Principles of Perfection - June 2014
My first memo written back in 2014, I hope to stay true to the principles set out here as best I can as a market operator.
Strategy
Execution
Flow
If I have seen further than others, it is by standing upon the shoulder of giants. - Sir Isaac Newton
Absorb what is useful, discard what is not, add what is uniquely your own. - Bruce Lee
Introduction
Our goal is to maximize long term returns for our shareholders and to outperform market indices over the long run.
The following sets out to the principles which we apply ourselves in the intelligent investment of capital under our management. As we continue to seek growth and evolution in ourselves and our thinking, this set of principles will evolve and updated accordingly.
Strategy
He will win who, prepared himself, waits to take the enemy unprepared. - Sun Tzu, The Art of War
On Time
A poor man plans for the weekend, a rich man plans for 5 years ahead. - Anonymous
We invest with a 3-5 years time horizon ahead of us.
Holding such a time frame allows us to think long term and ride through/take advantage of short-term instability of prices in the markets.
Time is an illusion at times.
We always think that 3-5 years is a long way ahead, but that time will pass by anyway.
The seeds you plant today will reap fruits 5 years later. The seeds you plant tomorrow, will reap 5 years plus 1 day later.
If you keep planting seeds everyday, the first 5 years will pass, putting you in a position to reap the fruits of your labour every single day for the rest of your life thereafter.
We like fruits and we are willing to wait.
On Risk
Risk comes from not knowing what you’re doing. - Warren Buffet
Volatility is not the enemy, permanent total loss of capital is.
With our investment horizon being typically longer than others, we are able to hold quality positions through short-term market gyrations and not be thrown off our investments and decisions by listening to the unnecessary short-term noise.
The risk is mainly in making bad investments, not good investments that look bad temporarily.
On Portfolio Allocation
You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Be water my friend. - Bruce Lee
How do you prepare for a future that has no certainty?
To be ready for anything and expect nothing.
Portfolio allocation between different asset classes, a strong balance sheet and carefully managed liquidity keeps one present in the moment and ready to take advantage of any situation may be.
When a black swan occurs, our anti-fragile structure blossoms because of it.
In good times, we aim to do well. In bad times, we aim to do better.
On Macroeconomic Outlooks
While we never know where we’re going, we ought to know where we are. - Howard Marks
Macroeconomics matter, but we do not pretend to be able to tell the future.
We can only look at what is, and know where we are most likely to find the best investment opportunities.
Acknowledging current risk to the best of our ability and demanding an adequate risk premium for it is the key.
On Valuation
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. - Warren Buffet
Price matters. Don’t overpay.
On Mr. Market
Be greedy when others are fearful, be fearful when others are greedy. - Warren Buffet
Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he might do this: the way of timing and the way of pricing. By timing we mean the endeavour to anticipate the action of the stock market - to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels. - Benjamin Graham, The Intelligent Investor
When there is a sale, we stock up.
On The Margin of Safety
It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity - provided that the buyer is informed and experienced and that he practices adequate diversification. - Benjamin Graham, The Intelligent Investor
By understanding that even the best laid out plans have a chance of failure, demanding an adequate margin of safety in our investments and our Portfolio as a whole ensures the long term survival of ourselves and our fund.
On Quality Investments
Here at Perfect Capital Enterprises, our aim is to make quality investments that align our execution with our strategy.
Execution
When you think that it’s too hard, remember that in the long run, doing the things that will make you successful is a lot easier than being unsuccessful - Ray Dalio
On Intention
Our moves are purposeful, functional and clear.
Always make an investment with our eyes wide open to the risk and the rewards we are expecting from the move.
On Honesty
To reflect upon our situation and results with total honesty.
That is the best way to make the clearest and best decisions.
With clear intentions, we then can reflect truthfully upon how our decisions pan out and minimize cognitive biasness that may result otherwise.
Know the difference between a right decision with a bad result, from a good result resulting from a bad decision.
Over the long run, superior decision making is the key whilst in the short run chance may play a superior role in determining results.
Being honest allows us to tell the difference between the two.
On Flow
No man ever steps in the same river twice, for it’s not the same river and he’s not the same man. - Heraclitus
To be present and in a state of flow when executing.
The markets, like rivers, can never be in the same place twice.
Understand that markets are dynamic which moves along with the world.
We cannot stop it, nor can we change it.
The key is to be present in the moment and learn to raise our sails when the wind is up. When the storms are coming in, we seek safe habour.
On the Holy Trinity
Risk, Price, Value.
Every investment decision is based on the interaction between these 3 entities.
The relativity of these three elements ultimately distinguishes a good investment from a bad investment, and the quality of the investment cannot be identified by looking at any of the elements in isolation with the others.
Our aim is to invest with the view of paying a reasonable or good price for something with amazing value whilst understanding and undertaking acceptable risk for it.
Flow
How can one respond to the totality with partial fragmentary pattern? - Bruce Lee
On being Present
If you are depressed you are living in the past.
If you are anxious you are living in the future.
If you are at peace you are living in the present. - Lao Tzu
On being a Hyper-realist
When I say I’m a hyperrealist, people sometimes think I don’t believe in making dreams happen. This couldn’t be further from the truth. In fact, I believe that without pursuing dreams, life is mundane. I am just saying that I believe hyperrealism is the best way to choose and achieve one’s dreams. The people who really change the world are the ones who see what’s possible and figure out how to make that happen. - Ray Dalio
On Judgement
There is nothing either good or bad, but thinking makes it so. - William Shakespeare
Seek to understand rather than to judge, for there is nothing good or bad until you make it so.
Markets do not care whether you are wrong or right.
Hence there is a place and time for everything; something that might be good now may be horrible later.
All we can do is the best we can with what we have at that moment in time.
On Understanding
It is futile to argue as to which single leaf, which design of branch, or which attractive flower you like; when you understand the root, you understand all its blossoming. - Bruce Lee
On Totality
I am learning to understand rather than immediately judge or to be judged. I cannot blindly follow the crowd and accept their approach. I will not allow myself to indulge in the usual manipulating game of role creation. Fortunately for me, my self-knowledge has transcended that and I have come to understand that life is best to be lived and not to be conceptualized. I am happy because I am growing daily and I am honestly not knowing where the limit lies. I treasure the memory of the past misfortunes. It has added more to my bank of fortitude. - Bruce Lee
We do not just believe in these values as just a way of investing but also as our way of life.
Believe
Tan Yong Sheng
Co-Founder
Perfect Capital Enterprises Limited
June 2014