Phuong Nguyen – Avoid Leveraging Investment in Cyclical Stocks

Apr 23, 2019

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Phuong Nguyen is a CFA charterholder. He is a value-oriented and fundamentally driven investor. He has 8 years of experience in the investment industry with various buy-side firms and has lived through some, a few of the tough market times. In his view, the Asian investment landscape is uneven and investors should sharpen their investing acumen beyond the face value of data or information. He manages his family investment account, which has delivered an annualized return of more than 30%, which is more than 15% over the benchmark. Meanwhile, his portfolio since its inception 4 years ago has only sustained an average 14.1% downside volatility compared to 23.9 for the benchmark. He is currently exploring a global career opportunity to apply his rigorous research process and investment acumen. His core expertise is in Asia-Pacific markets and he is a member of the CFA Society Singapore.

“I make it worse by using leverage, Charlie Munger and Warren Buffett talk about the 3 Ls to avoid, which are ladies, liquor and leverage: leverage I used it. It turned out to be bad for the investment.”

– Phuong Nguyen

Lessons learned

Don’t forget the 3Ls. Phuong referred to Buffett talking about him and his partner Charlie Munger’s attitude to leverage when he said: “There are only three ways that a smart person can go broke: liquor, ladies, and leverage.” Leverage in Phuong’s case meant borrowing money from a broker in the hope of having the money multiply to the extent that the loan can be repaid with interest to leave enough of a gain to profit from.
Look out for all potential headwinds.
Avoid emotional bias after meeting a company’s smiling faces. No matter how charming a company’s management is, how convincing and humble they are, do not act to invest in a company right away after you meet the company because at that time you will be suffering from emotional bias. Stay away from them for about a week, do more research and only then can you look at the investment again. Despite a company meeting and your feelings about investment going well, emotions should be kept in check.

“Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”

– Warren Buffet

Andrew’s takeaways

Be mindful of the effect of confirmation bias. It’s human behavior to look for information that confirms our original views or hypothesis on a matter, and everyone in all fields suffers from that bias. Therefore, investors especially have to work extra hard to find opposing views or arguments against our thesis on an investment idea.
Be wary of cyclical. When investing in cyclical type of companies, it can be extremely dangerous. A lot of people like to invest in consumer-type products because generally demand is steady and supply is steady. But when you’re investing in cyclical, there is a much greater risk, which sometimes is what attracts investors because of the old magnet: “high risk, high return”.
On company visits. As an analyst for more than 20 years, taking thousands of fund managers on visits to just as many companies, Andrew says that probably 95% of the meetings he attended added no value. In some cases, it made someone either overconfident in liking the company or overconfident in disliking it. Which either way biased their decisions. Andrew agreed with Phuong but said:

“Go out and visit the company. Fine. You may like the company, you may they hate them, but don’t make your decision right way based on the visit alone.”

– Andrew Stotz

You can also check out Andrew’s Books

Connect with Phuong Nguyen

Connect with Andrew Stotz

Further reading mentioned:

Retire Before Dad (2018) Liquor, Ladies, and Leverage: How Smart People Go Broke
Warren E. Buffett (Feb 2018) Letter to Shareholders of Berkshire Hathaway Inc., reporting on the company’s performance for 2017.