Interview with Ronald Chan: You Only Need to Get Rich Once
Ronald Chan founded Chartwell Capital in 2007. Born in Hong Kong, Chan is a self-made value investor. He seeks undervalued securities not to get rich, but to stay rich. When Chan was searching for a career after finishing college, his late father advised him to stay away from three potential headaches in business: labor, rent, and inventory. His father’s insight naturally led him to become an investor.
In the late 2000s, Chan interviewed business leaders at Berkshire Hathaway and wrote the book Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders. In 2012, he interviewed fund managers worldwide and published The Value Investors: Lessons from the World’s Top Fund Managers. Since 2016, Chan has been a member of the Listing Committee Panel of the Stock Exchange of Hong Kong Limited. He is a happy father of three young daughters and makes significant contributions to Hong Kong’s financial market as an investor and influencer.
Section I: Father and Son
Shinya Deguchi (“SD”): Thank you for your time today. It is a pleasure to speak with a devoted fundamental investor like you. I’m thrilled to hear about your experiences with Warren Buffett, but let’s start with your background.
Ronald Chan (“RC”): I must be very honest — I came from a good family background. My late father was a politician in Hong Kong and was also quite successful as an investor. He would often say things similar to Warren Buffet’s saying: “Be rich enough to do something, but not wealthy enough to do nothing.” He enjoyed investing in the stock market, although in the old days he invested in only one stock, and that was HSBC. Because of his political influence at the time, he did not want any conflict of interest, so he decided to stay away from investing in local stocks. As a large British bank, HSBC was the best choice amongst all of the listed stocks in Hong Kong.
SD: Do you know roughly when he started investing in HSBC?
RC: I think it was in the 1970s.
RC: Whatever income my father generated, he simply invested in more HSBC shares. He didn’t know it, but he basically followed the “dollar cost averaging” approach to investing. You have the same amount of money to invest every month. When the stock price is low you buy more shares, and when the stock price is high you buy fewer shares. Ultimately, you will get a simple average of the stock price.
Because my father didn’t really need to live off the dividends, he ticked the scrip dividend box. As HSBC’s dividend grew almost quarterly and its share price grew every year, it became a compounding machine. That strategy has generated a lot of wealth for the family over the past few decades.
SD: What else did your father teach you?
RC: When I was young, he taught me about the vision of having a long-term plan, doing something that is simple and not trying to outsmart yourself.
As I entered university, my father wanted me to study accounting. He said that accounting is the skeleton of every business. If you can understand accounting you can basically recognize the principles of finance. He said that after getting my accounting degree I could do whatever I wanted, but he cautioned me against three things that I should not do.
SD: What were those three things?
RC: Number one, I should not rent an expensive place to run my business. I should stay away from landlords because in a city like Hong Kong, rent is what kills an operation.
SD: But I remember he himself was a landlord?
RC: Yes, that’s why he understood the danger of property, especially in Hong Kong where rents are high.
SD: What was number two?
RC: Number two: he told me not run a business that carries physical inventory. If you hold a lot of unsold inventory it could become junk. In one of his early investments he was involved in a commodity business, and excess inventory eventually killed the business — so he told me to stay away from it.
SD: Number three?
RC: The third thing was that I shouldn’t do anything that requires a lot of labor. Labor leads to human politics, so finding a job that did not require a high headcount would be best.
Taking his advice to heart, I knew I would not go into manufacturing or retailing. I guess my father was ultimately steering me to become an investor. As an investor, my only inventory is shares and they are held in custody at a bank at almost zero cost. And I don’t need to rent a very expensive place. I can even work at home. Finally, I don’t need to hire a lot of people. My brain is my partner.
To become an investor, my father gave me a challenge. He gave me a lot of HSBC shares and opened a private bank account for me. He asked me to pledge all of the shares and take out a loan. He said that if I could beat the borrowing cost consistently, then I would achieve financial freedom. I was about 18 or 19 years old at the time, and I went crazy with the money.
SD: Wow. That’s an amazing way to train a son.
RC: Well, I was trading in and out every day and I was treating every moment like a special situation. I was all over technical analysis. I traded stocks, futures, options, and even commodities. And while it was a great journey, it didn’t work. Somehow my timing was all wrong. I just wasn’t good at technical analysis. I lost a lot of money.
SD: Did your father say anything?
RC: My father was very kind. He said, “I will replenish your lost capital. But this time don’t think of beating the market, just think of beating your borrowing cost. And think of staying rich rather than getting rich.” That was probably my biggest lesson in life.
