Today’s Chapter is based on the book “Living Value Investing: the Story of Cheah Cheng Hye“ by Tony Tsoi.
Cheah Cheng Hye is a Hong Kong-based investor and entrepreneur best known as the co-founder of Value Partners Group, one of the city’s leading asset managers. He started out as a financial journalist before becoming a prominent advocate of value investing in Asia.
Here’s what I learned:
Outsider Advantage
“You can’t do the same things others do and expect to outperform.”
— Howard Marks
Cheah Cheng Hye’s career as an investor is quite interesting considering he came from an unconventional background. As an immigrant without an university degree, Cheah first started working as a beat reporter before starting work in the investment industry. Rather than viewing his circumstances as liabilities, Cheah was able to leverage them into distinctive advantages.
As a matter of fact, Cheah was born into poverty in Malaysia. His father passed away when he was just nine years old. His childhood had no such concept as leisure, there was no time stop as he was struggling to survive. Cheah writes, “When I was a kid, my family was really poor. I spent my days on the streets. I had no idea what it was to be rich I never even had any contact with anyone wealthy before. I thought the whole world was just like my world.”
Nonetheless, this situation instilled in him a hunger and resilience that no formal education could replicate. At twenty, Cheah found work as a reporter for The Star, a small local newspaper. This allowed him to establish his self-learning process that would become primordial to his career as an investor. As Cheah once said, “Working as a reporter was the ideal self- learning platform. There’s always someone answering questions I posed. The whole world was my tutor.”
As such, it is clear that Cheah’s outsider’s background is not a disadvantage but a potential source of insight. While insiders become trapped into conventional thinking and following the crowd, outsiders are not bound by the same assumptions and group-thinking.
“Outsiders don’t often succeed in changing the rules of the insiders’ game. Most either give up and leave, or resign themselves to following the method of the insiders, becoming one with the crowd. Few outsiders can maintain their determination on their own, and gradually narrow the gap with the insider by patience and earning results. The biggest weapon of the outsider is their view of what is lacking with the insider. The insider can never see his own blind spot, and will always deny it at first when pointed out to him.”
— Cheah Cheng Hye
In the case of Cheah, due to his outsider’s approach, he was able to find opportunities in Asia where others weren’t. He was one of the first investors in Asia to use the value investing approach, especially in non-blue chips stocks. Tony Tsoi writes that “The investment value of non-blue chips then was too obvious. The biggest problem was that no one was interested; what was cheap would continue being cheap, people thought. Cheah saw the opportunity with the insight of an outsider, committing to work in a new way where everyone thought there was only one way to work.”
As a matter of fact, Cheah also loved to invest out of the beaten path. His firm Value Partners thrived in in investing in industrial stocks. Tsoi mentions that “Value Partners, on the other hand, started out avoiding the heavyweights, while looking for new terrain to invest in. At the time, one type of stock was often left unattended to by most investors and that was industrial stocks. Value Partners was so active in industrial stocks that it grew to become recognized as an expert firm in the field.”
Finally, what made Cheah special was his ability to adapt value investing to Asian contexts. He explains that “To me, the core definition of value investing has never changed. But we must adapt. One of our best adaptations: to understand how Asian companies are different from Western companies. The human factor is critical—way more important than other objective standards. Western companies are more institutionalized, and the impact of individuals is not as great. Investing in Asian securities, though, is virtually an investment in the management of the firm. Our edge is our knowledge in using an Asian perspective to analyze Asian companies.”
“Asian companies have a unique style of management. The market is full of family operations that Americans would, prima facie, be unable to accept given the management standards practiced. Our edge is our understanding of Asia, of Asian culture. Cultural differences mean that many Asian companies are undervalued, and these are our opportunities. Asia is the perfect seedbed for value investing.”
— Cheah Cheng Hye
This reminds me of how Howard Marks mentions that it requires seeing beyond the obvious surface-level analysis that everyone else is doing. Marks argues that merely matching the market is easy, but outperforming it requires superior insight, which he calls second-level thinking. He writes, “Anyone can achieve average investment performance—just invest in an index fund that buys a little of everything. That will give you what is known as “market returns”—merely matching whatever the market does. But successful investors want more. They want to beat the market.”
As such, in Marks’ opinion, the definition of successful investing is to do better than the market and other investors. He adheres to the fact that “To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan, so you’d better concentrate on insight.”
The core challenge is that not only do you need to have a contrarian approach, but your thinking must surpass the collective intelligence of the market. Other participants are smart, informed, and equipped with powerful tools, so you need an edge they lack.
“Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others—both more powerful and at a higher level. Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others … which by definition means your thinking has to be different.”
