Making a Small Amount Meaningful

Document created by williamh on Nov 5, 2015
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Here is my story of how a little bit of saved money and a desire to learn can go a long way:

From January to August of this year, I was studying abroad in Seoul, South Korea. Before long, I met a Canadian-American named Charles through a mutual friend, who was very interested in algorithmic trading. In fact, he had developed an algorithm that he was refining and could use some help on. I had no experience in finance, but was willing to help. Charles spent many nights teaching me to be a proficient technical trader, and taught me to understand the fast pace of the market. I used the proceeds from selling my car back home to put a small sum of money in an Interactive Brokers account. Riding the coattails of the US equities bull-market through March, the algorithm promptly returned 11%. We were beating the market, and we felt ecstatic. In this state of euphoria, we looked for ways to black box the algorithm and start a hedge fund, reaching out to lawyers and learning the regulations. At the same time, to further improve the model, we began to deeply contemplate the ideas of risk and return, and eventually altered the algorithm. We lost 6% in the following two weeks (we found out later it was because of a data mining error). Between the dip and performance and the high barriers to entry, we abandoned our hedge fund dreams. But only temporarily.

A New Scenery

Through one of Charles’ family friends, we were offered an office at a local hedge fund, HB Investments. The principal was a 37 year-old “whiz kid” in the finance industry who was an established technical trader. Prior to starting up HB, he was a top performer at a Korean proprietary trading firm and a frequent guest on Korean finance shows. We quickly became acquainted with the overarching reality of a growth-oriented hedge fund: you either produce or you get the boot. Charles and I worked late nights to put together an attractive pitch. It felt like old times when we worked on the algorithm; however, this time, we had the company’s resources. Sharing a Bloomberg, we were able to piece together an equities arbitrage strategy based on right’s offerings, a type of corporate action. Our target companies were based around the world- Italy, Norway, and Australia. We spent a few weeks calling management and making sure the numbers checked out. Finally, we gave the work to the principal. Pleased with our work, our boss allowed us to have free reign. Here is where my real introduction to investing began.

A New Focus (and a Wild Ride)

With the luxury of time and resources, we scoured through the Korean equivalents of analyst reports and 10-Ks, trying to identify undervalued small and mid-cap companies. We would scan lists and lists of KOSDAQ-listed companies and came up with a strategy to reduce the research burden. We decided to focus only on companies in no-growth industries that could compete on an international scale in an established market. These companies often traded at lower multiples and had a margin of safety. The inspiration for our investment philosophy stemmed from the books we were reading at the time, namely One Up on Wall Street and The Snowball for me. The rest of our investment philosophy stemmed from our understanding of Korean business and culture.  In order to vet our investment proposals, we traveled across Korea to meet management teams and tour operations. For the vetting process, South Korea is a value investing paradise. Roughly 90% of traded companies are headquartered in Seoul, and the other companies are at most 3 hours away by train. Once we found 5 or 6 companies, we began to rotate in and out of each position using technical analysis in order to generate immediate profits. In the tail end of the Korean bull market, we brought in 28% over a month. This time it was even more euphoric. We had a new pep in our step at the office, and it became easier to meet others in the Korean finance world with hard numbers behind us. However, much like the algorithm, thinks went awry. When the market bubble popped, we sold most of our positions and suddenly lost 17% before our eyes. We were totally demoralized. We spent about a week out of the office, sitting on Charles’ porch contemplating our lives. We thought, “How could we ride so high and fall so low?”

A Good Find

With the extra free time, we delved back into our investment books to find meaning. In a few days, we both came to the consensus that we should buy more. With new purpose, we spent a week searching for what to buy in the bear market. It was like Christmas morning. Although we could have bought any of our companies, we wanted to find “The Real Deal”. After musing at one of our portfolio favorites, Nexen Tire, we looked deeper down into the industrial food chain. It was a rabbit-hole. Before we knew it we were researching the prices of nickel, other commodities, and everything in between. After a long, good research process we hit the nail on the head with a company called Saehwa IMC. The company makes metal parts that aid in the tire molding process. After going through our checklist on the financials, we took the train to the coastal city of Gwangju to see it for ourselves. Gwangju was a well-known but small town. Families from Seoul seasonally head down to coastal cities like Gwangju to spend some of their hard earned money. When we got in the taxi, we asked the driver about Saehwa. Expecting a scratch on the head, we were surprised when the driver knew Saehwa. In fact he knew Saehwa very well. His brother had worked there for a few years in manufacturing and so did some of his friends. From the enthusiastic tone in his voice, I would have believed everyone had worked there. When we got there, management was very accommodative and had a vision that was evident at varying levels of the firm. The industry was restructuring in the company’s favor and new contracts were flying in. On top of that, turnover was low for the workers and relatively high for the inventory. Barring any setbacks in their new plant in Mexico, Saehwa was set for record numbers. When we got back, we went all in on Saehwa without any further thought. Until this day, I am fully and unshakably invested in Saehwa. When I came back from Korea, my dad told me to pull my money out of Korea immediately. I told him that I understand. However, the same day Saehwa IMC had hit fresh lows. It was now under $10 a share and was too good to pass up. So I bought more.

A New Path

It was tough returning home. I felt like my life was in fast-forward, but now it had paused. I was going back to life in the classroom. Slow and regimented. My life seemed like a remnant of my past life in Seoul. I began searching through my past experiences to find new direction for myself, and I remembered one particular encounter. I met a young Korean investment manager while in Korea who aspires to be “The Korean Warren Buffet” someday. When most people say this you laugh, but this guy had turned $100,000 of his own money into $25,000,000 in 7 years. By all standards he was a genius, and I’ll never forget one thing he told me. He said, “If you could meet Warren Buffet or any other investor of similar stature for a cheap meal, would you do it?” Of course I would, who wouldn’t? He continued, “Then why haven’t you read their books?” Reading good finance books is an opportunity to hear the best of what the most prominent investors have to say. Learning the lessons in these books are the most informative and relatable way to gain confidence and curiosity in investing endeavors. I originally thought I would have a meaningless life after returning from South Korea, but now, I have a full lunch schedule.

A Closing Remark

Even if you are working with a little money, that is OK. We are young adults with great money earning potential in the future. Take what small amount you have today and use it to learn!