculated and informed contrarian stand against the crowd. It’s usually lonely and uncomfortable but that’s how the real world works.

An update on MOMO

I don’t typically like to measure investment returns of a stock so soon after taking a position. However, there was an interesting corporate development about 2 weeks ago which I deserves a quick update.

So far, MOMO has worked out relatively well. I started accumulating MOMO at around US$25 and dollar cost averaged up and down along the way. It last traded at US$32.89 on Friday. Overall, while the position is up just 14%, I believe MOMO is still a good investment prospect.

Acquisition of TanTan

About 2 weeks ago, MOMO announced that it acquired TanTan, a Chinese Tinder equivalent for about US$700 million, of which the bulk will be paid in cash. MOMO had about US$950 million in cash and short term investments as at 31 Dec 17 so while the acquisition is certainly going to make a dent in its war chest, MOMO can well afford it. Better that the cash is deployed within a space it is highly familiar with than left fallowing to earn miserable interest on.

Unfortunately, there hasn’t been much details such as TanTan’s revenue, user base or profitability announced yet. TanTan was founded only in 2015. Not bad for the founders and investors of a company that’s barely 3 years old. Can’t be sure if it’s going to turn out great for MOMO with the US$700 million splashed on TanTan but I believe the acquisition certainly makes sense.

Roll it up like IAC/Match

The deal reminds me of IAC, listed in the US, which spun off Match not too long ago. Match is the holding company of dating platforms, which not only includes its own namesake brand but also Tinder, OKCupid, Plenty of Fish and several others which dominate the dating platform market. In other words, Match’s roll up strategy means it holds a near-monopoly in the US. From what I’ve checked out online, it appears that TanTan and MOMO are neck to neck as the top dating apps in China.

What I think of the acquisition

In a nutshell, I think it’s a good move.

What’s really interesting here is that although MOMO started off as a dating app, the real cash gusher is the livestreaming business it diversified into about 2-3 years ago. The US$950 million in cash is probably entirely due to the profits from the livestreaming business. There’s plenty of competition in the livestreaming space, including YY Inc which I also own, and MOMO may have some concerns on how it’s going to solidify it’s position in the livestreaming space. An interesting tidbit is that YY owns a part of TanTan and its selling out to MOMO. Quite a bit of interesting/incestuous relationships going on here.

My thoughts are that MOMO is utilising the massive cash generated from livestreaming to consolidate its lead and position in the dating app space, which I believe is stronger than it’s current position in the livestreaming space. The irony is that MOMO’s less profitable business is the one with a stronger competitive position in. I doubt TanTan is profitable at this point or if it is, just barely.

That begs the question – Instead of focusing on the more profitable livestreaming business that has a weaker competitive position, is MOMO throwing good money after bad on dating apps that are barely profitable but which it has a stronger competitive position in? Looking at how Match turned out with its near-monopoloy portfolio of dating apps, I am of the opinion this is a good move. Investing in a space where you are already close or are at number one when your moat is wide given the network effects, and will be wider thereafter, is unlikely to be a bad move, unless you grossly overpay for it. The acquisition will without doubt, gives MOMO a much wider lead as the most dominant player in the dating platform space. On whether MOMO overpaid, I can’t be sure, given the lack of information but I’ll give management benefit of the doubt and there’s real comfort it isn’t paid taking on debt and little shares were issued.

I don’t think livestreaming is a fad. I see it as a new form of entertainment, like how people consume videos on YouTube or Netflix. If I turn out to be dead wrong and livestreaming is indeed a fad, MOMO’s dating platform dominance and potential roll up strategy in the space are going to be a great buffer. At this point in time, I doubt anyone in this day and age is going to call online dating a fad.

What I’m going to do with MOMO

The short answer is I’m going to hold on to it and see how it plays out, particularly checking out next quarter’s filings which will definitely elaborate more on the acquisition. Even without the TanTan acquisition, with MOMO’s growth rates just from livestreaming and the moat it has built up in that space, I would argue MOMO is at the inexpensive to at the most, fair value range.

If MOMO truly becomes the Match of China, backed by a livestreaming cash engine used to fuel its rampage in snatching up dating platform rivals, MOMO will likely be be worth much more than its current price today. From how Match has monetised its dating platforms as they achieved scale, my opinion is that MOMO won’t have too much trouble doing the same at some point in the future even if their portfolio isn’t yet profitable now.

Shopify case study – No earnings, negligible cash flows but one hell of a moat

A few days ago, I read an excellent Fortune article on Shopify, the Canada-headquartered company that allows business owners to easily and quickly set up their digital e-commerce presence. It got me thinking about plenty of things on business and and investing.