— Howard Marks
Marks mentions that second-level thinking is not linear or simple. It involves weighting probabilities and comparing your view to the consensus. A second-level thinker must take many things into account such as:
What is the range of likely future outcomes?
Which outcome do I think will occur?
What’s the probability I’m right?
What does the consensus think?
How does my expectation differ from the consensus?
How does the current price for the asset comport with the consensus view of the future, and with mine?
Is the consensus psychology that’s incorporated in the price too bullish or bearish?
What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?
Howard Marks reminds us that investing is a competitive endeavor. To win consistently, you cannot follow the crowd. You must train yourself to question assumptions, probe deeper, and stay disciplined when your view diverges from the majority. Marks makes it clear that this higher-level cognition is the foundation of lasting outperformance. He writes, “Before trying to compete in the zero-sum world of investing, you must ask yourself whether you have good reason to expect to be in the top half. To outperform the average investor, you have to be able to outthink the consensus. Are you capable of doing so? What makes you think so?”
“If your behavior is conventional, you’re likely to get conventional results—either good or bad. Only if your behavior is unconventional is your performance likely to be unconventional, and only if your judgments are superior is your performance likely to be above average.”
— Howard Marks
Self-Learning
‘I have never let my schooling interfere with my education.”
— Mark Twain
As mentioned, Cheah Cheng Hye’s life is a perfect example of how self-learning can overcome any limitations from the lack of formal education. His approach to learning shows that knowledge accumulation is done through compounding over time.
In fact, Cheah was a huge bookworm and was known as such among his friends and colleagues. A friend of his once said, “The one that has stuck with me the most is his bookworm image. Wherever we saw him, we were sure to find him behind a pile of books. Whenever we talked with him, our conversation was sure to revolve around books. His office is not unlike that of a university professor’s, filled with books from floor to ceiling.”
Similarly, Tsoi mentions that “There are really plenty of tidbits about Cheah and his addiction to books. Every person I interviewed brought it up. Some report hearing rumours that at no time is Cheah not reading something. One particularly amusing anecdote came from someone who had heard that Cheah reads even in the shower.”
As such, it is not surprising that Cheah was able to transition from a beat reporter to become one of the greatest investors in Asia, as he was studying on his own. In fact, it is fair to say that Cheah mastered accounting and valuation principles by himself.
“As his shelves seemed to be filling up with books on financial matters, Cheah was being pulled into the field, almost without even being aware it was happening to him. Still an outsider, Cheah quietly studied on his own. Like the apprentice monk who fetches and carries water up the mountain every day without realizing that the routine activities were making up the training to be a master, Cheah’s study as an amateur outsider, and his 17 years as a journalist, was the simple training that was enabling him to grow into a master of the field.”
— Tony Tsoi
However, Cheah also warns us that true self-learners must be able to master various skills from different disciplines. He explains that “There are many people who learn some skills, and then actually become limited by these skills, because they think that is what they are good at. I think we often underestimate ourselves. Humans are always breaking past their limits. I’m an expert in self-learning. I never formally studied accounting, for example, but I’ve learned enough to have knowledge at what might be considered a professional level.”
This reminds us of the importance of being multidisciplinary. Charlie Munger once said that people who have a broad mind and who understand many different models from many different disciplines make better decisions. This is mainly because it allows one to have a different box of tools when facing a problem. Tren Griffin writes that “Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines—psychology, history, mathematics, physics, philosophy, biology, and so on—a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts.”
Peter Kaufman, one of Munger’s most vivid followers of his multidisciplinary approach, mentions the reason why it is important to be a multidisciplinary thinker in his speech to the California Polytechnic State University Pomona Economics Club:
“The answer comes from the Austrian philosopher Ludwig Wittgenstein, who said, “To understand is to know what to do.” Could there be anything that sounds simpler than that? And yet it’s a genius line—”to understand is to know what to do.” How many mistakes do you make when you understand something? You don’t make any mistakes. Where do mistakes come from? They come from blind spots, a lack of understanding. Why do you need to be multidisciplinary in your thinking? Because as the Japanese proverb says, “The frog in the well knows nothing of the mighty ocean.” You may know everything there is to know about your specialty, your silo, your “well,” but how are you going to make any good decisions in life—the complex systems of life, the dynamic system of life—if all you know is one well?”
— Peter Kaufman
Kaufman continues by saying that he was able to learn the big ideas of science, biology and etc. through reading interviews with experts on the subject. He was able to understand because the interviews were done in a clear language and by using good examples. As we have learned previously with the Feynman Technique, learning can be easy if you keep things simple.
