2 weeks ago, while meeting with an investor of mine, I had the opportunity to meet one of the most (if not the most) famous quarter prediction article writer in I3. We spent roughly 1-2 hours discussing as a group. We touched on a few topics, but I don’t think they are worth talking about.
For this article, I will focus on the parts of our conversation relating to his article writing, the Malaysian markets, as the discussion was from a group, I will be paraphrasing our conversation very heavily.
However, I believe the essence to be accurate. However, the flow of the edited conversation will be quite awkward, as we did not spend time talking from front to back, unlike my discussions with Calvin, OTB, KC or 500% Trader.
I will not be identifying the person in this case, as I don’t think what I write will be flattering. I’m a firm believer in the “Praise by name, criticize by category maxim”
Having said this, this famous quarter predictor writer, wrote articles on various companies, however, his most famous is his Hengyuan and Masteel articles.
To be short, my articles
Were unfortunately relatively accurate.
The conversation is not as combative as it would sound below, as we are relatively good at being polite and frank to each other, but when edited to the essence, it will seem so.
Choivo Capital: Hello, it’s nice to finally meet you. You seem to a little silent these days, I rarely see any post from you in 2018. Why is this?
Famous Quarter Prediction Article Writer (“FQPAW”): Well in bear markets, nobody will have the mood to buy. Even if you have good news, the price of the stock barely moves and may even drop. I’ve written quite a few articles, but I didn’t post them for this reason.
Choivo Capital: Ok that makes sense. I have to say, whenever I read your articles, it always felt a little like a pump and dump article. Albeit one done up to a very high standard. They are usually very detailed, with the facts, figures and assumptions.
However, they always seemed to be very biased and unbalanced. I won’t say it’s a bonescythe article, that one is a pure pump and dump article with little actual facts.
But yours seem to be cherry picking of the facts to suit the narrative you want to drive, which is essentially, “Earning go up over short term, this is the TP, go buy”
FQPAW: Well. First of all the facts and assumptions stated in my article are either public knowledge, and back by news articles or the annual report, or the various commodity trackers etc. This is where I am different from bonesycthe.
Choivo Capital: True, however, you must admit they are very biased. Like for example in your Heng Yuan articles, the way you write about the crack spread is as if, this incredible thickness will stay forever. You seem to ignore natural feed backs, ie: When cracks spread is fat, supply will go up via maintenance delay driving it down. Vice Versa.
You made a TP of RM14.3 and above based one off extraordinary events, as if this will continue forever.
Yes, your data is based on available figures or articles. But this is the internet, for every position you take, you can find another article out there arguing for and against. They were articles on “Seeking Alpha” on analysing American refiners, that this will not last forever.
FQPAW: To say it is biased is not that accurate. Because I do add in a few lines describing the risks etc.
The reason why it’s not balanced, is because if you were to write a balanced one, that considers all the perspective, you will just confuse people. They won’t know what to do.
I want people to know very clearly what they need to do, which is to buy and push up the price.
Choivo Capital: Makes sense. So, my guess is that the few lines give an appearance of balance, but by making it short and not quantifying or emphasizing the impact, it almost disappears in the article, especially since the Target Price etc is in bold at the bottom.
FQPAW: Correct. To be honest, most people probably don’t even read the analysis. They just go down straight to the bottom for the TP.
Choivo Capital: Well, if im honest, neither do I. I usually speed read it, because they almost always have zero bearing on the real economic power of the business.
And even if it’s the short term results you’re predicting, even a relatively simple business, like refineries have so many moving parts and hidden complexity, that your analysis ends up precisely wrong. I prefer being roughly correct.
Did you think RM14.3 or whatever to be the fair value of the company, do you think it reflects the real economic power of the business?
FQPAW: Well, yeah, it’s hard to get the figures right, you just know roughly. I thought RM14.3 was the fair value at that point in time. There has since be changes in the crack spread, and therefore the fair value now is much lower. It’s a cyclical business after all.
Choivo Capital: I mean the real economic power of the business. The earnings of each business can be split into two components. The first is the real economic power of the business. This encompasses, the quality of the management, the actual economics of the business, the moats it has etc.
The second, is one off temporary changes in the various external factors, which if normalized over the long term, should be close to zero.
For you to say that the fair value of Heng Yuan is RM14.3 when crack spread is thin, but much lower when crack spread is thin.
Its like a father saying calling his son a genius when he gets 100 marks in the exam because he saw the friends answer, but when he fails the exam because he had a fever at the time, the father then calls him a failure in life and wishes he had never been born.
No one or any father will do this unless they’re crazy or have mental illness. You will know the kind of person your son really is and what he’s really capable off, regardless of short term results.