SD: The lesson is so valuable…
RC: Then I started reading about different methods of investing. I was in New York at the time and there was this bookstore called Barnes and Noble. At the store I always focused on the technical analysis section, but after what my father said, I started focusing on fundamental analysis.
SD: Which books did you read?
RC: I read Peter Lynch’s Learn to Earn, then his other books One Up on Wall Street and Beating the Street. It was in the late 1990s when I read those books, and Amazon.com was becoming popular, so I went online and looked at Amazon’s book recommendations, and one by one I read them all.
I read Philip Fisher’s Common Stock and Uncommon Profits, and Charles Ellis’s Winning the Loser’s Game. And, of course, The Intelligent Investor by Ben Graham. I also read all of the books on Warren Buffett and the annual letters of Berkshire Hathaway.
By 2000 my investment style had totally changed. When the Internet bubble was red hot and everyone was investing in Amazon and Ebay, I was buying Nike and McDonald’s. I also remember buying apparel company Abercrombie and Fitch because Peter Lynch said something like “if you cannot explain a business easily to a 5-year old kid, then you probably don’t know what the company does.” Abercrombie and Fitch or Nike would pass the test.
SD: You were still in your early 20s when you went through this journey, correct?
RC: Yes. I was in my late teens and early 20s between 1998 and 2002. I graduated from New York University in 2002, shortly after the 9/11 terrorist attack. Unfortunately, I couldn’t find a job in New York and I decided to come back to Hong Kong. As I was coming back and looking for opportunities, Hong Kong suffered from the SARS epidemic. This virus killed a lot of people and the city became a ghost town. I simply couldn’t find anything to do.
Then, my father said to me, “Look, why don’t you just do it on your own? I’ve been training you as an investor for the past few years. You have lost money, you have made money, but all along you have learned the basics. And more importantly, you have learned how to beat your borrowing.”
The interest rate in the late 1990s and 2000s was around 5–7% in Hong Kong, and my goal was to beat that. I wasn’t trying to beat the market at all, but just trying to beat myself because If I could generate better than 6–7% I would make some nice money. I looked at high dividend yielding stocks in the utility sector. I also looked into the really low multiples sector just to get a margin of safety.
One of the important phrases I learned during that period was “margin of safety.” It’s important to know your downside risk. To this day, I must admit I sometimes don’t know my upside potentials, I only know my downside. But, as the saying goes, if you manage the downside, the upside will take care of itself.
Section II: Finding the Style
SD: What was the experience like to do it on your own?
RC: I was fortunate because I started my operation during a bear market. The 9/11 terrorist attack, the Internet bubble burst, and then SARS in Hong Kong. A lot of companies were trading at below book value and single digit PE ratios. At university I learned the discounted cash flow model of valuing companies, and that formula worked like the holy grail. You would be surprised that during the bear market in the early 2000s, you could easily assign a 10, 11, or 12% discount rate, and you could still justify buying McDonald’s and Abercrombie and Fitch. Things were just cheap in general. I was lucky because I simply caught the bottom.
By 2004 to 2005, stocks began to pick up and my ideas began to generate profits. However, I wasn’t happy, I felt that investing was not only about my personal journey, and running family money was just a son’s responsibility. It wasn’t a career.
Fortunately, I found a former classmate, Brian Lui, who was also interested in value investing and fundamental analysis. Brian came back to Hong Kong after his NYU graduation. He worked at an accounting firm for a very short period, and then worked at HSBC as a stock broker. When I found out that Brian had become a stock broker, I opened a brokerage account with him. Over the next year and a half, Brian saw all my trades. I think one of my biggest trades with Brian was buying Colgate Palmolive. I remember the stock dropped from the $60s to the $40s due to an earnings miss in 2004. After I made the valuation, I told Brian to sell all other stocks and just buy this one. A few years later the stock had doubled. (note: Colgate-Palmolive’s stock price was split 2:1 on May 16, 2013. The figures cited by Chan were pre-split.)
Dealing closely with Brian, I said to him one day, “Why don’t you join me? Why don’t we do something together?” Brian was fine with teaming up, but his parents were skeptical, so I ended up sharing with them my vision, family support, and genuine plan. Brian was persuaded to join me.
In around 2005, we found the office where Brian, an assistant, and I started our operation. A year later another friend of mine from high school, William Tsang, also joined us. So, the four of us were on the journey toward tackling the stock market.
SD: It sounds like everything was going well.
