The third quarter was a relatively uneventful quarter. Not much we need to address. As such, we have the luxury of taking the time to review our philosophy and principles and discuss some changes at Noesis. I hope this will help you further understand the team you entrust your money with.
The Noesis Way
Simply put, we are long-term investors focusing on top-quality securities. Our portfolios are moderately diversified into global businesses, bonds, cash and, occasionally, unconventional securities, with capital preservation always our first priority.
At Noesis, we believe in taking care of risks first and profits will follow. Thus the first step in our risk management is to focus on only top-quality securities – never junk. As Warren Buffett said, “Time is the friend of the wonderful business, the enemy of the mediocre.” We are convinced that owning an outstanding business at a reasonable price is safer and better than owning a mediocre business at a bargain price.
Of course, investors generally have to pay premiums to acquire high quality assets. It could be risky if the price we pay is too high, so we have to make sure that the price is at least reasonable. To make a profit is tougher than to make a loss. It takes 100% return to come back from a 50% loss; we all have to remember that. In order to make any commitment, we need to build in enough safety margin when acquiring assets to allow us to sleep well at night.
While we agree that moderate diversification can reduce risk, we don’t, however, agree that wide diversification is necessary. Statistically, increasing the number of securities above a certain level reduces risk only marginally. As such, we’d rather concentrate on a reasonable-sized basket of top-quality, individual securities. We apply the concept of wide diversification only to areas where we believe we must participate but have no particular expertise. In addition, we prefer not to use margin in portfolios.
We consider capital preservation to always be our first priority. We don’t try to time the market and prefer to fully invest. However, if we cannot find an appropriate opportunity, we usually choose to stay aside and be patient for bargains. To us, missing a profitable opportunity is better than making a disastrous loss.
Our attitude toward equity investment is that it’s really owning a piece of a business, not just trading a piece of a security. As such, when we consider buying a company, we ask ourselves:
- Do we really understand the business?
- Will we be proud to own this business?
- Are the long-term prospects favorable?
- Is the management competent and trustworthy?
- Is the price attractive enough that we would be willing to put a majority of our own family money into it?
We buy only if the shares pass all of the above tests. After the purchase, we consider ourselves an owner of the company. We, like most business owners, don’t intend to trade our business monthly or annually. As long as the business — not the stock — performs reasonably well, we are willing to hold for a long time, ideally forever.
There are many pitfalls of frequent transactions, for example, increased transaction costs and tax burden, unproductive distraction, and reduced research quality. Trading is indeed inefficient, life is too short to waste energy on this kind of activities.
To consider selling, we ask ourselves:
- Will we have a chance to buy back such a high-quality business in the future even when the price is considered far above the intrinsic value?
- Are we concerned about the long-term prospects of the business, regardless of the price?
- Are there other, more attractive alternatives at hand?
These are very simple and productive tests for selling candidates.
We believe that the market is emotional in the short term and rational in the long run. We evaluate a company based on its long-term prospects, not the short-term; but we take advantage of short-term volatility (emotions) when making a trade.
While we believe that the market will reflect the true value of the economy in the long run, it is cyclical from a short-term viewpoint mainly due to human emotions. When the economy is good, most investors rush in; when time is bad, most flee. To invest successfully, we have to do something different: be ahead of the herd. “What the wise man does in the beginning, the fool does in the end,” said Howard Marks. Or, as Warren Buffett remarked in a similar fashion: “Be greedy when others are fearful, and fearful when others are greedy.” In that sense, we consider ourselves contrarian. Unfortunately, being a contrarian is lonely and uncomfortable. I will never forget the time periods of 1999 before the market peak and 2008 before the crash. These were the most difficult times in our corporate history. Some clients constantly complained about our conservatism, selling high flyers and keeping cash at hand while the broad public was happy about its investment holdings. On the other hand, right after the market bottomed out both times, quite a few clients actually liquidated their portfolios, afraid that there was no tomorrow. Fortunately, these events don’t happen often.
We are a small company in terms of assets under management. However, we have strong ambitions and a commitment to research. A quote from Benjamin Graham:
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” – The Intelligent Investor
In this context, thorough analysis is key to investment and runs deep in our blood. Deep research doesn’t necessarily guarantee superior returns, but without it, you need tons of luck to earn reasonable returns. You are welcome to visit our office to see our “Blue Boxes”, the due diligence files we keep.
