July 26, 2024 • 1hr 17min

TIP647: Value Investing Masterclass w/ Soo Chuen Tan

We Study Billionaires - The Investor’s Podcast Network

In this episode, Clay Finck interviews Soo Chuen Tan, founder and president of Disarene Group. Soo Chuen has an impressive background, including roles at Baupost Group under Seth Klarman and degrees from Harvard and Oxford. He started Disarene in 2010 with less than $100 million in assets and has grown it to over $2 billion in AUM. The firm has had an impressive track record since its founding, with a batting average of 82% on its investments. The discussion covers Disarene's founding philosophy, investment approach, and what differentiates the firm from other value investors. Soo Chuen shares insights on developing as an investor, the importance of long-term thinking, and avoiding common pitfalls in value investing.

0:00

-0:00

Key Takeaways

Long-term investing focus: Disarene Group was founded with a 50-year investment horizon in mind, using a fundamental, long-term, contrarian global value investing philosophy.
Structural advantages: The firm uses 3, 5 and 10-year investor gates and a capital commitment structure to enable truly long-term investing, avoiding pressure for short-term results.
Value investing approach: Focuses on buying businesses, not stocks, at a large margin of safety to intrinsic value. Avoids statistical value traps by analyzing fundamental business quality.
Contrarian mindset: Willingness to be greedy when others are fearful and buy quality businesses when they are out of favor or facing uncertainty.
Global mandate: Invests worldwide to take advantage of inefficiencies in global markets, unlike Buffett's primarily US-focused approach.
Partnership culture: Views limited partners as true partners rather than just customers, fostering collaboration and leveraging LP networks/expertise.
Continuous improvement: Emphasizes ongoing development of skills, mental models, and judgment to become better investors over time.
High batting average: 82% of investments have been profitable over the firm's 14-year history, demonstrating consistency in picking winners.
Avoiding value traps: Focuses on intrinsic value based on future cash flows rather than just low valuation multiples. Considers quality of management and capital allocation.
Intellectual honesty: Willingness to speak up against widespread beliefs that defy common sense, even if unpopular.

Introduction

In this episode, Clay Finck interviews Soo Chuen Tan, founder and president of Disarene Group. Soo Chuen has an impressive background, including roles at Baupost Group under Seth Klarman and degrees from Harvard and Oxford. He started Disarene in 2010 with less than $100 million in assets and has grown it to over $2 billion in AUM. The firm has had an impressive track record since its founding, with a batting average of 82% on its investments.

The discussion covers Disarene's founding philosophy, investment approach, and what differentiates the firm from other value investors. Soo Chuen shares insights on developing as an investor, the importance of long-term thinking, and avoiding common pitfalls in value investing.

Topics Discussed

Founding of Disarene Group (2:30)

Soo Chuen discusses launching Disarene Group in 2010, shortly after the collapse of Lehman Brothers:

Started with a vision of running an investment program over a 50-year time horizon
Wrote a white paper outlining a fundamental, long-term, contrarian global value investing philosophy
Structured the firm differently from industry norms to enable truly long-term investing:
- 3, 5 and 10-year investor level gates
- 3-year clawbacks on incentive allocations
- Capital commitment feature similar to private equity
Focused on creating a genuine partnership culture with limited partners

"We structured our firm with three year, five year, and ten year investor level gates, which were highly atypical in 2010. You can imagine just in the aftermath of the global financial crisis. In fact, there were anathema to so many investors because so many partnerships had actually thrown up gates during that time to prevent redemption. And here we were launching a new fund with 3510 year investor level gates."

Disarene's Investment Philosophy (15:33)

Soo Chuen outlines key elements of Disarene's investment approach:

Fundamental: Owning businesses, not stocks. Willing to hold through good and bad times.
Long-term: Generational time horizon, owning businesses through full economic cycles.
Contrarian: Seeking large margins of safety, often when businesses face uncertainty.
Global: Investing worldwide to take advantage of inefficiencies in global markets.

