Charlie Tian is the founder of GuruFocus.com, a website that tracks the stock picks of top investors such as Warren Buffett, Carl Icahn and Joel Greenblatt. He is also author of Invest Like a Guru: How to Generate Higher Returns At Reduced Risk With Value Investing (John Wiley & Sons, 2017).
Can you give us a brief history of your investing experiences?
I came to the U.S. in 1998 when the tech bubble was heading to its peak. As someone with a PhD in physics, I put all my money into fibre-optic stocks. I thought I understood the products and knew the companies. When the bubble burst three years later, however, I lost almost all of my money.
Following this painful experience, I read Peter Lynch, Warren Buffett and other investment authors. I also read 50 years of Buffett’s shareholder letters, articles and interviews. As a result, my views on business and investing were completely changed.
How did your views change?
I became a value investor. I started by focusing on buying companies that were trading below the value of their balance sheet or profit-generating capacity. But I found many of them had a good reason for being cheap: they just did not have a good business.
Now, I feel much more comfortable and confident putting money into high-quality companies that are reasonably priced. As Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
My occupation also changed. In 2004, I started GuruFocus.com. It has grown and now employs a team of people who serve hundreds of thousands of investors worldwide.
How do you define a high-quality company?
They are consistently profitable with above-average operating margins, have double-digit returns on invested capital and are growing at above-average rates. Companies with these qualities can continuously grow value through its operations.
They will be worth more tomorrow than they are today. As opposed to mediocre businesses that erode value over time, a good business can grow its value and do so consistently.
With only good companies, the risk of permanent loss of capital becomes small. One can hold them for the long term as they continue to grow their values. Therefore, they are more tax efficient and more forgiving with your purchase price because time is on your side.
What are some of your current holdings?
Some of my holdings are Ebix Inc., Ansys Inc., Church & Dwight Co., Jack Henry & Associates Inc. and Chinese liquor company Kweichow Moutai Co.
What’s the thinking behind a couple of these companies?
Ebix is a provider of software and e-commerce solutions to the insurance industry. It has above-average growth, recurring revenue, a capable CEO and profit margins greater than 30 per cent. The company is now expanding into money-transfers in India.
Ansys is a company that makes engineering-simulation software that has a good reputation for accuracy and reliability, which makes customers very unwilling to switch to other software. The company’s profit margin has expanded over time and is now more than 35 per cent.
What was your best investment move?
My best move has been Ebix, which I started to buy five years ago. Along the way, I took the opportunity of adding to my position on sharp sell-offs caused by short-seller attacks. My cost is about US$13 a share and today the stock is trading close to US$80 on the Nasdaq. It is still my largest position.
What was your worse move?
The mistake that scared me the most was when I bought into Sears in 2007, thinking it was extremely undervalued. Later, I realized that Sears is a poor retailer. At least expert shoppers, like my wife, never went to Sears to buy anything. This made me think more about the quality of a business, and strengthen my conviction of never buying low-quality companies.
What advice do you have for other investors?
When it comes to investing, buying good companies at reasonable prices can be very rewarding.
Also, as Charlie Munger said: ‘Those who keep learning will keep rising in life.’
This interview, has been edited and condensed
Larry MacDonald is an economist, author and financial writer.