RC: Yes and no. In 2007, three things happened. First, my father passed away. I felt that I had lost my mentor. I had no idea where to go. Second, the market became very expensive. The holy grail that I had found — the discounted cash flow analysis — and everything that I had learned about fundamental analysis, just didn’t work. Things were too expensive, whether in America, Hong Kong, or any other part of Asia. Lastly, I thought about my team. I had to think about their career objectives and aspirations. I felt that we could achieve more.
So, we decided to sell down on most of our holdings, restructure our group, and then apply to the Hong Kong Securities and Futures Commission for an investment license. We started Chartwell Capital in 2007. After setting it up we wanted to raise external capital. Funnily enough, my first client was my private banker. He looked at all my trades and he knew what I was doing, so he gave me his money to invest.
With some seed capital, Chartwell officially started running money in mid-2008. Then the Lehman crisis happened in September. We had a lot of cash at the time and only deployed 50% of our capital. By the year end we had still lost 10%, so the bear market was pretty dramatic. However, because we had quite a lot of cash we bought a lot of cheap ideas, and when the market began to turn in 2009 we were already above water and began to make money.
SD: When you started Chartwell, you decided to focus on Asia. Why?
RC: I think I can invest anywhere because the same investment principle can be applied globally. The problem in the professional world, however, is that investors may not trust a Hong Kong manager investing in the U.S. or elsewhere.
I remember one prospect coming all the way from Atlanta in America. He asked me what my best idea was, and I said Coca Cola. He laughed so hard and said to me, “I came all the way from Atlanta, where the headquarter of Coca Cola is located, and you are here telling me to buy Coca Cola. What is your edge? Why do I need you to buy Coca Cola?” The prospect told me that knowing what is cheap is easy. A lot of valuation models can tell you that. But to understand the true quality and the future of a company requires more than just analyzing the numbers. I took his comment to heart and he really gave me the idea about what we should focus on.
When it comes to investment valuation, I guess the world according to the DCF model is absolute. There is an ultimate intrinsic value to any business. But in the real world, everything is relative. Relative in terms of sentiment, perception, investment multiples, interest rate, inflation rate, and even the risk premium that different investors assign to the world or to a business.
Planning for Chartwell’s future, the question to ask is really what value proposition do we bring to investors? What distinct us in absolute and relative terms? Focusing on just Asia was probably the first step to creating our value proposition.
Section III: Value is Not Enough
SD: Let’s shift the focus onto Buffett. Your experiences with Buffett were truly unique, and Buffett also shifted his investment style over time like you did.
RC: That’s correct. Let me start with my journey with Buffett then. As I mentioned to you, when my father died, I felt that I had lost my mentor and didn’t know what to do. I said to myself, “Who should I learn from? Mr. Warren Buffett, of course!” So I wrote a letter in which I said, “Mr. Buffett, I have read so much about you. I have learned everything about you, but I don’t know much about your subordinates and partners. I want to know about them. Could you give me your blessing to interview them?” Mr. Buffett was kind enough to say that he didn’t object to the idea and I could contact the leaders at Berkshire.
From 2008 to 2010, I toured around America and met with many of the subsidiary CEOs of Berkshire Hathaway. Companies such as See’s Candies, MidAmerican Energy, Acme Brick, Jordan Furniture, and Justin Boots. I wanted to learn about one thing: what is the meaning of success?
Through this experience, I learned the essence of running a business, leadership, and what value means in the eyes of Buffett. That was really a watershed moment for me because investing in cheap stock is not good enough. It’s also about being a good judge of the quality of a business and the people behind it.
After meeting with the Berkshire managers and learning why Buffett picked them, I began to understand the true meaning of moat: the economic moat of a business, its brand equity and value proposition. By becoming a good investor, I began to see how to become a good businessman.
SD: I guess that experience completely changed how you look at businesses.
RC: Yes. Benjamin Graham, the father of value investing said, “Investing is most intelligent when it is most businesslike.” The saying is so simple, but after meeting all those Berkshire managers, I began to see that quote for what it is. You have to become a good businessman to become a good investor. That was my lesson on business moat and character judgement.
After getting to know the people at Berkshire Hathaway, I have much greater admiration for Buffett. The way he penetrates a business, synchronizes the world, and sees the future. I also learned that Buffett has an advantage. Because Berkshire has so many subsidiaries, and their CEOs send Buffett their latest financials and business outlook every month, Buffett became an ultimate big data center. He has a strong finger on the pulse of corporate America, so this is a positive feedback loop. The more data points he gets, the more intelligent an investor he becomes over time.