What do you think is the real economic power of the business? How much do you think the real economic power is worth?
FQPAW: Well, most businesses in Malaysia is cyclical. You need to buy at bottom of the cycle and sell at the top to make money.
Choivo Capital: I digress. Almost all business is cyclical. Even nestle sales drop in recession. They’re economic power just happen to be very strong.
For cyclical business, you just need to buy it when its selling far below its real economic power, ie when its cold and dead, and sell it when its selling for far above its real economic power. Ie when everyone wants it.
*We then went on to talk about cyclical business that are cold and dead now, but I don’t think there is any interesting insight there*
How was Heng Yuan for you, how much did you sell it at. Can you tell me what is your returns this year?
Can you tell me your modus operandi? When you write these articles, who do you intend to attract?
FQPAW: Well, I sold all the way down from the top. The last batch was sold at RM9.9. In 2017, I made a lot of money from Heng Yuan. In 2018, I’m down 8%, I was actually gaining this year, but I got burned by Masteel etc.
To be honest, it’s not so much the average retailers I’m trying to attract. Those people are too small. I’m looking to get the big fish interested. Like Koon Yew Yin, Ooi Teik Bee, Icon8888 and the other big buyers in the market. KLSE market is very thin after all.
And then you want the retailers who chase high as these big fish buy, and the fund managers who want to ride this wave and make money from the retailers and if possible the big fish as well.
If Ooi Teik Bee recommends it to his followers, and people like Koon Yew Yin etc buy, you really hit the jackpot. Everyone will follow.
Choivo Capital: You’re not wrong on that observation, I wrote a little on it in an article.
For most pump and dumpers, which you are, just a very sophisticated one, they will always come a time, when their word and articles mean nothing. Because the fact they are trying to make money from the readers in a somewhat dishonest manner becomes too widely known.
When do you think this will happen to you?
And what do you think of your picks which have fallen by 70-80% from peak to trough?
FQPAW: Well, I don’t know. I think my articles have enough facts in them, that they are not false. It’s up to you to buy or sell, I’m not responsible for you. You get to keep your profit, so you should keep your loss.
It’s not just my picks that have fallen, but most of the market. At least 300 companies is down 50% or around there.
Choivo Capital: Correct. But most of them have little retail participation. Tasek fell from RM12.2 to RM4, but no one is really making noise, because the retail investor is not there.
Yours happen to be the ones with the highest volume and retail participants.
FQPAW: Well, as you are aware, the KLSE market is very immature and unsophisticated. Especially when compared to Hong Kong, US etc.
For us traders, and those who do what we do, we need the constant flow of new water fish that comes in every time we are in a bull market.
All of us here was at one point a water fish, who got chopped properly by the sharks by not selling in time etc.
We just learned from it, and now become the sharks and make that money from the new people. It is a zero sum game after all. To make money, you need to take it from someone else.
Choivo Capital: Well I digress, stock valuations and dividends should grow in tandem with the economy, which is how most investors make money. But I don’t want to talk about this. You are more than aware of my views.
We went on further here on other things like the audit perspective when it comes to the figures in the financial statements, if the financial statements can be trusted. The difference between the accounting representation of the figures versus the economic reality But i dont think i’ll be writing them here
The one thing I want to stress at the end of this article, is that I don’t consider myself more moral than him.
At the end of the day, it all boils down to incentives. Fuck up your incentives, and you can get good people to do despicable things.
In the US, directors used to give themselves ESOS like crazy without expensing them in the profit or loss. Therefore essentially robbing the shareholders blind in broad daylight, and trying to hide it. And these directors, if not for this, would be considered models of society. They donate to charity and you would want your children to marry them.
If I ever wrote a goreng article at the start of my investing career.
If I had not known Warren Buffet, Charlie Munger, Peter Lynch, Seth Klarman, Howard Marks etc so deeply.
I can see myself being one of the best quarter predicting article writers (ie pump and dumpers) in i3. And probably quite a bit richer.
However, for all our actions, we always pay one way or another. You get cynical of the markets, thinking it’s only the dishonest and manipulative people who make money, and you miss out on the wonderful companies available for sale.
And most of all, if you spend this much amount of time thinking of how to manipulate people, I’m not sure what kind of life you will end up with.
Having said that, I’m also long term greedy. I have never heard of a pump and dumper, who ended his life a USD billionaire. And if they were, they usually ended up in jail at some point. Hahaha
There is no such thing as people sharing for your learning. Or to share the profit with you. Track the incentives! If you are not paying for it, you’re the product!
Having said that, as I’m an investor, it’s my preference that other people do not invest and instead participate in those games. Feel free to get on that merry go round and have fun! Leave the rest to me.