Vinadong – Investing principles

Value investing was first invented by professor Benjamin Graham in his classic “Intelligent investor”. His timeless wisdom includes the concepts of Mr. Market and Margin of Safety. Professor Graham’s most popular student is Mr. Warren Buffett, known as the Oracle of Omaha, the Chairman and CEO of Berkshire Hathaway Inc.
We studied professor Graham and Warren Buffett as well as well-known value investors such as Charlie Munger (Buffett’s friend and vice chairman of Berkshire Hathaway Inc.), Philip Fisher (the author of Common Stock and Uncommon Profits), Walter Schloss (professor Graham’s student, Buffett’s friend), and many others. The study took us more than 3 years but gave us confidence that value investing works and we can be successful. We have been investing in Vietnam using what we learned from professor Graham and Warren Buffett.
Vietnam’s stock market is relatively new. Investors mostly focus on short-term gains by speculating that stocks would go up or down. A scan at public companies using professor Graham’s investing criteria or net-net approach (net networking capital per share is greater than the company’s stock price) would result in many hits, which mean many companies in Vietnam are selling for less than their liquidated values. This was the approach that professor Graham used more than 60 years ago and Warren Buffett used with great success in his first 20 years.
VinaDong allocates a small portion of our capital to invest in those net-net companies. We will continue to do this as long as we can still find companies that sell for less than their liquidated values.
Our majority of capital, however, will be allocated to companies that meet the investment criteria that we will discuss. These criteria were tested with our money during the time we studied value investing and proved to be successful with VinaDong since it was formed.
The criteria were also time-proven by the success of Warren Buffett and many other value investors. The main idea is to find good companies that are selling at reasonable prices so as to have enough margin of safety. The criteria are as following:
Company with understandable business

Company that will last forever and we are comfortable with holding it for at least 5 to 10 years, preferably forever.

Company with record of attractive profits

Company with limited debt and sufficient cash

Company with high barriers to entry

Company that has low reinvestment cost

Company is selling at reasonable price

Warren Buffett – Investing Tenets

Tenets of the Warren Buffett Way Business Tenets

  1. Is the business simple and understandable?
  2. Does the business have a consistent operating history?
  3. Does the business have favorable long-term prospects?

Management Tenets

  1. Is management rational? (that is what decision management made before publishing annual report – continue invest in low return biz, buy growth, or return to shareholders. The rational choice is to return to shareholders)
  2. Is management candid with its shareholders? (every company makes mistake. Managers who confess mistakes publicly is more likely to correct them.)
  3. Does management resist the institutional imperative? (why is capital allocated so poorly? why annual reports only trumpet success? Thinking independently and charting a course based on rationality and logic are more likely to maximize profit than a strategy called ‘follow the leader’)

Financial Tenets

  1. Focus on return on equity, not earnings per share.
  2. Calculate “owner earnings.”
  3. Look for companies with high profit margins.
  4. For every dollar retained, make sure the company has created at least one dollar of market value.

Market Tenets

  1. What is the value of the business?
  2. Can the business be purchased at a significant discount to its value?

Charlie Munger – Wisdom on Investment

Model #1: Betting on newspapers in two-newspaper town
Model #2:  Low priced item + global marketing advantage
Model #3: The cancer surgery formula – GEICO : cut all cancer parts and leave only good parts
Model #4: think in term of decision tree
Model #5: advantage of scale —> enable company to do complicated things in more and more volumes for cheaper price
Sam Walton had a very interesting competitive strategy in early days. He was like a prizefighter who wanted a great record so he can be in the finals and make a big TV hit. He went out and fought 42 palookas. And the result was knockout, knockout, and knockout 42 times.
Winner-Take-All:
     Jack Welches : To hell with it, we are going to be #1 or #2 in every field we are in or we are going to be out. I dont care how many people I have to fire and what I have to sell. We are going to be #1 or #2 or out.
Figure out where you have an edge – stay there (Circle of competence)
It’s obvious that winner has to bet very selectively. When you get a few, you really need to load up. (Pari-mutuel system)
“Well, I am like a guy who is prospecting for gold along the banks of the Sacramento River in 1849. With a little intelligence, I can reach down and pick up big nuggets of gold. And as long as I can do that, I am not going to let any people in my department waste scarce resources in placer mining”. And that’s the way Thomas Hunt Morgan got through life.
Einstein : Everything should be made as simple as possible, but no more simple.
Keynes: it’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.
             Better roughly right than precisely wrong
If a thing can’t go on forever, it will eventually stop.
“My God, they are purple and green. Do fish really take these lures?”, the fish tackle saleman said “ Mister, I dont sell to fish”.
We can consider bass fishing. You can go on the bass fish tours and catch basses and win prizes. Or you can go into the business selling tackle and giving advice to bash fishermen. They are two different businesses. The people who chose the later wouldn’t be very good at catching bass. That’s how Warren and I view things. We want to win the bass fishing tour. We are not interested in selling tackle, we are interested in catching bass.
Spend each day trying to be a little wiser than you were when you woke up.
“To the man with only a hammer, every problem looks like a nail.” And of course, that’s the way the chiropractor goes about practicing medicine. But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world.
One of the advantages of a fellow like Buffett is that he automatically thinks in terms of decision trees and the elementary math of permutation and combination.
Carl Braun’s Five Ws: Who, What, Where, When, and Why  – you have to tell who was going to do what, when, where, and why. People will understand better, consider it more important, and will be more likely to comply if you always tell them why.
“Are any muskies caught in this lake?” asked Hoskins
“More muskies are caught in this lake than in any other lake in Minesota. This lake is famous for muskies.”
“How long have you been fishing here?”
“Nineteen years.”
“How many muskies have you caught?”
“None”
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. “It’s the strong swimmers who drown.”
“I discovered at Harvard that simple is always better than complicated” – Jorge Paulo
The safest way to try to get what you want is to try to deserve what you want. It is such a simple idea. It is the golden rule. You want to deliver to the world what you would buy if you were on the other end.
You must have confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. Nevertheless, there are also cases where  you have to recognize that you have no wisdom to add – and that your best course is to trust some expert.