One of Noesis’ key mottos is “talk the talk and walk the walk”. All the principles we believe, we apply not only to investment but also to our personal lives. For example, our attitude toward long-term investment also applies to client and colleague relationships by avoiding conflicts where possible. As a result, our client turnover remains quite low and most of our colleagues have worked together for more than a decade.
Most important of all is the promise we made to ourselves: Run a first-class business in a first-class way.
I have considered investment part of my blood and have enjoyed the work since day one. However, after more than two decades working as a professional investor, I have decided to retire from the field as of December 31, 2013.
Approximately fifteen years ago, I heard an adage from the highly respected Dharma Master Cheng Yen, “There are two things you should never wait with: filial piety and helping people.” It reverberated with me so much that I became actively involved in the Tzu Chi Foundation, a Taiwan-based global charitable organization founded by Master Cheng Yen. When my mom passed away unexpectedly in 2008, I was very sad and promised myself that I wouldn’t let myself feel any regret again. As Noesis continues its pace growing steadfastly, my dad is getting old. I realized that it is time for me to move back to Taiwan, where I was born, to take care of my eighty-two-year-old dad and become fully involved in my volunteer work.
I feel so grateful that I met many great people in the United States. I appreciated a small group of high-production brokers I met early in my career who trusted me enough to follow my recommendations and give me opportunities to grow. It was through them that I met Nico Letschert, my boss who eventually became my partner working together side-by-side at Noesis.
I admire very much Nico’s positive thinking and caring attitude, which I believe is crucial in running a business. During the 2008-2009 Great Recession and financial crisis, he decided not to let go any employee during the tough time because he firmly believed that Noesis should get through the crisis together as one. That ensured an extremely low employee turnover and thus laid a strong base for our latest growth. When it came to investment strategies, Nico gave me full authority to make decisions and rarely looked over my shoulders. His trust and confidence have motivated me to work fearlessly in this otherwise stressful industry and remain disciplined when tempted.
I have always felt grateful to Nico for introducing me to Dick Brown, my mentor and best teacher. Dick was a senior Vice President and supervisory analyst at Goldman Sachs before his retirement and subsequent move to Florida. For more than 15 years, he worked as an advisor to Noesis. During this time, through an old-fashioned master-disciple relationship, he pushed me hard and I became a critical thinker. I later took the CFA exams and earned the designation because of his encouragement. Dick, one of the earliest CFA charterholders, was a top-notch analyst with decades of experience covering a wide range of industries. He was one of the pioneering analysts at Goldman Sachs covering Japanese companies. Without him, I could never have become who I am today. Mr. Brown passed away in late 2011. Dick: Thank you so much for your selfless teaching. I’ll miss you forever.
Jerry Spitzberg is the other partner and cofounder of Noesis I’ve been honored to work with for the past two decades. Jerry is a CPA and a CFA charterholder. He is prudent, with high integrity.
I don’t know how many times he’s challenged me in the past, helping me clarify my thoughts; I value his input highly. He has always trusted my investment judgment and faithfully followed my investment guidelines. For that, I feel grateful.
Shihfang Chuang, Christian Paterok, and Steve Smith, the other members of the Noesis research team, have worked with me for years. I’m happy to say that they are now ready to take over my responsibilities. They are all well-trained analysts with different expertise and backgrounds. Shihfang, with an education background in economics and management information system, was an IT consultant before she joined us. She is great at multitasking, problem-solving and making tough decisions. Christian, with his German inheritance, is strong in detailed work. He can dig deep into research and will never give up. Both Shihfang and Christian participate in the CFA program, have passed the level II exam, and I wish them success in earning the designation. Steve, a CFA charterholder, majored in Corporate Finance and Investment Management. He worked for Sterne Agee Asset Management for nearly a decade before he joined us. Steve has a respected track record as a portfolio manager. During the many years that we all worked together, we got to know each other well and share the same principles. I have high confidence that the trio will continue to take care of all Noesis clients and will exceed my achievement.
I also owe a big debt of gratitude to the rest of my colleagues. Indeed, it is the teamwork that counts. This is the team, the family that I went through the good times and the bad times with together for years. I have high respect for each and every one of them. The team will continue to focus on you, our client. Even without my involvement here, I still believe that Noesis is whom you can entrust your money with a peace of mind.
Good bye, my dear friends. Thank you so much for your confidence all these years. I wish you all the best.
Joseph Lai, CFA
Chief Investment Officer
Our most recent Form ADV, Part II is available upon request.