18) The evolution of a value investor with Jae Jun founder of Old School Value
From NeyTorres.com
Ney Torres: [0:03] ... I met Jae when I was reading a
book about value investing. I was looking for this very specific terminology. I
found one of your articles. It led me to Old School value. I wanted to ask you.
Can you tell me your story of how you started a website business? What did you
learn about it? How did you start in investing? And specifically, how do you
start value investing?
Jae Jun: [0:49]
Okay, sure. Yeah, that's a lot of questions but I'll try to go through it one
by one. So, the real sequence of that is I first got into investing. I was
working at a job. I got my first 401k in the US. So, that's the retirement
account. And then, the company was putting it automatically into a mutual fund.
I just wanted to get a better idea of what the money was being invested into.
[1:14] So, I was going through some articles
and this and that, trying to read up. I got into, like say, trying to learn day
trading. But that didn't work out because I had no idea what I was doing. I
ended up meeting up with supposedly a financial advisor. Ultimately, it was to
purchase life insurance. And not knowing anything, I went ahead and pretty much
dumped all of my life savings of $3,000 into it. And then, I realized that it
wasn't an investment vehicle. So, I took the loss and then really started
learning and came up with Warren Buffett.
[1:51] Like many other value investors before
me, that's pretty much the start of the journey. And so, I really started a
website, only to document everything that I was learning because I was going
through all these books, and nothing was really in a logical order for me. So,
I was just rewriting and trying to organize my thoughts on paper. And that's
how Old School Value came about.
[2:16] So, it was a natural progression from
going from a blog, and then creating formulas realizing that I was spending way
too much time entering, and copying, and pasting data from annual reports and
stuff into spreadsheets. So, I just started making templates and tools to help
myself. And that's how Old School Value came about, which is now an investment
software.
[2:41] So, I'm not involved with Old School Value
anymore. That part of the business was sold. But that led me to really diving
into online businesses. And it's what Warren Buffett says when he says, “I'm a
better investor because I'm a better businessman. And vice versa.” And by
actually being in the trenches of running a business, it makes it so much
easier to understand value investing and investing as a whole. Because I get to
see like the ebbs and flows of business cycles, the decisions made and how
things can lead to certain financial either gains or losses. And so, over the
decade, that's been a natural progression of just going from investing, to
blogging, to trying to build these online businesses, and then trying to just
scale and make these businesses grow. That's where I'm at today.
Ney Torres: [3:41]
Okay, so can we first start talking about building an online web page, of
course, a web page business, and then we can talk about value investing. Is
that okay?
Jae Jun: [3:54] Yeah, sure. Let's do it.
Ney Torres: [3:56]
Cool. What would you tell yourself when you started the webpage, Old School Value?
Jae Jun: [4:03]
Do you mean what did I tell myself?
Ney Torres: [4:05] What will you tell yourself if you
have a chance to go back and talk to yourself?
Jae Jun: [4:11] Well, from what I know now,
value investing is never a popular investing model. So, unless you have the
guts, determination, and the temperament to ignore the news, ignore emotions,
value investing is not going to work. I've lost a lot of money by either being
too impatient or thinking that I was selling something at a proper time, when
in fact, I could have just let it ride and let the business take care of
itself.
[4:45] So, rather than trying to really
understand the business, I spent a lot of time focusing too much on just being
numbers driven. That's sort of the counter to what is going on now nowadays
with all these data driven approaches and passive investing strategies. They work
until it doesn't.
[5:08] It's the same with value investing. So,
it's just being able to identify your weaknesses and strengths, and then to
apply it. And so, if I had to start Old School Value again and value investing
again, it's just understanding the different things that come up with it, and
being able to work through it and not being so impatient.
Ney Torres: [5:31] Like what? Like, I want to start a
business like yours. What would you tell me?
Jae Jun: [5:39]
Work backwards. That's the number one advice that I give to pretty much anybody
that asked me. It's the same with investing in a business. The problem is too
many people… When I started Old School Value, I lucked out because I wasn't… It
wasn't because I worked backwards, but I just lucked out in terms of like the
timing and the product. But nowadays, you see too many people fall in love with
their ideas. They create a website, then they go out and try to sell it.
