Roger Fan – Value Trap Or Just Bad Investment Analysis?

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Good morning Listeners,

Today I have a very special guest, Roger Fan, the Chief Investment Officer and founder of RF Capital Management, llc. He graduated University of California, Davis with a Bachelor’s of Science in Psychology, Biology Emphasis and he earned his JD from Texas Tech University School of Law. Roger just launched his fund this past year in 2017 with a focus on investing in Asian and North American Equities. His fund adheres to the value investment principles. In this conversation we cover a wide range of investment topics from his investment philosophy, definition of risk, value traps, and being a fund manager and entrepreneur.

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Below is an excerpt from our conversation.

RP: “What is your overall investment philosophy?”

Roger Fan:“My investment strategy is rooted in value investing principles and I think value investing is really the way to go. Value investing has 3 key principles and I am sure there is more. But the three key principles are one, stocks are not just a piece of paper. It is an actual fractional ownership of a business and so when you are evaluating companies, you want to think as a business owner. You want to think as if you are the CEO of if you are inheriting the business and you were going to get 100 percent stake and so that is the better way of looking at the stock market in my opinion. The second thing is the concept of Mr. Market which was the term coined by Benjamin Graham. Mr. Market is the stock market and he is person, character, or whatever you would like to call it who is manic depressive. When prices are good prices are high and they keep going higher and when he becomes depressive and angry, the prices crash. So you have this volatility but volatility is opportunity. But over the long run, Mr. Market will agree with you if you did the right work and if you did the right valuation work. The third principle is investing with a margin of safety. Margin of safety means being risk averse and being very conservative with your valuations and how you analyze the business. Margin of safety just means buying companies at a huge discount to intrinsic value. So for example if you value a company at a billion dollars, you do not want to pay a billion dollars, a billion and half, or two billion. You want to pay 500 million dollars or less. You want that huge discount. And so that is the investment philosophy which is value investing.”

RP: “What are your thoughts on value traps and how do you avoid them?”

Roger Fan: “With value traps, it really goes back to doing the proper investment analysis. Value traps happen because there were gaps in your analysis and there were things that you missed. You did not do the proper valuation work. So I think intellectual honesty is a very important thing. You have to know what you know and know what you don’t know. You also have to realize there is a possibility that you don’t know what you don’t know. It is very important to be intellectually honest during the investment research process. I think I don’t agree with the term value trap; I think there are just investing mistakes. So it goes back to reading everything you can, being curious, doing the right work, doing the right valuation work. If you do everything right, you should have a really high batting average and your going to make mistakes but the beauty of this business is that you can be right about 2/3rds of the time and your still going to have an amazing track record. If you are right on your high conviction ideas. If you are right on all your 25 percent position ideas, your 20 percent ideas; your going to do well over the long term. So that is I would say how you avoid investing mistakes.”

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1:06 – Tell me about your background and how you got started in investing?

7:02 – What is your overall investment philosophy? What attracted you to it and why?

9:21 – What are the investment strategies that you implement like shorts, options, special situations?

16:59 – Is there a particular industry or sector you specialize in or you just go where the opportunity is?

23:53 – How do you measure and define intrinsic value?

26:27 – How do you measure growth and is growth included in you intrinsic value calculation?

27:57 – How would you define and measure risk?

31:41 – What are your thoughts on value traps and how to avoid them?

33:28 – You recently launched your fund, can you tell me about that experience and what you have learned so far?

38:25 – Are there any lessons you learned being and entrepreneur and running a business on your own?

40:21 – Can you tell me about your daily activities and what you enjoy the most about running your own fund?

44:37 – Did you have any mentors and who did you look up to?

46:11 – Do you have any general favorite books?

48:30 – Closing thoughts

Enjoy and thanks for the listen!

Article by Raul Panganiban

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