BIO: Richard H. Lawrence, Jr., is the Founder and Executive Chairman of Overlook Investments Group, an independent fund management company established in Hong Kong in 1991.

STORY: Richard invested heavily in a successful Korean company that brought him great returns until the founder died. The son took over and brought the stock to its demise.

LEARNING: If it’s not working, get out. Invest in a company with no or minimal debt. Operating return is the purest way to measure profitability.

“I’m a big believer in modest self-financed growth.”

Richard Lawrence

Guest profile

Richard H. Lawrence, Jr., is the Founder and Executive Chairman of Overlook Investments Group, an independent fund management company established in Hong Kong in 1991. Overlook invests US$6 billion in a concentrated portfolio of public equities throughout Asia, excluding Japan.

Richard and his wife, Dee, have founded several non-profit organizations; he’s a philanthropist who is devoted to climate change. He has two grown kids and lives in San Francisco, California.

Worst investment ever

In 1992, Richard discovered that stocks in Korea were incredibly cheap. He owned everything at 2-4x earnings. Richard owned a hair dye company and all kinds of oddball companies. Within that mix, there was one company that stood out. Korea, at the time, had massive debt. But this one company didn’t have any debt, so Richard was immediately attracted to it.

Richard purchased shares in the company initially in 1992. At the time, the company was the largest synthetic fiber producer in South Korea, making spandex. It was a formidable company going from strength to strength. It became among Richard’s most significant holdings, the strongest of this cohort of Korean companies he owned.

The company was founded by one of the greatest titans of the Asian textile industry. The founder was Korean and a larger-than-life figure in a manner unlike any other business leader in Korea in the lead-up to the Asian financial crisis when Korea went burst. He was a nonconformist in a culture that admired conformity. That was one of the reasons his company had no debt. He had the confidence and independence of someone who knew how to run a company for cash flow. Just as he disliked debt, he also disliked paying taxes. He was the most aggressive executive Richard had ever encountered in Asia or anywhere else. In one instance, he built a US$400 million facility, depreciated it over two and a half years, then revalued it and depreciated it a second time. By doing so, the founder minimized reported profits to minimize taxes and used cash savings to avoid debt. Richard liked this business model, so he invested heavily in it.

The company did very well in the start-up years until the founder died. His son took over, but he struggled to fit into his father’s giant shoes. Richard thought he could help him be successful and worked on it from 1997 to 2000 during and after the Asian financial crisis. Richard gave him all the advice he could, but he was ignored. By 2000, with no concrete action taken by management, and no upward movement in the sock, Richard’s patience wore thin. Then the new leader crossed a red line and blatantly undertook an unfair related party transaction that effectively bailed out an insurance company owned by the family with cash from the spandex company.

Richard, at that time, requested a reversal of the acquisition. He asked management to initiate paying cash dividends, execute a series of share splits, establish an IR department, and appoint additional directors that are at least partially independent. The largest internationally managed Korean fund cast the deciding vote against Richard ending the investment in a huge loss.

Lessons learned

Being an activist publicly doesn’t help.
If it’s not working, get out.
Invest in a company with no or minimal debt.
Avoid the stock that’s the hype of the day.
Operating return is the purest way to measure profitability and should be high. The higher it is, the better it is.

Andrew’s takeaways

An activist type of shareholder has its limits.
There’s value in owning a diversified portfolio of stocks over a long period.

Actionable advice

Go for companies with modest growth, don’t look for something off the charts. Build a portfolio of roughly 12 companies that can deliver a good operating return and rebalance it regularly.

Richard’s recommendations

Richard recommends reading a lot of investing books. You can start with Buffett’s letters and then go to John Train’s books as you grow your library.

Parting words

“Beginners in this industry can learn from the tough lessons that we all went through.”

Richard Lawrence

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