Whereas, if you work backwards, you first identify whether people are actually
interested in your idea. And if there's a market need, then you go out and
build a very simple basic prototype. See if you can sell it. And then, if
there's interest, that's when you really dive into the business side.
Ney Torres: [6:28] How many times a week did you write
an article?
Jae Jun: [6:33]
Oh, in the beginning, it was at least four to five articles a day, minimum 700
to 1200 words. And since these are investment articles, it's not just something
where I can just sit and start typing. It was research. I was reading annual
reports. Pretty much I would spend about 2-3 hours a day just researching. And
then, another two hours a day writing. And another one for editing. So, it was
a full-time thing. So that was pretty much my hobby at the time. I still really
like writing. I still do. But it was just dedication. Only because I actually
wanted to do it for myself that I was able to do it for so long.
Ney Torres: [7:19] And how many articles? Do you know
how many did you end up writing?
Jae Jun: [7:26]
Take out the sort of like the smaller, non-essential articles, that would have
probably been about 700 to 800.
Ney Torres: [7:35]
Wow, congratulations, my friend. But it's such a robust corpus of knowledge.
I'm really impressed. I've always been. It's very well done. If somebody wants
to learn about stocks, you have to go to Old School Value. Your articles are
amazing, congratulations. So, let's talk a little bit about investing. You find
this Warren Buffett guy, what comes next?
Jae Jun: [8:05]
So, it's just looking through his books. But then there's so much knowledge and
so much information, right? So, the problem with value investing or any sort of
investing is that there's so much information. You really have to come down to
nail it down to your core tenants. And that could be like five main criteria
that you're looking for. And it's just sticking to that. I mean, Warren Buffett,
I didn't know his exact criteria because he has so much and he's become much
more advanced over the years. But I mean, if I just take the cliché, he looks
for good, high quality companies with great earnings potential, right.
[8:42] And so, you really have to boil it down
to what type of company you are looking for because there's so many. There are
thousands of stocks, right. You don't have to be invested in all of them. You
just have to find the few that fit your criteria, and then invest in those. And
that's the way I approach value investing or any type of thing. I don't say
traders are wrong. I don't say options investors are wrong. They found what
works for them. They found what works for their temperament. Same with value
investors. You have to find what works for you within value investing, before
you can actually really see the monetary gains. Otherwise, you're just going to
be swimming around in still a large ocean of value investing tenants and people
quoting this and that. You're just going to be confused unless you really
understand what it is that you want.
[9:26] And that's why even with value
investing, that's why I say you work backwards. Figure out what you want,
create a checklist to something, and then find the stocks that match those
criteria. And that's just an easier way to get started as opposed to starting
off with like a huge pool of 10,000 stocks, going through each and every one
and then trying to figure out which one to invest in.
Ney Torres: [9:49] So, what is value investing? How
would you define it?
Jae Jun: [9:54]
Yeah, that's a tough one because value investing to me is pretty much if I see
something where something can appreciate with minimal downside risk, that's value
to me. Right now, with the current economy, we’re seeing stocks tank. The media
and people are saying this is a great buying opportunity. I just called BS on
that because Tesla went up to $900, let's say. What is it now? $500 or $400
something? But the mainstream media is saying this is the new crazy buy at the
moment. It could be. But the media know a lot of people were thinking it was a
great buy at $900. But just because the stock hits the 52-week high every
single day, it doesn't mean that that's the fair value. Something from $100, going
down to $50 is not great value if the actual intrinsic worth or the fair value
is something like $20. So, just knowing what you're paying, and believing
expecting that you can get a bigger return on that, that's value investing and
just holding on to your guns.
Ney Torres: [11:00]
One special thing that Old School Value has is you keep track of portfolios or
different systems for investing. You did that for many years. What did you
learn about those systems? Do you remember any of those? Can you describe them
a little bit?
