Taiwan Trip Report – Don’t Forget the Boring Stuff (Re-Post)

I've always wondered why everybody likes to invest in tech shares.  They can be multibaggers, but returns from non-tech shares are many times just as good, if not better.  Most importantly investors in older, staid companies usually don't have to worry about product obsolescence as much - or as quickly - as in tech companies (think Blackberry and HTC). 

An example is Taiwan.  It has some of the most cutting edge and best tech companies in the world. Almost everybody I know in Taiwan is somehow involved in it.  However returns from non-tech shares have many times been higher as I show in the re-posted article below. 

The article below was originally published on Quamnet.com in February 2015, but it has since been removed from their site.  It's one of my better observations and one that I don't want to lose sight of. I've written in the past that profitable investments are typically found where others are not looking and this is in the same vein (see here). 

The reminder that I wrote this came from a recent Quartz article that points out that since they both went public in the summer of 2004, non-tech Domino's Pizza has returned 2,400% which is a bunch more than tech high-flyer Google's 1,555% (see here). 

Finally, here's the article:   

I was in Taipei the week before the Chinese New Year. I’m a big fan of Taiwan. Nice people, clean cities, good infrastructure, and I can practice my bad Mandarin on unsuspecting taxi drivers.

I can also talk about Taiwanese stocks with locals who closely follow the market.  Most of this centered on which Taiwanese companies will do well by supplying to Apple. Several felt that TSMC will take core chip supply contracts from Samsung. Others speculated on how much of Apple’s new products will be manufactured by Hon Hai/Foxconn.  Not many were talking about UMC on the latest trip, but around 10 years ago it seemed like it was all about the two fabs (i.e. the two large semiconductor manufacturers in Taiwan- United Microelectronics and Taiwan Semiconductor Manufacturing).

Nobody mentioned some of my favorite Taiwanese companies – Hotai Motor, Giant Manufacturing and Taiwan FamilyMart.  I’ve been a fan of them since my 2005 research trip to Taiwan when equities there were not so expensive.  At that time, very few people were looking at these companies and I could easily arrange management visits and factory tours.

All of them operate fairly straight forward businesses.  Giant manufactures and sells some of the world’s best value bicycles, Hotai distributes Toyota and other vehicles, and Taiwan FamilyMart owns and runs convenience stores throughout the island.

They all had pretty similar characteristics when I looked at them in 2005.  Good dividend yield, a net cash or low debt balance sheet, a simple shareholding structure with organic rather than acquisition-led growth.  They fit into my people, structure and value model that I’ve been developing over the last several years (although looking back they were a bit more expensive than what I typically like).

None of them are tech companies. None of them were followed by more than a handful of analysts.  None of their CEOs or owners were in the press.  None of them had secondary or overseas listings.

However returns of all three of these low-tech boring companies have outperformed the highflying tech and electronics firms that were so popular back then. Hotai’s 10-year total CAGR was 32.1%, Giant’s was 26.1% and Taiwan FamilyMart’s was 19.5%. The average CAGR of the three was 25.9% which means that an investor would have doubled their money every 2.8 years by holding an equal weight in these stocks and collecting dividends.

Holding three of the more popular and biggest companies in Taiwan 10 years ago would not have led to as good returns.  Holding a basket of TSMC, UMC, and Hon Hai and collecting dividends would have left one with an average CAGR of 8.6%.  This means that an investor could have made 17.3% more every single year on average by holding the boring stocks rather than the exciting, cutting-edge ones.

In addition to their low-profile management the three companies share another classic characteristic.  All three directly sell to end consumers.  This is in contrast to many high-tech firms that sell their products to other manufacturers or branded product companies.  Apple’s customer ownership and very high margins means that their suppliers operate on thin margins.

Taiwan equities today are not as inexpensive as they were in the mid-2000s.  While Taiwan is not as expensive as other countries in Asia such as Indonesia and the Philippines, there are few companies in these later two that are trading at valuations I consider attractive. 

It’s fun to read about and imagine the wondrous things that high-flying, cutting-edge technology companies can do for us.  But – as for profitable investing in Taiwan and elsewhere – it pays to look where others don’t.  

Click to Enlarge

Why Equities Outperform

A week-long summer reunion got me thinking once again about how to best explain what I do to my more academically-inclined family.  “It sounds like you’re trying to figure out what will go up and what will go down. Don’t you get bored with that?” is the way my very wise mother summed up my profession/obsession with stocks.