My experience with choosing e-commerce platforms

I’ve known about Shopify for years, since at least late 2013. Back then, I was planning to set up a simple e-commerce store and was choosing between a number of platforms. These ranged from free ones like WordPress to paid platforms like Wix and of course, Shopify.

I actually quite liked Shopify as it seems fuss-free and powerful enough. What turned me off was the pricing. Well, at US$29 a month for the basic plan, it was not exactly unaffordable. But when I first started out, every cent counts. Besides, the margins of the products I was intendinf to sell were relatively lower and I guess it was just the penny pinching mindset that was part of the package as a value investor.

I ended up on the WordPress platform which is more robust than Wix or Shopify but requires a certain level of technical and programming expertise (of which I had very little of). Although I had to install it myself, the most crucial factor of deciding on WordPress was that it is largely free! Over the years, whenever I need technical expertise to upgrade or if the site breaks, I had to seek external help by turning to gig platforms like Fiver. For minor issues, Googling DIY solutions had been most useful. While the overall explicit costs from using WordPress were definitely lower, if I had known beforehand that I could have avoided all the headaches, struggle to learn how to use it, time spent to resolve issues, security fears, inability to utilise new functions due to obsolete underlying system, lost revenue when the site is down, minor errors faced by customers, I would probably have opted for Shopify instead.

Fast forward about 4 years later today in July 2017, Shopify is now a public company listed on the NASDAQ, with a stock price that’s climbed from US$17 to about US$89 since it’s listing in 2015.

Financials wise, Shopify remains unprofitable even though revenue has continued growing like a weed. In fact, it seems to be that the higher the revenue generated, the greater its losses. Cash flows from operations were barely breakeven and would have been negative without adding back stock-based compensation. The dismal quality of its financials stopped me from exploring further and from considering investing in Shopify. But the stock price keeps marching upwards. What is it that the market knows that I don’t? Could it just be a bunch of loonies pushing prices up? Turns out, the closer I read the article, the more I realised there could indeed be substance behind the skyrocketing stock price.


A tech startup’s snake oil – “We can be profitable if we want to”

It has been argued that Shopify can be profitable if it wants to. It just has to cut marketing costs. I viewed it with great scepticism. After all, all tech firms are saying exactly the same thing. There’s alot of Kool-aid being passed around and I thought this was one of it.

Well, it turned out there is truth in cutting down marketing expenses to gain profitability but it only applies to very specific business models. It only applies to businesses with strong recurring revenue, of which a complete reduction in marketing expenses would not lead to its existing customer base bailing out. Shopify’s business model is a prime example of this phenomenon. In my opinion, the function of its marketing costs is really to grow and acquire new customers rather than retaining existing customers.

The moment a customer signs up with Shopify, sets up shop and gets some revenue streaming in, you can be quite assured he will stay with Shopify for some time as long as his operations remain profitable. After learning how to use it and having invested effort into optimising his storefront and utilising value-adding third party plugins from riding on Shopify’s platform, he gets locked in to the system.

Contrast this with a fashion retail brand like Abercrombie & Fitch (“A&F”). Once a consumer purchases an item from A&F, that’s the end of the transaction. To induce the same consumer to spend at the store, he has to be convinced that down the road he will be perceived to be cool when people see him wearing a new piece of A&F apparel. That’s where marketing and advertising expenses come in for A&F – to not only attract new consumers but also retain existing ones.

**High switching costs**
The point on Shopify’s third party plugins is what makes the customer lock-in extra powerful. Over the years, Shopify has built an ecosystem of app creators not unlike Apple’s app store. Shopify is no longer just a web host and template provider. It is an ecosystem which app vendors can build onto Shopify’s underlying platform and integrate their functions with customers’ stores. As an example, Mailchimp, a highly popular marketing email automation tool layers onto Shopify’s platform, allowing store owners to automatically send emails to re-activate customers who have not made a purchase for 60 days by encouraging them to make a purchase, perhaps through discount codes. Customers pay a small fee to Mailchimp, but the returns can potentially be way more exponential. The more extra tools (plugins) customers use, the more app vendors Shopify sign up and the more innovative they are, the more locked in Shopify’s customers become. And of course, Shopify gets a cut of all those fees flowing through.

I’ve used the same web host, same WordPress platform, same domain name host for 4 years and I sure as hell am not uprooting from it, given all the hassle I’ll face if I do so.

Although I’m not on Shopify, if I am and they take care of all my traffic load, security matters, create value for me with additional functionalities to bring in more sales and better track inventory, etc, you can rest assure I’ll stick with Shopify for a long long time.