SD: I guess a lot of people might ask why someone from Hong Kong did this and not an American, because Berkshire is still an American company.
RC: People ask why and I like to ask why not? I think anyone can do anything in the world. As long as you are genuine and true, and have a strong will, you can achieve your dream.
I remember in the Berkshire book, I learned that “dreams are never too big until you turn them into goals.” I had a dream and I relentlessly pursued it. There was nothing to be embarrassed about if the other party said no. I mean, I have read a lot of biographies and autobiographies of leaders and heroes in the world, and there are a lot of people I would love to meet if they were still alive. For example, if Winston Churchill were still alive, I would love to meet him. If Ben Franklin were still alive I would love to meet him. A lot of great people, good or bad, if they were still alive you might want to meet them to find out who they are. I asked myself, “Who are the heroes of today’s business world?” And the first person who came to mind was Warren Buffet.
SD: So is it your plan to create the Berkshire Hathaway of Asia?
RC: I think having a Berkshire Hathaway model with the right intention would be good for the world. However, the regulatory environment and economic landscape are different than when Mr. Buffett created his structure. For example, Berkshire Hathaway is ultimately a reverse takeover, but in Hong Kong the reverse takeover code is now more stringent, and it’s not as easy as it was before.
SD: Having learned from Berkshire managers, how do you value a business now?
RC: The first thing we think about is business quality. What makes businesses tick? What can be the size of a business and how does the management team operate it? In terms of valuation, we can only evaluate it a few years down the road. Anything after that is anybody’s guess.
With regards to the discounted cash flow analysis, it is not that we don’t trust the formula. In fact, we use it all the time, but we believe that there can be discrepancies in it. You have many moving parts. You make assumptions about the growth rate, the discount rate, the terminal growth rate, and it’s just estimates added on top of estimates.
So what we do with the DCF is to get a sense of the business valuation, and then we look into the multiples to see if they are realistic with reference to historical levels or to the current economic conditions. In a way, we have to be students of history to understand the dynamic of valuation and business in relation to the world.
SD: So what is value to you?
RC: Many people ask me what value is. The honest truth is I don’t know. In fact, I cannot tell you what value is, but I can tell you what value is not. It is the same with life. I don’t know where I am heading, I only know where I am not going.
SD: So, how do you describe your investment philosophy?
RC: A lot of people think of me as a value investor, but actually I have grown to dislike the word “value.” It limits my capacity as an investor. I no longer wish to be stereotyped. If one day I am simply called an intelligent investor, that will be the best endorsement.
With that said, I still believe and apply the merits of value investing — or you can call it fundamental analysis — when conducting an analysis. But that doesn’t mean one should not learn and acknowledge the other styles. For example, when I am pitched on a stock, the first thing I do is look at its chart, so a bit of technical analysis knowhow is needed. Indeed, I look at RSI, MACD, Bollinger band, Fibonacci numbers, candlestick, and even point-and-figure charts. When doing that, fundamental analysis is still the core.
These value investing principles also lead to a lifestyle. Now that I am a father of three young daughters, I also want to instill in them a similar approach to life. I remember reading Peter Lynch and he said that you don’t buy a heater in the winter or an air conditioner in the summer, when they are obviously going to be more expensive. You should probably go and buy a heater in the summer, and an air conditioner in the winter. That to me is pretty logical, and that’s probably my investment philosophy.
SD: Investor Z is a Japanese comics drawn by Mr. Norifusa Mita. Over 1 million copies were sold over the last 5 years in Japan. This cartoon follows a young junior high school student called Takashi Zaizen, who turned out to be an investment genius. You read a lot of investment-related books at your early age. We hope that this book will become an entry point for our next generation to think about investing. What do you think?
RC: I am a supporter of manga (comics). In fact I grew up reading a lot of Japanese comics. I think Investor Z is an excellent way to attract the younger generation and teaches them money management. In the book the main character encountered a lot of challenges in investing, but he’s relentless because he has passion. I think whether your are intelligent or not, good at what you do or not, the ultimate ingredient that brings out the best in you is whether you are passionate in what you do. The German word for passion is “leidenschaft.” If you break the German word apart, it means “to suffer” and “to create.” To master your game, you must be willing to suffer, then you will eventually create. The manga reminds me of my passion in investing, and I hope it will inspire the next generation.
Ronald Chan’s books are available in English, Chinese, Japanese, Indonesian, Thai and Portuguese. You can buy his books through the link below.
Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders
The Value Investors: Lessons from the World’s Top Fund Managers