Jae Jun: [11:19]
Yeah, for sure. So, all of those different screeners and systems, as you say,
targeted different types of companies. So, one was looking up Graham cheap
stocks. Another one was looking up Munger type curve stocks. Another one was
looking for low PE. Another one was looking for very strong cash flow or free
cash flow. What I found is that you have to have many tools in your belt. Like
for example, a carpenter isn't going to make a house with a single hammer, but
that's pretty much what most investors do. They fall in love. They learn
something. They fall in love with it and then they try to apply that one single
skill set to every single stock, and then it blows up in their face.
[12:04] So, the point of those different
systems was to have different tool sets for different situations that market
was going in. So right now, over the past 10 years, low PE or deep value stuff,
it didn't work, and everybody knows it. The people who are still waiting,
they've lost either a lot of money or still on the sidelines. But at the same
time, there's no reason why you cannot switch up your strategy and apply a
different tool set say like going for high quality companies like a Buffet and Munger
type strategy right now instead of trying to continually look for deep net
nets.
[12:42] And that's one of the problems that I
see with too many fundamental value investors where they just define value
investing so narrowly that they say its heresy if you go outside of this
specific skill set. And to me, that's not value investing. That's just burying
your head in the sand. I've come to this conclusion because I used to be like
that. But after running a business, I know that if I was to do the same thing
over and over again in good or bad times, I'll be bankrupt by now, when the
economy's bad, like right now with the corona virus, I'm adapting and playing
different strategies to stay ahead. If I was still doing the same thing as if
the economy is still great, hey, I'm out of business. That's the same with value
investing in the different screeners and systems that I had set up.
Ney Torres: [13:35]
So, would you say you have different system in your head depending on the
market? If the market goes up, you have a certain system. If the market goes
down, maybe you have another one. Different strategies.
Jae Jun: [13:55] Right. Hey, Ney, you broke
up a little bit so I didn't get the full question.
Ney Torres: [14:00]
Oh, sorry. Let me repeat it. So, will you say you have different strategies in
your head depending on the market type.
Jae Jun: [14:08] Yep.
Ney Torres: [14:10]
Yeah. Which one of these systems is one the one that you like the most? Again,
you just said, not, there's not a golden system but which one do you think is
the one you will start if you're starting from zero?
Jae Jun: [14:29]
Again, I mean, I'm sounding like a broken record, but it would be again,
working backwards. So, understanding what situation you're currently in. Like
right now. For example, if we were at this middle of the bull market, let's go
back to say like 2014 or something, I'm not going to all of a sudden go into Graham
net nets. I may have come across, say, intelligent investor, and then I started
reading all these books about net nets. But when I realized that the market
isn't cooperating because the market is going to outlast anybody's pocketbook.
The market couldn't can be wrong much longer than I can be liquid.
[15:03] And so, rather than just trying to bang
my head against the wall, and just refusing to adapt, I'm going to look at the
market. If I was in 2014, we're still in a huge bull run. So, I would go
towards something with higher quality, higher growth. And taking that approach
right now with the way the market is so volatile. That's a good thing because
it's going to scale a lot of people.
[15:30] I would say we're sort of in a
difficult transitionary period where there's just so much uncertainty right now
in terms of you can buy good value stocks, but I'll focus on high quality
stocks at the moment with plenty of cash and good cash flow with high customer
demand that would be able to ride out the current situation, and then see how
things play out before redeploying more capital. I mean if I had $100,000 I
wouldn't be investing $100,000, bam, straight thing tomorrow, I'll be trading
into the market, just getting my toes wet, finding out what works and then
continue to monitor the situation and buying the companies that would best suit
the situation.
Ney Torres: [16:18]
What, what do you remember are one of your best calls, I remember you didn't
like, for example, Weight Watchers when it was going down. There were some
people saying, “Oh, it's going to go up because of this.” Eventually you were
right. I also remember you describe Apple as a great business when everybody
thought it has ready run its course. How do you do this?
