If 2013 was a good year, then 2014 can be described as total disappointment. We realize that this is a not a good opening for a letter. It does sound depressing. However, that is the reality of how we are doing in 2014. On brighter note, it is a year that teaches us about contentment, gratitude and humility.


Our performance this year causes a period of soul-searching for us. We are beaten by the index around 1-2%, while the best funds are doing 30-40% return. Are we doing the right thing by insisting on value approach? Or value just doesn’t work in Indonesia? Why do so much research on company fundamentals, and why take so much concentrated risk if it is possible to return that kind of numbers using other methodologies?

In 2013, we were tempted to experiment on other strategies such as those based on technical, momentum, and market flow. Our retreat from those strategies might explain our outperformance in 2013. When the calendar turns to 2014, we are quite committed not to do the same mistake again. That is apparent from our portfolio turnover that decreases from 320% to 136%.[1] However, the avoidance of the strategies also causes us to miss some of the potential gains in the market. We missed out on the buying at the dip early in the years. Our conviction was the market was not cheap enough. Apparently we are still waiting for people to panic, while some of the less pessimistic value investors had gone in to look for bargain. Clearly, this year, we have been more pessimistic than required; it is reflected from our average cash holding from 22% in 2013 to 36% in 2014.[2] Are we shaken by this? Yes, but eventually we realized that we need to stay true to our core beliefs. We cannot let result of one year to evaluate our conviction. Our concern is not whether our foundation is correct (if the concept of buying a good company with margin of safety is invalid, then at least we die trying); our concern should be focused on the application of that principle.

Value investing is analogous to our faith. We will never get 100% certainty that a method will work. It is exacerbated by the fact that to find out whether a method will work as intended, we need decades of application. Yes, we can refer back to the textbook or biography of the successful value investors, but reading and knowing are very different from actually walking through it. When doing it, there is always a lingering question whether we missed something or made mistake along the way. To our consolation, at least investing is a much easier topics than salvation. In salvation, we put our hope and faith in a belief, and wait until we wake up at the other side of life to find out. In investing, the worst thing that can happen is to wake up one bright day and found out that the 40 years of application has been proven wrong by one swipe of massive underperformance or total loss. Well, at least we still have our lives and souls (If you think that is not true, and losing soul is less painful than losing wealth, we suggest you contact the nearest monastery / church to get your soul checked out).

[1] Turnover is calculated by taking the total value of the trade done (both buy and sell) divided by the average value of the portfolio.

[2] Calculated by taking the average of the daily cash to net asset value percentage.

Mistakes and Lessons Learned: The price of our soul

We should beat ourselves at this section since we should know better. At one point, we were ahead by almost 15%, a number that is too good to be true. Had we done our homework and stick to our principles, we would have performed much better.

Our mistake was not selling when the market valuation is too frothy. Now, before we explain further; we divide the companies that we invest in into two general categories: Cheap companies based on book value and cheap companies based on future potential.

Generally, we would hold cheap companies because they are doing badly, management are abusing the shareholders, it is doing an average business (without moat) or because they are cyclical companies. How do you assess the cheapness? We rely mostly on the book value. There are debates of why book value is not an accurate measure, we are aware of that. However, that is fine with us because we generally incorporate a wide margin of safety in this type of company. We are betting that the cheapness based on book value would not persist. The reason is because we think somebody will realize sometime in the future that they can extract more value from the company, and that would revert the valuation to normalcy. That is a huge leap of faith. In this kind of company, we would need to be disciplined and sell our position once the company hit the level close to the fair value.

The second type of business is the business that has wide moat. These are the rock stars of the stock market, or maybe the unicorn of the investment world. We live to find this type of companies. The company is prized for its ability to compound and maintain its competitive advantage, and little doubt exists of its ability to maintain and grow its cash flow in the future. Usually this kind of company is sold for premium. It is often to find them trading much higher than the book value. For this company, the book value doesn’t matter a lot because in few years, it will earn much to justify its valuation anyway. In this kind of investment, we should not sell it just because we bought it at 2x book value and it is now trading at 5x book value.

