Pareto’s Contrarian

Hello, and welcome to my investing blog. My name is Irving Soh. Some of you might know me as the ex-editor/writer/investment analyst of Dr Wealth.

This is an investment blog by me which will feature my ideas, market trades, and other associated stock market opinions.

Be advised – this is merely a journal of my moves in the market and does not constitute investment advise. Caveat Emptor.

The blog has a peculiar name that I hope is not un-obvious.

  • “Pareto” refers to the principle that 20% of almost all effort is responsible for 80% of the results. I aim to only invest in companies that can deliver such outstanding results. By the nature of my process, I invest in very few companies and have large concentrated holdings with hedges, often puts/calls to ward against my downside. You have been warned.
  • “Contrarian” refers to the principles that in order to achieve results that are different from the crowd, you must be ready, comfortable, and even eager, to step boldly where they do not. To step boldly into unexplored or even actively avoided territory, you must arm yourself with research – the kind that can take weeks or even months.

I’ve chosen this cheesy ass title as a reminder to myself – to always seek the highest payout for my efforts, and to always aim to see if widely accepted truths are penetrable. Too often, we get caught up doing other things. I might get made fun of, but hey, each joust will be a good reminder for me.

My Investment Approach

  1. Look through the daily list of insider transactions
  2. Clustered insider transactions
    • Find which ones have experienced clustered (multiple company executives, not just one) insider transactions that are non-scheduled (because some executives have a compensation program that buys shares for them annually and I want a separate and distinct signal), where cash invested by insiders form a significant chunk when compared against annual take home earnings (because a billionaire can drop a million dollars on a stock and not blink an eye – but you can’t.)
  3. Which ones are cheap enough to offer a margin of safety?
    • Once you have a list of companies where insiders have purchased shares in a clustered fashion, the next step is to determine valuation and liquidity.
    • The company must be able to survive the next three years of operating business. Cheap undervalued companies often take time to solve problems. Sometimes, that problem takes years. Most mean reversion takes anywhere between a month to 3 years or even 5 years. My holding period is 3 years. I prefer my companies to still be alive in this time frame.
    • Be thorough and look through the debt the company owns and when that debt is payable. Companies should have some way of paying their debt on time or the liquidity to pay their debt on time or there’s just too much risk.
    • We start by investigating the cheapest company in front of us and we go up the chain of expensiveness. Ideally, you’re able to use a stock screener such as gurufocus or a bloomberg terminal to help you do this. That way, you get to focus on the next part.
  4. What is the problem and what is the catalyst?
    • Stocks are cheap for good reason. Find out the problem. Determine if it can be fixed. If insiders are buying, they know something you don’t. Figure out what they know that you don’t.
    • Once you’ve ascertained that the company’s cheap and can operate the next three years with a high degree of certainty, the lion’s share of your work will go towards digging into and understanding the industry that you’re looking at.
    • Each industry is different and will have different nuances and different jargon and different problems (headwinds) as well as solutions (tailwinds). To get better results than 90% of the rest of the crowd, you have to dedicate effort and time towards information that the rest of the world is unlikely to seek. That is where asymmetry lies in terms of market beating returns and in terms of personal investing success.
  5. How are you going to implement your idea?
    • A majority of the time, all you’re going to be want to be doing is buying shares (with no margin and no leverage) and calling it a day. Most times, this is correct. This is the method which allows you maximum holding period.
    • For those who are aware of catalysts and events that can accelerate within a year or so however, say, because of a merger, or because of a spin-off, then it becomes evident that you can start by buying options which allow you greater exposure with less risk. Most of the time, I do a mix of both. You should operate how you see fit.
    • You should also consider how much of your portfolio will be allocated to a certain stock. How many positions and stocks do you want to hold on to at any one point in time? How are you protecting your portfolio in the event of a market meltdown? Etc cetera.

Further Investment Nuances

These are some of basic thought processes and considerations I go through when I’m considering an investment.

  • What are the prevailing trends across the world? How is this investment set to benefit or lose from it?
  • Where are the biggest bear markets and thus the biggest possible likelihoods of discounts?
  • What industries have retail investors and institutional investors alike been avoiding like the plague?
  • What have insiders been buying?
  • Which companies have insiders owning big positions? Why?
  • Are the reasons for purchases by insiders understandable?
    • Can the industry be analysed more thoroughly?
    • Can I develop intimate understandings of the industry?
  • If it can be done and motivations can be ascertained, are the companies undervalued sufficiently as to provide a margin of safety? [ev/ebitda, cnav, net-net, nav]
  • If valuations are not attractive, can the catalyst, and its effects on the share price of the stock be ascertained?
  • Does the stock have significant exposure to public perception? Is the stock liquid enough for institutional investors to get into?
  • Is the company likely to go bankrupt in the next three years? Is its balance sheet healthy? Does management have skin in the game? Have they taken prior value destructive action for shareholders?
  • Is the upside high enough to justify the risk and can my downside be hedged?
  • Am I buying an “IF” or “WHEN“?
  • Is the trade asymmetrical? (potential upside vs downside is skewed in my favor)
  • In addition, I tend to favor quantitative analysis. That means even if all of the above checks, the list of companies which are cheap enough to justifiably invest in is typically small and concentrated. My holdings are also thus, similarly small and heavily concentrated. You have been warned.
  • I do plan on eventually establishing different portfolios using different models. In particular, a dividend-focused or income-focused portfolio with stocks based in Singapore and Hong Kong will be established at some point – there are no taxes on dividend yields from this 2 countries. Giving up such an edge would seem foolish in the extreme. You can click here for an example dividend investing strategy.

Updating Regularity

Generally speaking, I will post updates between once a week to once a month. I don’t intend to publish on a weekly schedule. From time to time, I will write on ideas and on the philosophy of investing as I navigate the markets on a day-to-day basis.

Why blog?

1st – to open my ideas and approach to the public so that I may find those who are able to help me develop a more nuanced approach, either through frank criticism or discussion.

2nd – to catalog my own investment journey for myself, and perhaps later on, if I am so lucky, for my children. A sort of, “instagram“, if you will, but for investment ideas rather than pictures of delicious meals.

If you’d like to contact me, please use the contact form here. I encourage healthy discussions, not messages asking about stock tips.

Have fun. Stay safe. Thanks for reading.