Jae Jun: [16:47]
Pretty much just trying to figure out what something is worth right. So, for
example, if I'm going to buy a car, I'm not going to just go pay something like
$200,000 for a used Toyota simply because everybody's trying to buy it. So just
understanding and trying to calculate what the value is worth. And that's where
accounting comes in. Accounting is the language of business and investing but
too many people don't even bother trying to learn that language.
[17:16] You and I are speaking English to
communicate. We learned it because we know that we have to know it to
communicate, but people don't take the same approach with accounting and
investing. So that's why if you can figure out how much a company is worth,
you're already way ahead of the pack. Now I am going to go back and say I was
right with Weight Watchers and also wrong, because I thought that Weight
Watchers would have had a much longer decline. But then when Oprah jumped in,
that change the trajectory so change. So, it goes to show how something can
just turn on a dime where I called Weight Watchers too expensive and that the
business model wasn't going to work out too great. But then Oprah comes in, her
marketing power just boosted the stock up like 100% - 200%. And it's just done
fantastic after it bottomed out to some degree.
[18:10] And same with Apple a long time back
when it was just peaking too high. I was just waiting for it to come down and
then I didn't make a purchase when it did come down. And since then Apple has,
again done a fantastic job. So, it's just figuring out what price you want to
get it for. Just figuring out what you want to pay. And that's the thing where
you have to know how to value stocks.
Ney Torres: [18:33]
Awesome. What are your favorite stocks? If you've got to pick three or four,
especially now? Especially now.
Jae Jun: [18:43]
Now... I strongly believe in digitalization. People are finally getting to
understand that companies and services is the new economy as opposed to just
manufacturing. This is being plugged a lot in CNBC. So, one example is
DocuSign. Not that I like it or anything but that type of direction where it's
making companies much more efficient. It's making it convenient for people and
that direction.
[19:20] Two companies that I hold strongly in
my portfolio is Visa and MasterCard. If people stay at home, they're still
going to be purchasing something off the internet. How are they going to pay
for it? Either with MasterCard or Visa or credit card or even PayPal, stuff
like that.
[19:37] I really like those stocks. Another one
that I do like is definitely Amazon. Being in the Amazon ecosystem. I have much
more knowledge of Amazon and how everything works better than most investors.
Just looking at all the things that are going on internally, I hate to say it
but I did buy it much too late. I've always said Amazon was overvalued. But
once I started getting into the business, and really understanding how they're
driving so much cash and so much business and future potential, Amazon is on my
list.
Ney Torres: [20:15]
I know you are an advocate of valuing companies based on their cash flow,
right? Discounted cash flow. Would you say that that's the measurement you use
for Visa, MasterCard, Amazon?
Jae Jun: [20:31]
Yes. Yes and no. So, previously, when I was valuing customers, I only focused
on max year to date or next 12 months future cash flow, or free cash flow. But
now, I've taken a step further where I actually try and project the free cash
flow to a much better degree. So, a lot of my history with value investing and
the limiting factor and what new investors shouldn't always rely on is a
backwards looking valuation. It works for really steady stable companies. So,
if like I was valuing utilities, then it's so much easy to value utilities
using historical free cash flow. But for companies where they're coming up with
new revenue streams, new business models... For example, like look at Amazon,
right? Before AWS, like the Amazon Web Services really took hold, we were just
measuring the free cash flow based off their market web services, the
marketplace side of Amazon. And since they were just continually reinvesting
every single dollar back into it, it looked extremely expensive because they
weren't really generating that much free cash flow. But then I looked at my analysis
back then today, and I realize how short sighted I was by just being so set on
trying to calculate based on tangible assets, intangible numbers. So right now,
I tried to look at the whole business, the business as a whole, by not overly
focusing just on the current free cash flow, but also trying to project future
free cash flow by looking at the different departments, different revenue
streams, different business endeavors that they are launching, compared to what
others are doing and stuff like that.
Ney Torres: [22:26]
You're in a different level, like a growth investor, right? That's where you
feel more comfortable.
