Reporter: Sang Hee Ahn | Date: Oct. 20, 2010
[Translation]
“Market will remain strong until investors favor risky assets”
Co-CEO Namho Lee of V&S Investment
“It is our differentiated strategy to invest on stocks faced with special situations,” said co-CEO Namho Lee of V&S Investment Management, answering the reporter’s question about the company’s unique investment strategy that differentiates itself from more than 100 competitors. He added that the company’s name, “V&S,” stands for “Value” and “Special Situations,” respectively.
Value investment is a common sense to investors. It means that you identify undervalued stocks and make a long-term investment to earn profits. But the “Special Situations” need to be explained.
“In other words, it means an ‘event-driven investment’,” said CEO Lee. “For instance, everyone knew for many years that Hyundai Engineering & Construction will be up for sale but the issue at the time was who was going to be its real owner and when. For that reason the company’s stock price remained weak. But we saw the company’s ‘event-driven’ value and made a 50% profit from our investment decision for a year.”
Co-CEO Lee explained: “Leading investment banks such as Goldman Sachs and Morgan Stanley all have a separate department called ‘Special Situations.’ Its job is to see any possible event such as spin-off, bankruptcy and M&A and make an investment decision based on the analysis of those events. Our company has recently received KRW 50 billion from Landmark Partners, the world’s third largest private equity and real estate investment company specializing in secondary funds. I believe that the company liked our investment philosophy and event-driven business strategy.”
Q: Value investment and event-driven strategy may not be easily understood by investors.
A: I think that we have won the confidence of our business clients because we succeeded in continuously making profits based on our unique investment strategy. Once they become our client, they tend to trust more fund to us. We saw few clients leaving us even during the global financial crisis.”
Q: What is your recent performance?
A: “I cannot say that our performance has been exceptionally good over the past one year. But the three-year performance is not so bad since we focus on long-term investments. Our flagship account’s three-year cumulative rate of return stands at 56.6%, which is quite significant considering that the Kospi shrunk 6.1% during the same period.”
Q: Who inspired you to build the company’s unique investment philosophy?
A: I learned a basic principle of investment from “The Intelligent Investor” by Benjamin Graham, who stressed the importance of a long-term investment in cheap stocks as a way of avoiding a big loss. Seth A. Klarman’s “Margin of Safety” taught me how to implement what I learned from Benjamin Graham. This book has not been translated into Korean but it inspired me to build up the company’s overall philosophy of value investment and the event-driven investment strategy.”
Q: The KOSPI passed the 1900 mark. What is your outlook for the market?
A: I want to see a big picture with focus on long-term investments because the Kospi index would have little impact on our investment portfolio. I keep a close eye on the changing pattern of the investor behavior to determine whether the market is weak or not. The Kospi index may suffer a short-term adjustment but I believe that it will remain bullish in the long run.
Q: What do you mean by observing investors’ behavior?
A: When you see people’s behavior in the market, you realize that they are not crazy about risky assets such as shares, real estates and alternative investment products. It means that people are unsure if the US economy will slide into a double dip or not. Individual investors are dumping fund products they purchased. So I think that the stock market will remain brisk until people begin rushing to risky assets.
Q: Foreign investors are buying up Korean shares.
A: Money is flooding into Korea these days. Some experts are mentioning a ‘decoupling’ between advanced and emerging economies. Advanced economies do not play a leading role as they did in the past and Korea will remain as an attractive market to foreign investors as long as the current situation goes unchanged. In other words, hot money will flow into emerging markets until they believe that advanced countries are doing more to drive the global economy.”
Q: What are you looking at in the market these days?
A: For large companies, we are looking at KEPCO, Samsung Fire & Marine Insurance, Yuhan Corporation (000100). We are also interested in promising SME’s such as Shinsegae I&C, Asia Cement (002030), and Leeno Industrial (058470).
Q: Why is that?
A: KEPCO is now keeping electricity prices low but it will be normalized someday. Investors are not interested in this because the current pricing policy will go unchanged for a while. Nobody is serious about Samsung Fire & Marine Insurance, either. But Samsung’s leaders have the knack of turning a bad company into a good one. One good example is Samsung SDI (006400). I think that it is going to be a good long-term investment destination. In the case of Yuhan, the pharmaceutical industry is not doing well these days but the company is likely to take off later. Shinsegae I&C has more than KRW 70 billion in cash while its market capitalization amounts to KRW 100 billion. So it is undervalued now. Emart has started the mobile phone business, whose outlook is not so bad. Asia Cement has assets such as buildings and lands. It also has stocks and bonds worth KRW 200 billion while its market capitalization is about the same amount. Its stock price is boxed simply because the cement and construction industries remain sluggish. Finally, Leeno Industrial’s operating profit margin exceeds 30% each year and it has business clients all over the world. Samsung Electronics takes up less than 10% of its total operating revenue. In addition, the company’s newly launched businesses are all promising.
Q: Let’s talk about personal things. Co-CEO Chaewon Ri and you have chosen an interesting career path.
A: We studied together at the Department of Business Administration in Seoul National University. We both specialized in finance when we joined the MBA program in the United States. After the graduation, I worked for foreign investment banks such as JP Morgan and Morgan Stanley and gained experience in the fields of commodity, bond and stock. My friend, Chaewon, first joined the M&A team of JP Morgan and worked later as an analyst at Daewoo Securities and PCA Asset Management.
Q: Your career at foreign investment banks would be a great asset for what you are doing now.
A: “I learned a lot while working for the big names and my experience is in fact a great asset for what I am doing now. I was lucky to join Citibank in 1998 when Korea was hit hard by the foreign exchange crisis. My pay was not highest when I was there but I could learn a lot about investment. I am still using knowledge and skills that I learned there.”
Q: What is your tip to individual investors?
A: In a nutshell, investment is not about intelligence but about emotion. Individual investors may be smart and have enough information about the market but they still do not make profits. What matters most is if they can control their emotion or not.
Charles D. Ellis, CFA, once talked about three ways to make money: (1) you can be intelligent; (2) you can be a hard worker; and (3) you can control your emotion. He said that he was not as intelligent as Warren Buffett nor could he work till one or two in the morning. So the first two ways do not apply to him. But he thought that he could control his emotion. In other words, he was able to jump in while others remained hesitant and by doing so he could make money in investments. I am sure that people need to control their emotion if they want to be a successful investor.
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