0003 Soo Chuen Tan - Discerene Group (Value Investor)

Investing in Depth

Today’s guest is Soo Chuen Tan, founder and President at Discerene Group, based in Stamford, Connecticut. Discerene is a private partnership, which invests globally on behalf of several long-term institutions and families. Soo Chuen is a long-term value investor and the depth of his commitment to his craft came through in our conversation. He’s able to seamlessly translate a high-level philosophy of investing into the practical hard work of executing fundamental securities research and the critical psychological aspect of being a contrarian who is at the same time constructive. We talked about Mega Study, a trailblazing South Korean online test prep company that saw its star fade when VC-fueled rivals emerged, but that Soo Chuen’s research revealed to have durable long-term value. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did. Feel free to email [e-mail] with feedback.

1:40 Journey to becoming an investor

3:05 Mega Study is the leading online high school KSAT test preparation company in South Korea, supplying the country’s “educational arms race” with a must-have service that has strong demand

7:00 Top teachers in Korea are pop stars with celebrity status and compensation

8:40 How Mega Study hit Soo Chuen’s radar screen: Looking for companies protected by structural barriers to entry (i.e., “economic moats”) at times when they are out of favor

10:00 Focusing on economic moats in evaluating the business as an investment. Mega Study has attractive economic characteristics as the owner of a self-reinforcing, two-sided platform

14:47 An opportunity to invest with belts and suspenders that provide a margin of safety: Venture-backed competitors ate into Mega Study’s business and the stock price declined below tangible book value (i.e., cash and value of property, plant, and equipment on its balance sheet, consisting primarily of real estate)

17:05 How Mega Study widened it economic moat: Adopting bundled pricing to transition from being a multi-homing network to a single-homing network

21:18 The psychology behind being a value investor taking a contrarian position. The hallmark of value investing is, in the words of Warren Buffett, “Being greedy when others are fearful and being fearful when others are greedy.” Four defining characteristics of value investors are:

• Independent mindedness. “The best value investors we know tend to be cats, not dogs.… They are comfortable marching to the beat of their own drums and making up their own minds about things with little regard for conventional wisdom or a desire to fit in or please others. They deliberately invert propositions and test counterfactuals.”
• Natural skepticism while at the same time being constructive
• Using mean reverting mental models
• Deferred hedonism (i.e., patience)

29:25 The Discerene research process: Combining “The Harvard Business School Approach” and “The Chicago School Approach”

34:40 Soo Chuen’s secret sauce: Compounding and building out a network

39:50 Conducting due diligence on hard assets

43:30 Areas of uncertainty and risk

45:20 Sizing the investment

47:40 Monitoring the investment

48:55 Recommended reading

• On Korean education, Education Fever by Michael Seth
• On investing: Securities Analysis by Graham and Dodd; Common Stocks and Uncommon Profits by Phil Fisher; all of Warren Buffett’s letters; Seth Klarman’s Margin of Safety; various books by Michael Mauboussin; Howard Marks’ The Most Important Thing; Edward Chancellor’s Capital Account
• More broadly on economics, business, and finance: the work of John Keynes, Jean Tirole, John Sutton, Joseph Schumpeter, Hyman Minsky, Phil Rosenzweig, as well as current and former Harvard professors Michael Porter, David Yoffie, Clay Christensen, John Wells, Bob Merton, Andre Perold, Stuart Gilson, Peter Tufano, and so many others.
• David Hume on epistemology
• Among contemporary authors: Thinking Fast and Slow, by Daniel Kahneman; Triumphs of Experience, by George Vaillant; The Second Mountain by David Brooks.

Note: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.

Note: For full disclosure, I have in the past served as a senior advisor to Discerene Group. I now have no commercial relationship with, and receive no financial benefits or compensation from, the firm.