Jae Jun: [22:33]
Not so much growth. For example, I don't trust old growth. I believe that most
growth is overrated. And for long, sustainable growth, there has to be a really
strong underlying engine. For example, like Uber, ShotUp like say 20% or 30%,
just the other day because the CEO came out and said, "Oh, we're going to
have enough cash flow to ride out this virus." That's not the type of
thing investing I do. And for example, like people have made me really high on
Riba, but just the sustainability and the competitive advantage, I'm not sure
is there. So, I don't just look at growth. I like to consider myself more on
the Buffett and Munger where I really have to strongly believe in the
underlying business, fundamental growth. Not just the pie in the sky story type
growth.
Ney Torres: [23:25] So, you will say is more like a
gut the feeling. You'll know it when you see it.
Jae Jun: [23:32] It sounds like a cop out
but yes. It's hard to see and it's hard to understand. For anybody that's
listening, you'll realize 10 years later, you'll look back and you'll think
about the same thing. It's hard to do but it just comes with experience.
Ney Torres: [23:52]
Yeah. The reason I'm asking this question is because I see a pattern here. I
think investors, we all have this same trajectory, right? When you're starting
out you focus on the numbers because that makes sense, right? Then you go to
whatever the business probably is worth right now without any projections of
growth or any crazy. And when you go to a third level because your knowledge is
so deep that you can actually kind of project with certainty what's going to
happen in the future in a in a probabilistic future. I see you're going there.
I see you are now in that space where you're like, "Oh, yeah, I don't
really think about it. I just feel it because you already went through all this
process of checking the numbers, reading all the paperwork, and now you can
take decisions in five minutes probably."
Jae Jun: [24:49]
Definitely. So yeah, it's now much easier on a subconscious level where I don't
have to plug in so many numbers to come up with the same conclusions. I already
have enough. Like Buffett, he doesn't need a spreadsheet to understand how much
a company is worth. He can just do a quick calculation, right? Because he's
done it. He's done literally 10s of thousands. And it's just so ingrained.
[25:12] That definitely is the direction that
most investors take. It just takes time. It just takes experience. It's like
when we launched new products in our online store and our business, right, when
I see somebody asked... Or like on Facebook groups or something, people will be
like, "Hey, is this product a good idea?" And I look at it and I can
immediately tell whether it's a dud or a hero, right? So, whether it's zero or
a hero. It's much easier than say, five years ago when I was trying to make the
decision. Because I know the industry, I know what type of sentiment there is.
I know what type of market demand there is. And that all just comes with
experience.
Ney Torres: [25:50]
I think that this is a great interview for people that are in investing or
starting out to figure out, "Oh, this is a pattern that you will
eventually go through." From checking the hard numbers to eventually just
having gut feeling decisions, which are not really illogical by any means, but
it's just ingrained in you. Right?
Jae Jun: [26:11]
Right. Right. Exactly. It just comes with experience. It just comes with time.
That's why it's hard to get down to the specifics because when you're a
beginner, you just want a list. You just want somebody to give you a list of
100 things to do from beginning to end. And then, you just want to copy it, and
that's the biggest mistake, but that's the initial sentiment and what most
people want. That's why when you read business books or hear podcasts,
everything sounds a bit too generalized, but that's because there's no single method
to do it. You follow the process like what you've just outlined so many times
that you finally understand, but then if you try to confine it so narrowly on a
piece of paper, like what most people want, you're going to lead to just as
many failures than successes because you've just defined it too narrowly. And
so, nothing is going to fit inside that box all the time.
Ney Torres: [27:19]
Perfect. With that note, I want to thank you for your time Jae. I think it's an
amazing interview to describe the path of an investor, the career of an
investor too, and I congratulate you. Everybody, please go to Old School Value.
Where can people find you?
Jae Jun: [27:38]
I am writing more on GorillaROI.com now. So, Gorilla ROI for return investment.
It's a software company for Amazon sellers. That's where I do my blogging and
writing.
Ney Torres: [27:54]
Perfect. I'll make sure to follow it right now. By the way, thank you for your
time. It's been a pleasure.
Jae Jun: [27:59] Okay. Thanks, Ney. See you.
Ney Torres: [28:01] See you. Bye!
