Value Investing

A Critical Lesson On The Power Of Compounding

I always find it fascinating how varied the paths are that people follow on their way to becoming professional investors. My own journey took a circuitous route. My father who is a Medical Doctor always had dreams of making it big as a businessman. As long as I can remember, he was always working on some new business idea or product. At various times in his life he’s been a real estate investor, restaurant owner and stock speculator. I’ll mention that he was doing all these activities part-time. There were many ups and downs, but mostly downs.

tsingtao brewery
rawpixel / Pixabay

My Dad like many investors was always looking for the next big multi-bagger. Unfortunately, he mostly found losses. My mother to this day still hates the stock market. I still remember the day I told her that I wanted to be a professional investor. She questioned why I couldn’t be like my other Harvard Business School classmates and take a secure high paying job with a big corporate firm. Instead I chose to go work at a small privately held asset management firm.

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I actually was turned off from investing in my early years. I saw my father rack up major losses and I felt that the stock market was nothing more than a casino. Real wealth I felt could only be generated through building a business as an entrepreneur or a high-paying job as a professional. But before I came to the conclusion that I would avoid the stock market, I actually opened up a brokerage account with a friend when I was a teenager.

We pooled together our savings for a combined total of $3,000. At the time, I felt this sum was still too paltry. So I told my grandfather about my venture and he agreed to invest another $1,000 from his retirement savings.

Armed with a $4,000 brokerage balance my friend and I sought out our first investment. We ended up zeroing in on Tsingtao brewery, China’s second largest brewer. Back in 1993 Tsingtao brewery was the first Chinese listed company to issue H-shares on the Hong Kong market.

It was a miniscule USD 115 million IPO but it was a 110x oversubscribed. The shares jumped 28% on their debut. The company also cross listed on the NYSE in the form of N shares. According to legend the company’s executives skipped the customary bottle of champagne to celebrate with their own brand of beer. I don’t think we did any fundamental analysis or research. We just thought that you couldn’t go wrong with a growing population in China and the assumption of rising beer consumption.

After our initial purchase, we promptly lost half our money within a few weeks. My friend then had a brilliant idea that he would take the remaining funds out of the account and try to win it back on a trip to Las Vegas. He actually couldn’t legally gamble at the time, but it didn’t stop me from agreeing to his ridiculous plan. Naturally he lost everything. Or that’s what he told me. He’s now working in Venture Capital, which isn’t surprising. Needless to say my first investment was a major learning experience.

The surprising thing is that if I had just held on to the stock, my returns would’ve been astronomical. The chart below shows that stock is up 2,824% since May 1, 1999. We actually bought the shares in 1994 but the data in the chart doesn’t go back that far. If that example alone doesn’t convince you about the power of holding stocks for the long-term, then I’m not sure anything will.

tsingtao brewery

Robert Hagstrom eloquently stated the following in The Warren Buffett Way, “In this high-paced world of constant activity, Buffett purposely operates at a slower speed. A detached observer might think this sloth-like attitude means forgoing easy profits, but those who have come to appreciate the process realize that Buffett and Berkshire are accumulating mountains of wealth. The speculator has no patience. Buffett, the investor, lives for it. As he reminds us, ‘The best thing about time is its length.’”

Holding high-quality stocks for the long-term is only part of Ashva Capital’s edge. There are actually two additional criteria that separate us from other fund managers. I’ll explain in more detail in the next e-mail. Thanks for your time and attention.

Regards,

Ankur Shah

Ashva Capital Management LLC