The difference between the two types of companies highlights our first mistake. One of our holdings went from 1x BV to 2.2x BV. The thing is, when the price went up so much, we were trapped by our own misjudgment. Originally we thought this is a company with a good moat, good management, low scalability, high capex, and cyclical earning. We think we are find paying up to 1.5x BV. However, when it overshot our target, we adjusted our opinion of the business. We substituted our analysis and conviction with what the market told us what the company was worth. Suddenly, this average next door girl, powered by magic of Mr.Market, transformed into the hot magazine cover girl. Our opinion of the girl was disoriented. There is slight possibility that the fundamental of the business have changed, but at that time, (we know exactly with the benefit of hindsight), that we were wrong. We are trapped by Mr. Market’s sirene.

As the result, we upgraded this company from the first category to the second category. Therefore, our valuation of the company went higher. What was our reason to do so? Nothing but the seven deadly words of investing (as said by Aswath Damodaran): “They must know something I don’t know.”

Lesson Learned: Focus on facts, don’t get distracted by the allure of market.

Notable Ideas
This was one of the area that we did well. As we have mentioned in our write-up before, the stock went down by a lot because of unsubstantiated rumors. We thought that market and media were wrong, and we were betting our money. Long story short, we close our position with almost 100% return on this play in less than 3 months.

We suffered in this counter. Having first established position at 1600, right now we are in pain. The stock was trading below 1000 now. However, we are betting that the corporate governance of the company will work as intended. The company still has a good cash flow, and if the price doesn’t recover, we still can get our return from the dividends and cash flow to the shareholders. We much prefer the management to return the cash to the shareholder rather than initiating merger & acquisition activities.

We don’t know what was wrong with our mind when we established this position. We get this share at the average cost of 52. Through the years, we have tried to get out in the negotiation market for price around 40. We could not find any buyers to take it, and we have given up already. Then, on one fine day in October, the counter suddenly went on rampage, and we sold the counter at 60. That was a 13% return for two years. Not good, but considering that we were trying to get out at a loss, this is a blessing indeed. The scary part is, we were thinking not selling at wait until the price hit 70. It never hit 70 and we were glad that we did not fall into doing that. It is amazing how psychology can affect our mind so much.

In the previous section, we have discussed about us being mistaken in putting the company that should belong to the first category into the second category. BBRI is the reverse mistake. We thought that the company is an extremely good company, but because the price has shot up in a short time, we decided to sell. If we have been careful to realize that we are selling a compounder company, we would have been happier now.

Regarding Dividend
In 2014, our income derived from dividend has grown more than 100%. Although this seems to be a lot, it doesn’t make a lot of difference in our return. This is probably due to the uptrend of the market. When the performance of the market is good, then dividend will not matter much. This is exemplified by our dividend which constituted 14% of our absolute return in 2013 and less than 4% in 2014.


As we end 2014, there are a lot of reflections in the coming time. We still maintain our last year opinion that there are not many investment ideas in the market right now. As we look at the valuation demanded by the market, we think it needs to go down by at least 20% before opportunities come out to present themselves.

The present government has done quite a lot since their installment. As we have said in the midyear update, the market has priced in that the new president will be able to bring prosperity and fixes to the broken part of our country. As citizens, of course we hope that would realize. However, as investor, we think it is unwise to pay for it. It is almost one year since the new government took charge, and the development in the politics has shown that it is not easy for a reformer to come in. We hope for the best for this country.

One of the investment themes of 2014 was infrastructure. The government has pledged to focus on infrastructure development, and we think it is a right target for spending. This prompted to the strengthening of contractors’ stock price. We choose not to participate in this because we think, even before the government announcement, the valuations were already frothy. It is a fact of life, that sometimes expensive thing gets more expensive (the reverse is true, cheaper thing gets cheaper). Our opinion is, contractors’ quality of earning is not the same with that of consumer goods or mutual fund companies. It is far less sticky, and it should not warrant the frothy multiple.

Despite of the negativity we have over the economic situation, there is good news coming in form of oil price. The cheap oil price has given an ample breathing room for the government’s budget. This, we reckon, will help tremendously with the government’s finance. It can actually prevent market from correction; possibly moving sideway for quite sometimes. The bad news is that it might encourage people to accept lower return for a longer period of time, which is already happening right now.

We don’t know what 2015 will have in store for us. We entered 2015 with a high position of cash, not primarily reflecting our pessimism, but it is a reflection of our inability to find bargain in the market. Meanwhile, we will keep ourselves busy with learning and sharpening our thoughts.

Medan, February 16th 2014
Christopher Angkasa