In short, I believe the marketing expenses are truly and largely for growth purposes. Customers who sign up and gets the first dollar of revenue rolling in likely stays for a long time. In other words, these customers have long lifetime values. On the topic of lifetime value, it is also important that it drags on as long as possible. As an example, say dating apps like Tinder, there is a natural attrition when a user enters into a serious relationship with a new partner. In most cases, he or she is not likely to utilise it again during the relationship until a breakup occurs. They may never use it again if the parties get married. Each iteration of marketing and advertising efforts serves to retain a certain customer count and the business is left running on a treadmill. In fact, the irony is that the better the dating app is at matching, the faster users drop off from the platform. Qualitatively, Shopify undoubtedly has a better business model and greater staying power from these perspectives.

The other consideration of the switching costs or likelihood of customers being retained on Shopify or any other platform would be the repercussions if they stopped using it. If Shopify customers want to move their sites elsewhere and recreate the previous site experience which their users are used to, to an extent, they may be able to export or recreate certain segments of their site but overall, the effort will likely be Herculean, if not a total nightmare especially for customers without the technical expertise.

Financials and valuation

Financials wise, revenue and gross profit grew almost 90% and 85% respectively between FY2015 and FY2016. Revenue was US$389m and gross profit was US$209m in FY2016. Losses widened from US$19m in FY2015 to US$35m in FY2016.

Sales and marketing expenses were US$129m in FY2016 and makes up the largest part of operating expenses of US$247m. This will not be a direct and most accurate comparison but if we take a peek at Verisign’s sales and marketing expenses, it makes up about 8% of revenue as compared to Shopify’s 33%. Verisign holds the monopoly to the .com and .net top level domain, has a quality of customer retention that is probably among the strongest I know and has a very slow and steady revenue growth pace. At 8% of revenue in sale and marketing expenses, I would think it probably is a good floor reference. Assuming Shopify requires a normalised equivalent of 10% to achieve a slow steady rate growth, that would translate to US$39m in sales and marketing expenses. R&D for Verisign makes up about 6% of revenue. Verisign, as the .com and .net monopoly hardly needs R&D so it probably is a lowball percentage. Shopify definitely needs a much higher percentage and this is arbitrary but I believe 10%, which is double that of Verisign’s should be fair for Shopify to achieve a slow steady rate growth. That translates to US$39m in R&D expenses for Shopify.

Assuming minimum sales and marketing expenses of US$39m and R&D of US$39m, would give us US$88m in normalised operating profit. There will probably be quite alot of NOLs for claims given the accounting losses Shopify made over the years. This would mean that Shopify may not need to pay taxes on incoming profits for some time. Assuming Shopify incurs effective Canadian tax rate of about 26%, it would generate about US$65m in normalised net profit or a net profit margin of about 17%. Not so unprofitable now eh?

This is where things take a much more arbitrary turn. Shopify had been growing at crazy rates and has near-guaranteed growth in the future given the secular trend of rising e-commerce volume. By exactly how much, it’s hard to tell but I do think 30% compounded over the next 3 years isn’t out of the question since the existing infrastructure has been built out and the incremental cost of a new customer who signs on isn’t that high. In fact, 30% CAGR over 3 years is probably conservative. I would slap on a 25 times EV multiple as a reasonable exit multiple down the road to pay for such a high quality, strong moat and high growth business.

Assuming earnings for the next 3 years grow at the 30% CAGR, at the end of year 3, earnings will be US$143m. At 25x exit multiple, That comes up to an EV of US$3,575m. To get the equity value, I’ll also add back 75% (arbitrary again – I assume the company needs about 25% for working capital) of net cash (US$296m) as at 31 Mar 17, and we get an equity value of about US$3,871m.

This is way below Shopify’s current market cap of US$7,800m and I could be too conservative about Shopify’s prospects in terms of financial projections. Sometimes, one does need to take a leap of faith to invest in compounder businesses with a wide moat. However, I am still pretty much a value and numbers driven investor as opposed to a story driven investor. As such, I find it hard to jump in with both feet into an investment with too high a valuation.



Ultimately, I may not be buying Shopify anytime soon. Nevertheless, I thought this was a great exercise to pen my thoughts down and build a framework to uncover potential investment gems with similar high quality moats and earnings that are obscured by expenses largely relating growth.

Kimly – Missed opportunity, lesson and alerts

As an update to a previous post on Kimly being a potential investment opportunity at S$0.42 and below, its been about 2 weeks since Kimly’s listing. Of course I knew there was no way it would trade anywhere near the IPO price of S$0.25 that day. It surged more than 100% at the opening bell before closing at S$0.44 on the day of the listing. As at 31 March 2017, the stock price was S$0.48.

