High property prices are creating opportunities in the leisure sector, but all investors need humility, self-awareness and cynicism to be successful says Dean Fergie, Director and Portfolio Manager at Cyan Investment Management.
How would you explain your job to someone who knows nothing about markets or investing?
We look for smaller listed businesses on the Australian Stock Exchange that are doing better than people otherwise think they are, or that have opportunities in the future that exceed current expectations.
So, simplistically, we’re looking to buy stocks that go up. We have a unit trust, so people buy units in our trust and we then buy shares in companies we think will make money for our investors. We don’t specifically give stock advice – we’re not really a stock broker, as such – we’re more of a discretionary investor.
People outsource their stock market investments to us.
Which sectors do you focus on or steer away from?
Firstly, we certainly don’t invest in anything that’s resources-related. We think that sector is very volatile and extremely hard to predict.
The opportunities of losing a lot of money in a short period time are quite significant in that sector, so we don’t invest in what we would consider a more speculative space.
Secondly, we really steer away from biotechnology, health, sciences — those kinds of medical industries. There’s been very limited investment success in that industry as a whole and often the outcomes are rather binomial – the drug is either successful or it’s not. So, we don’t really like those outcomes.
We tend not to invest in property or the really large conglomerates and big companies.
That leaves a bunch of businesses, a lot of software and IT companies, consumer discretionary, industrials companies, services, retail, food and financial services.
So, while we don’t specialise in any specific sector, we strictly eliminate the ones we think are too risky or where we just don’t have the expertise.
Which sectors look promising at the moment and which would you stay away from?
We focus on businesses rather than sectors. We don’t say ‘the outlook for consumer staples looks very positive’ or ‘the outlook for retail looks negative’. It’s a question of how well each individual company is performing.
We can often find some really good businesses in industries that overall potentially are struggling.
A lot of people say technology is a really exciting sector – it’s growing, heaps of businesses are doing a lot of things. But there’s a lot of hype in that sector and there’s a lot of businesses in the tech space we think are horrendously overvalued.
While we think technology is a good space as a whole to invest in, there’s potentially a lot of dangerous investments in that space.
One of the most interesting examples is the automotive space. A lot of people are a little bit negative on automotive because there’s all this talk of driverless cars and ride-sharing.
On a whole that’s quite true, but we have owned shares in a company called AMA Group (ASX:AMA), which is a smash repairer.
You might think on a 25-year view, automotive is going to become a declining industry as cars get safer and there’s all this anti-collision technology. But it’s a very fragmented industry — one in which AMA management are consolidating the business very effectively and very profitably and which has grown five or six-fold over the last three or four years.
So, that’s an example where we have a bad industry but with a company that’s doing a great job and which we have profited pretty well from.
What skills and personality traits make a good portfolio manager or investor?
A lot of humility. You really need to be very dispassionate about what you’re doing.
One of the main traps for private investors is they get emotionally attached to a stock: they buy something and it goes up and they feel that they kind of owe the stock something because it’s made money for them and they stick with it.
You have to make that decision to sell. You have to say: ‘I have done really well with it but I’m going to move onto something else’.
Conversely, a great mistake among investors is hanging on to things that are going wrong. To have self-awareness and humility to say, “I got this wrong, I made a mistake and I’m going to sell the money and crystallise the loss and move on from that’.
Plenty of investors don’t like to make that decision or they find it emotionally difficult. It’s the wrong thing to do.
Thirdly, we’re very cynical. I don’t tend to blindly believe what I’m being told by management. I need that backed up by facts or anecdotal evidence. If I believed everything that every management team told me when they walked through the door to present their company, I would have 430 stocks in my portfolio — and four of them would be doing as well as the companies suggested.
Is there a particular stock market trend that you’re following closely?
There are a couple of really significant trends in Australia.
Firstly, manufacturing is becoming more and more difficult domestically. It’s very expensive, there’s a huge amount of competition from offshore, and a strong local currency makes it extremely hard for Australian manufacturers to compete on a global scale.
Secondly, we think the services industry continues to be very promising. We’re amazed at the propensity for Australians to engage in a lot of leisure activities, whether dining out, fast food or entertainment.
It’s perhaps more of a Millennial trend. Housing affordability has been pretty much a pipedream, so young consumers want to spend more money on short-term gains, rather than the Baby Boomers, who saved up to buy a house – which for a lot of people has become an unobtainable dream.
One of our most successful investments to date has been a company called Skydive The Beach Group (ASX:SKB). They provide ballooning tours, skydiving, reef cruises. They’re profiting from the propensity of people to spend a lot of money on experiences rather than hard assets.
What three things do you look for when investing in a company?
- A clear business model and strategy. If we can’t get our mind around what a business does, we won’t invest in it. That’s why we knock out all the biotechnology stuff because we just don’t get it.
- Consistency in strategy and management rhetoric. We meet with businesses on numerous occasions and we want to see consistency in what they’re doing. If that tends to change we get concerned.
- We want to see positive momentum. We want to see their revenues growing, their market share growing, their footprint of stores moving out, and their number of clients increasing.
What small cap stock picks are you most proud of?
We made an investment in what’s now called Afterpay Touch Group (ASX:APT). They’re seeing some amazing growth in their online payment system domestically. That’s a business that has more than doubled in probably 18 months, since it listed.
We made an investment in a company called Blue Sky Alternative Investments (ASX:BLT). They are an alternative asset manager — similar to what we do, but more in the unlisted space, agricultural assets and some real estate. That was one we got onto really early and is probably up three or four times since we invested in it less than 24 months ago.
When you’re getting into businesses at the early stage and invest in them before other people realise how well they’re doing, you can make a lot of money very, very quickly.
What’s a common mistake made by investors when investing in small cap stocks?
Blindly believing the blue sky – the promise of an investment. You have all these little mining companies that will talk about all the promise.
There are a lot of businesses out there that haven’t really commercially proven their products. We don’t ascribe a lot of value to anything that’s not generating revenue.
Another mistake is not cutting losses when companies disappoint.
Small and micro cap companies often lack an earnings history. What are some other key financials to study when considering such stocks?
You can look at comparables in similar industries, but I don’t think there’s great value from doing that. You either have to trust what you’re being told by the company or simply don’t invest until they have runs on the board.
If you’re unsure about a business but you think it has a lot of promise, buy a small amount of shares and have it as a small part of your overall investment. As it proves itself you can buy more and if it disappoints you can sell.
That’s what I think a lot of private investors tend to not think about – it doesn’t have to be an all-or-none decision. You don’t have to buy a lot of shares in one business and sell them later on. You can buy a small amount and add to it or buy a large amount and reduce it or increase it over time.
What are you reading at the moment?
I’m reading a fascinating book called Sapiens by Yuval Noah about the history of the human race and how modern society has come to be.
Also a very old book called Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. It’s very relevant to the small cap space because it shows how hype can completely sway reality in the short term.
We see that now in the stock market, where some stocks have mind-boggling valuations given what they have in hard assets and potential. But when everyone gets on board a theme, it creates its own hype.
Dean Fergie is the Director and Portfolio Manager for Cyan Investment Management.
Dean has more than 25 years experience in the funds management industry covering all major asset classes. Over the past 15 years he has specialised in small cap industrial ASX listed companies. He holds formal qualifications including Master of Applied Finance and Bachelor of Engineering (Civil). Dean has lectured for the Securities Institute of Australia and is a Graduate of the Australian Institute of Company Directors.
Cyan’s unit trust holds investments in Skydive Beach Group, Blue Sky Alternative Investments, AMA Group and Afterpay Touch.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.