“So I tried to learn what Munger calls “the big ideas” from all the different disciplines. Right up front I want to tell you what my trick was, because if you try to do it the way he did it, you don’t have enough time in your life to do it. It’s impossible. Because the fields are too big, and the books are too thick. So my trick to learn the big ideas of science, biology, et cetera, was I found this science magazine called Discover magazine. Show of hands, anybody here ever heard of Discover magazine? A few people. Okay. And I found that this magazine every month had a really good interview with somebody from some aspect of science. Every month. And it was six or seven pages long. It was all in layperson’s terms. The person who was trying to get their ideas across would do so using good stories, clear language, and they would never fail to get all their big ideas into the interview. I mean, if you’re given the chance to be interviewed by Discover magazine and your field is nanoparticles or something, aren’t you going to try your very best to get all the good ideas into the interview with the best stories? Okay.”
— Peter Kaufman
Killer’s Instinct
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
— Warren Buffett
One of the qualities that distinguishes Cheah Cheng Hye from the average investors is his profound capacity for patience. He compares investing to the waiting for the process of medicine taking effect, this cannot be rushed, yet many patients are impatient. He once said, “Medicine takes time to work. Sadly, most patients can’t even wait till the next day to go to another doctor, and so demand the fastest, strongest antibiotics.”
As a matter of fact, value investing requires patience as it often takes time before a cheap stock is re-rated, unless there is a catalyst. Tsoi writes, “It’s not good enough for a stock to be cheap. It needs a catalyst, which is usually not something anticipated by the market. Buying into a company with high potential for growth in profitability and regular dividend payouts is the first step. The next step is to wait, patiently, for rerating to occur.“
As such, it is not surprising that Cheah is great at tolerating boredom, a skill in value investing that is necessary. As he once said, “Boredom is good.”
“Investors who know and are willing to ‘hold’ share a common belief. They know the reasons for what they are doing, where they stand, and how to make the next moves.”
— Tony Tsoi
Yet, despite his reputation for patience, Cheah is also known for what he coins as the “killer instinct”, defined as the ability to recognize an opportunity and to seize it with full force without any hesitation. In terms of investing, the killer instinct is about striking decisively when you find a no brainer opportunity. Cheah believes he has an ability to identify people with a “killer instinct”. He mentions that “These people are more reserved. Maybe even introverted. They are not huge personalities in school. On the other hand, people who are used to being stars, who are concerned with their own popularity, are always very cautious in making decisions. They are always in two minds about things.”
This killer instinct is part of the reason why Value Partners was able to invest in BYD long before Warren Buffett discovered the company. Tsoi mentions that “In 2006, BYD announced a drop in profits, but what was more damning was their announcement that they were entering the automobile market. The market and analysts widely condemned BYD for a lack of focus on their core business, which was a huge red flag in the investment world. BYD’s stock went into a freefall. Cheah sniffed a golden chance. He personally visited their Shenzhen factory to understand BYD’s plan for an automobile business, and he concluded that the market was not being fair to BYD. As usual, Value Partners took what others discarded. It kept taking on BYD stocks until its holdings exceeded 10% , with Value Partners becoming the second largest shareholder of the company.“
Furthermore, Cheah believes that the killer instinct is necessary since he acknowledges that investing is a game of probabilities; no matter how good of an investor he is, he will make mistakes. As a matter of fact, he has coined the term ‘Onethirds’ theory. Tsoi explains that Cheah is “not an invincible general: one- third of the time, he wins; one- third of the time, he loses; and the final third, it is a draw. He might not be intentionally humble. If one calculates his performance, Cheah might really have won only one- third of the time. But his victory could be very different from the victories of ordinary people. This is an important technique of fund managers called position sizing: when one wins, one wins an entire business; when one loses, one loses just a piece of candy.”
Cheah draws a parallel to poker, one of his favorite games. He mentions, “This is what I mean by the ‘Killer Instinct.’ Take poker- one of my favorite games—for example. I think throughout a person’s life, he gets dealt with about the same number of good and bad hands. No one gets only good hands or bad hands throughout the game. The key is that when a good hand comes along, one must win to the fullest.”
“When there is food on the table, I must eat, because I don’t know if there will be food tomorrow. When opportunity comes my way, I must take it, and take it to the fullest, because I don’t know if there will ever be an opportunity again.”
— Cheah Cheng Hye
Beyond the Book
Read "Second-Order Thinking: What Smart People Use to Outperform" by Farnam Street
Read "The Multidisciplinary Approach to Thinking" by Farnam Street
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The most useful line in here is the one that sounds throwaway: what was cheap would continue being cheap, people thought. That objection is really about a missing repricing mechanism, and what vindicated Cheah is that neglect itself is cyclical, the institutionalization of a market is the catalyst nobody can date in advance. His point about Asian companies being priced on management rather than on objective standards doubles as a discipline for reading screens today: a discount computed from numbers alone silently assumes governance is worth the same everywhere, and it never is.