The only time the stock price reached S$0.42 and below – prices at a margin of safety I was comfortable buying at – was in the morning and early afternoon of 21 March 2017. Unfortunately, I wasn’t able to get my hands on the shares. I was attending a prayer session held for my late grandmother during that time and my usual brokerage’s (Standard Chartered) trading platform was accessible only via a desktop/laptop.

By the time I got to a computer, the opportunity had vanished as the price had climbed back up. The price closed at S$0.46 that day.

I could make all these excuses but the fact was that I wasn’t there to pull the trigger when the opportunity presented itself. While the Standard Chartered platform did not allow trades to be done through a phone app or a mobile site, I could have utilised another brokerage although the fees were higher. I could have put a good-till-cancelled trade through other brokerages days prior even though Standard Chartered didn’t allow it. I could have gotten a close friend who would have been behind a desk at that time to login with my details to Standard Chartered and put through the trade.

The lesson I’ve learnt is this. When I’ve got the conviction to buy at a certain price once I’ve done up the necessary research, it makes sense to be well prepared in the event the trigger needs to be pulled. If there are restrictions, apply a little creativity to seek workarounds.

I’ve set an alert via the SGX app I downloaded. I’ll get a notification on my phone if the price falls to $0.42 and below. This will free me from having to check the stock price and in taking action only when the occasion arises. I also found a useful feature that the app is equipped with. It has a feature that alerts me to specific companies’ announcements when they are released. Instead of the usual ‘pulling’ of announcements as and when I decide to check, they are now ‘pushed’, which makes it more timely than before.

Small Burgers, Huge Discounts – An Investment Idea on An-Shin Food Services

I completed an investment idea write-up today on An-Shin Food Services Co., Ltd (“An-Shin”), a Taiwan-listed company which is the franchisee of the MOS Burger fast food outlets in Taiwan, China and Australia. MOS Burger was originally from Japan and is relatively popular in Asia. In particularly, the MOS Burger brand has more than 1,600 outlets in Japan, Taiwan, Singapore and Hong Kong.

Instead of the usual 1 pager, this write-up was expanded to 2 pages. In reality, the main content still remains on page 1, just that the historical financial figures are now on the second page. In essence, this is an opportunity that has a large margin of safety from:

  • 72.5% of market cap made up of cash and available-for-sale securities; zero debt
  • Profitable business gushing cash
  • Unjustifiably low EV/EBITDA of 1.9x compared to average private market transaction multiple of 9.8x and average listed-peers’ 14.9x

An-Shin is running a great business but it isn’t without problems. Most notably, its China operations are loss making. However, things aren’t as bad as it seems, especially since the China segment’s losses have been narrowing and cash flows have been more than healthy. It is also a relatively unknown and uncovered stock flying below the radar of institutions. With a market cap of just TWD2.44bn or about US$76mn, and its 2 largest shareholders controlling slightly over 50% of the shares outstanding, An-Shin is probably considered an obscure micro-cap without enough liquidity to attract institutions. This of course represents a potentially good opportunity for those investors  without the privilege of managing a couple hundreds of millions or billions to take a bite into An-Shin as an investment.

For the sake of jotting down my current thoughts and to keep track of how the business investment pans out, I would be comfortable with holding or adding to the position as long as:

  • Continues to generate the kind of operating and free cash flows over the past few years, which would eventually increase the ‘undervaluedness’ of the stock, as cash  holdings builds up
  • Healthy levels of dividends continue to be paid out (eg. 3% and above)
  • Losses in China continue to narrow
  • Measured store expansion pace, particularly in China and Australia

Even if one of the points does not ultimately come to fruition, it wouldn’t mean that it would be a deal breaker to the thesis behind investing in An-Shin. It would however, definitely be a red-flag that requires greater investigation to assess whether the quality of the business has deteriorated substantially.

To do your own due diligence of An-Shin’s financial statements, you can visit their investor relations website, which thankfully has English-translated versions. However, the earliest translated versions date back to 2014 while the traditional Chinese-based financial statements go further back to 2011 when An-Shin was listed. To view my write-up, you can click here.

As this write-up was completed over the Christmas holidays, I wasn’t able to put through a purchase order for the stock since the brokerages (Singapore) are only open tomorrow at the earliest. As such, I’m hoping to put through the order first thing tomorrow morning. If the last trading day’s volume of about 15,000 shares or about TWD1.1mn in value traded (US$35.1k) are of any indication, it should be sufficient for my order to hopefully be fulfilled.

Merry Christmas and a Happy New Year to all!