Ultimately my goal is to help people invest wisely which means I first have to convince others that equities make sense.  A good place to start with is my skeptical family.

Like many, one of their biggest direct investments was a second property.  It did not work out well from what I remember.  

Property is often seen as a safer investment than stocks.  But is it a better investment? 

My example takes this post back to Asia - my home and center of attention for most of the last thirty years.

In the last 15 years property in Taiwan has been a very good investment with prices rising almost three times, according to one of the most followed property indexes in Taiwan, the Sinyi Taiwan Housing Price Index (link here).

The index is provided by Sinyi Reality Inc., one of Taiwan’s largest real estate brokers with an estimated 7.7% market share as of June 2015. [1] Sinyi was founded in 1987 and listed via IPO in Taiwan in 2001.

Since March 2001 Sinyi’s price has increased by 1209%.  It was a volatile ride as seen in the chart below, but investing in a company that provides real estate services was a better investment than real property [2].

Put another way, if one bought NTD1m (USD28,500) worth of Sinyi shares in March 2001 and held until end-June 2015, these would be worth NTD13.1m (USD424,000).  The equity investor turned NTD1m into NTD13.1m.  In contrast the average investor in physical property turned NTD1m into NTD2.9m.  The long term buy-and-hold investor in Sinyi’s equity made more than 4 times what the average property investor made.

Investing in bricks and mortar is fine, but trails the innovation, hard work, and intelligence of the 4,085 people that Sinyi employed at the end of 2014. [3]

However the return from the market overall was not so good.  Over the same period the Taiex, the main index followed in Taiwan, rose by only 69%.  Stock selection matters as I've written about before (see here).

Not Just Taiwan

Robert Shiller, a famous US economist and one of the few who warned that US property was expensive before the 2008 bubble burst, was also one of the first to compile long-term data on housing prices. 

He found that real housing prices in the US – i.e. after the effects of inflation –rose by 66% between 1890 and 2004, or a mere 0.4% per annum. [4]

I couldn’t find a direct comparison, however between 1900 and 2014 the real return from equities was 6.5% annualized. [5]

This includes reinvested dividends so the comparison is not apples-to-apples. Assuming dividends and their growth account for half that gain, the long-term return from US equities is almost 5 times more than that of US property.

People Power

Equities represent shares of a business.  When buying and selling stocks you're buying and selling a small part of that business.  Saying that equities are a better investment than property is another way of saying that investing in people is better than investing in land and the inanimate block of concrete, wood, and other building materials that sits on it.

And what are businesses?  Fundamentally they are a collection of people and things that do something to help other people.  Those other people buy the stuff or service that these companies make.  If the business is adding value it makes a profit.  If more people want to buy that stuff in the future the business will grow.  

Notice how often the word ‘people’ appears in the previous paragraph.  What I like about businesses – and why I believe equities outperform other asset classes – is that business is all about people.  And we humans are wonderfully complex, imaginative and progressive creatures. 

The stuff we do simply amazes me.  The diver that scores the perfect 10s. The invention of the Internet and integrated chips. The discovery of a new medicine that cures a disease that was once considered unbeatable. 

Think of how we live more interesting and efficient lives because of Apple’s innovations.  Think of how many people in the world have one or several integrated circuits in their cars, handbags and pockets that were made at TSMC or UMC's plants.  Think of the savings in time and convenience because of the MTR Corp.’s trains.  None of these companies were around when I was born.  They are now part of millions of people’s daily lives and are all multi-billion dollar companies.

It is totally big picture, but investing in companies is like investing in man/womankind’s incredible ability to innovate. Human beings are amazing and many listed companies are big and famous now because they provide a superior product or service. 

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[1] Prices have risen so fast that, according to the Global Property Guide, property in Taipei has some of world’s lowest rental yields. It is also one of the world’s least affordable places to buy with a price to income ratio of 8.4x, more than double than Japan which has a price to income ratio of 4x.  In short, Taiwan’s property rise may still have a way to go, but after such a good run, large future price increases are unlikely. 

[2] Note that we’ve left out stock dividends and property rentals from our calculations

[3] As per Sinyi Realty Inc annual report

[4] Irrational Exuberance; 2^nd Edition, Robert Shiller

[5] Credit Suisse Global Investment Returns Yearbook 2015