The science of getting rich

[The wisdom described below has worked for us. We use the same to run VinaDong Inc.] 

The question one would ask is “how does Warren Buffett become so rich?” or “how did Arkad become the richest man in Babylon?”

Arkad was taught the principles to be wealthy. He applied it; he could buy anything he wanted; he could travel anywhere on luxury vehicles; he could eat the finest food the world offered. Those principles are the same that Benjamin Franklin used and taught. They are the same principles that Warren Buffett applied to build his wealth. John D. Rockefeller followed the same even when he was very young and poor.

First
, save one-tenth of what you earn and dont touch it. Bob Proctor put it in another way: pay yourself everything you earn from 8am to 12pm on Monday. If you earn $1000 per month, put aside $100 for your saving. Use only $900 to pay for your expenses. The hardest part is to have discipline not to touch the $100 you save. The most important thing to remind yourself of if you are tempted to use your saving is that you will spend your future without return.
Second, for every dollar you save, make it work for you. Make your savings your slaves. Make their children your slaves also. Let’s say that you put $100 into a bank that would pay you back 5% in interest annually. At the end of a year, you would have $105. The second year you would earn additional 5% on your $105 and end up with $110.25… in other words, your money is compounded at 5%. The first $100 is your slave. Its first 5% is its child which is also your slave. Each additional year you would get more slaves that work for you to earn your wealth.
If you start with $100 and continue to put in $100 each month, with 5% interest, by 10th year you will end up with $15,662.10.
Third, control your expenditure so that you never have to tap into your saving. Better yet, slash your expense so that you may have some extra dollars to put into your saving. Remember #2, your saving will work for you along with its children, grandchildren, …

Fourth, guard your capital. Remember that getting rich is not a quick venture. You must be patient and not jump into any venture that causes you to lose your saving. Warren Buffett follows this principle by saying “the first rule of investing is to not lose money. The second rule is to never forget rule #1”.

It’s just as simple as described above. If you start with $100 and continue to put in $100 each month, with 5% interest, by 10th year you will end up with $15,662.10.

There’s a catch. You must be disciplined to religiously put $100 into saving every month without fail. You must find a way to invest your saving so that it can compound at 5% over 10 years. This is a compound interest of 5%. Buffett recommended index fund, which is historically very safe to earn above 5% return.
There’s another catch which I must give you in full. Arkad got rich, not only because of his saving habit, but also more importantly because he listened only to people with credibility and expertise. So in your endeavor to invest your saving, listen only to people you can fully trust and they really know what they tell you as well as they have track record to prove.

Watch out for advices from your friends, relatives, co-workers, or even strangers. Advice is too cheap. You will lose money if you do not know what you are doing.

Vinadong was founded on the principles of value investing as taught by Ben Graham, Warren Buffett, and Phil Fisher. The cornerstone of Vinadong is Margin of safety (buying a company for less than what it’s worth). We consider stock as a piece of business. Hence, when we buy into a company, we do enough researches to ensure that companies which we invest in work for us even in our sleep or when market is closed. The money they reinvest or the dividend they pay and we reinvest would be the children that continue to work for us. What leaves us to do is to save and control our expenses, which we have great disciplines to do so.

 

About the author: the post was written by Hoan Do, a certified leadership coach with John Maxwell Team. In addition to coaching and training on leadership subjects, Hoan is an investment expert. He studied in depth the method that Warren Buffett is using to build his empire and have been using the method described above along with Warren Buffett’s principles with enormous success. Hoan has one available spot for a qualified client.

The science of living comfortably

[The wisdom described below has worked for us. It has enabled us to save in order to have capital for investment] 

Young man receives a salary sufficient to keep him and his family fairly comfortable. Then comes a promotion and an advance in salary of a hundred thousand dollars a year.
Does he lay the extra thousand dollars away in the savings account and continue living as before? He does nothing of the sort.
Immediately he must trade the old car in for a new one. A porch must be added to the house. The wife needs a new wardrobe. The table must be set with better food and more of it. (Pity his poor, groaning stomach.)
At the end of the year is he better off with the increase? He is nothing of the sort!
The more he gets the more he wants, and the rule applies to the man with millions the same as to the man with but a few thousands. It’s just as simple as described above.