"Our belief was, and still is, that if you want to own a business generationally and generate supernormal returns from that, then you have to have a large margin of safety when you make the investment. It's a necessary condition."

Developing as an Investor (20:34)

Soo Chuen shares advice for young analysts looking to become better investors:

Develop a strong foundation in accounting, microeconomics, and statistics
Study logic, epistemology, and game theory
Practice analyzing companies by reading years of annual reports
Continually ask "why?" to get to foundational topics of conceptual importance
Find a good mentor who is also skilled at developing people

"As analysts continue to mature and as fluid intelligence becomes crystallized intelligence, they begin to appreciate the incorporeal elements that make a big difference, including incentives and leadership and culture and values. There is no shortcut for this process."

Can Great Investing Be Learned? (38:43)

Soo Chuen discusses whether great investing can be learned or if it's an innate skill:

Certain traits of good investors may be inherent, but they are just the starting point
Good investors become great through deliberate practice and continually working on their craft
Draws parallels to sports, where excellence requires developing proper fundamentals and techniques
Emphasizes the importance of continuous improvement in all aspects of investing

"At Disarene, we're careful to build our investing skills on classical foundations. We prefer to be hard-working patient marathon runners rather than sprinters. Each year we continue to develop empirical data sets, knowledge base of businesses, sharpen our analytical tools, expand our mental models, reinforce our psychological conditioning, and hone our judgment."

Balancing Objectivity and Subjectivity in Markets (43:20)

Soo Chuen addresses how to remain objective in investing despite subjective market narratives:

Maintains an epistemological stance that intrinsic value exists independently of market perceptions
Emphasizes the importance of being truly contrarian and independent-minded
References Solomon Asch's conformity experiments to illustrate the challenge of going against the crowd
Stresses the need for courage to state unpopular views when market valuations defy common sense

"Whatever pressure we may feel to conform our view to others, we believe that it's important to retain the courage to state simply that we believe they are not. In our industry, courage can sometimes be quite prosaic, but it is courage nevertheless."

Reflexivity in Markets (1:00:19)

Soo Chuen explains the concept of reflexivity and its importance in markets:

Reflexivity refers to how market participants' actions can change the fundamental situation they are trying to observe and profit from
Gives examples from ride-hailing industry and monetary policy impacts
Highlights how ultra-loose monetary policy has dramatically increased economic and financial system risks
Quotes Charlie Munger: "Easy money corrupts, and really easy money corrupts absolutely."

"We believe that among the biggest investment stories of the last decade is how ultra loose monetary policy, intended by central banks around the world as a tool to countercyclically reduce economic and financial systems risk, instead dramatically exacerbated those risks. This is the result of free money changing the behaviour of economic actors."

Avoiding Value Traps (1:06:46)

Soo Chuen discusses how Disarene has managed to avoid value traps:

Focuses on intrinsic value based on future cash flows, not just low valuation multiples
Considers quality of management and how they allocate capital
Emphasizes a business-owner mentality rather than a statistical approach
Analyzes whether minority shareholders will benefit from the company's cash flows

"Value investing is not about buying low P/E stocks or low price to book stocks. It's buying businesses at big discounts to what they are worth. It's not a statistical exercise. It's a fundamental exercise."

Conclusion

Soo Chuen Tan's approach with Disarene Group represents a thoughtful and disciplined application of value investing principles. By structuring the firm to enable truly long-term thinking, fostering a partnership culture, and maintaining a strict value discipline, Disarene has achieved impressive results over its 14-year history.

Key lessons for investors include:

The importance of having the right structure and incentives to enable long-term investing
Focusing on owning quality businesses rather than trading stocks
Developing a strong foundation in accounting, economics, and critical thinking
Continuously working to improve investing skills and judgment
Having the courage to be contrarian when markets deviate from fundamental value
Understanding reflexivity and second-order effects in markets
Avoiding value traps by analyzing businesses fundamentally rather than statistically

Soo Chuen's insights offer valuable perspective for both aspiring and experienced investors seeking to refine their approach to value investing in today's complex global markets.