Are You Crafty Enough? Yellen’s Non-Bubble, Henry Ford’s Art Book Present and Korea’s Com2Us-Gamevil (Bamboo Innovator Insight)

The following article is extracted from the Bamboo Innovator Insight weekly column blog related to the context and thought leadership behind the stock idea generation process of Asian wide-moat businesses that are featured in the monthly entitled The Moat Report Asia. Fellow value investors get to go behind the scene to learn thought-provoking timely insights on key macro and industry trends in Asia, as well as benefit from the occasional discussion of potential red flags, misgovernance or fraud-detection trails ahead of time to enhance the critical-thinking skill about the myriad pitfalls of investing in Asia at the microstructure- and firm-level.

The weekly Bamboo Innovator Insight series brings to you:

• Are You Crafty Enough? Yellen’s Non-Bubble, Henry Ford’s Art Book Present and Korea’s Com2Us-Gamevil, Nov 18, 2013 (Moat Report Asia, BeyondProxy)

Dear Friends and All,

Are You Crafty Enough? Yellen’s Non-Bubble, Henry Ford’s Art Book Present and Korea’s Com2Us-Gamevil

“Mirror, mirror on the wall, who’s the bubble of them all?”

Checking the various Fed quant valuation models that attempt to mirror the actual world’s fundamentals and prospects, Fed chair Janet Yellen replied at her confirmation hearing before the Senate Banking Committee on Thursday 14 Nov asking about bubbles: “Stock prices have risen pretty robustly, but I think that if you look at traditional valuation measures, you would not see stock prices in territory that suggests bubble-like conditions.” Yet, the very action of artificially driving down interest rates is what’s making stocks look cheap. When pressed further by the senators, Yellen reassured them that she does not see the era of low interest rates and quantitative easing continuing indefinitely. “This program cannot continue forever,” Yellen said. The FOMC “is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks,” she said.

Yellen’s non-bubble proclamation reminded me of a closed-door presentation two-plus years ago that the Bamboo Innovator did to the CEO and top management team of an Asean-listed tech company that had a market value of over S$500 million then. I deliberately asked rhetorically a difficult question that would embarrass myself in front of the group of tech veterans: “Is there a bubble in tech stocks? What’s the difference between now and the Internet bubble that burst in 2000/01?”

Legs shuffle, some murmurings, people look uncomfortably at one another before settling their piercing eyes on me, waiting to shred apart my comments since everyone knows firmly that no one has the clear answer to this question. Before I made my remarks, the word regret did flash quickly through my brain but I believe in asking the authentic and uncomfortable questions to bring forth a meaningful dialogue, even if it makes me look painfully stupid. “Do you observe that this time round, there’re more large sophisticated giant buyers such as the likes of Tencent, Baidu, Alibaba holding sway the valuation – and overvaluation – of the off-market new assets created whose present fundamentals may still be awkward? In the previous round, it’s the mom-and-pop retail investors and fund managers driving the craze in the public market. Now, there’s an active private market for trade sellers with spillovers to the public market. These mega trade buyers believe they can integrate these smaller companies into their own business model as an offensive strategy to create bigger value for their customers. The mom-and-pop and fund managers hold paper; the trade buyers wring value – hopefully.” This is an important but less-visible fringe activity around the visible “bubble” that they have also observed but did not articulate it out to one another. The palpable tension in the room eased and positive energy ensued in our interesting discussion on wide-moat business models in Asia’s tech sector.

Observing the less-visible fringe activities that are not and cannot be captured in the traditional valuation measures has yielded interesting insights on the evolution of bubbles. Now, (too) many smaller private investors seek access to the party, lured by the explosion of VCs, PEs and dealmakers promising multibaggers. They want to be part of the thrill and become the conversational life of the party: “Oh, I have invested in that Unicorn”. Partly blinded by the “social returns” of investing in promising growth companies, the blasé attitude of private investors to the investment risks, believing that they are clever and crafty enough to discern the right VC, PE and dealmaker and right investments reminds me of the thought-provoking story of Henry Ford’s art book present and Joseph Duveen:

The year of 1920 had been a particularly bad one for American art dealers. Big buyers – the robber-baron generation of the previous century – were getting to an age where they were dying off like flies, and no new millionaires had emerged to take their place. Things were so bad that a number of the major dealers decided to pool their resources, an unheard-of-event, since art dealers usually get along like cats and dogs.

Joseph Duveen, art dealer to the richest tycoons of America, was suffering more than the others that year, so he decided to go along with this alliance. The group now consisted of the five biggest dealers in the country. Looking around for a new client, they decided that their last best hope was Henry Ford, then the wealthiest man in America. Ford had yet to venture into the art market, and he was such a big target that it made sense for them to work together.

The dealers decided to assemble a list, “The 100 Greatest Paintings in the World” (all of which they happened to have in stock), and to offer the lot of them to Ford. With one purchase, he could make himself the world’s greatest collector. The consortium worked for weeks to produce a magnificent object: a three-volume set of books containing beautiful reproductions of the paintings, as well as scholarly texts accompanying each picture. Next they made a personal visit to Ford at his home in Dearborn, Michigan. There they were surprised by the simplicity of his house: Mr Ford was obviously an extremely unaffected man.

Ford received them in his study. Looking through the book, he expressed astonishment and delight. The excited dealers began imaging the millions of dollars that would shortly flow into their coffers. Finally, however, Ford looked up from the book and said, “Gentlemen, beautiful books like these, with beautiful coloured pictures like these, must cost an awful lot!” “But Mr Ford!” exclaimed Duveen, “we don’t expect you to buy these books. We got them up especially for you, to show you the pictures. These books are a present to you.” Ford seemed puzzled. “Gentlemen,” he said, “it is extremely nice of you, but I really don’t see how I can accept a beautiful, expensive present like this from strangers.” Duveen explained that the reproductions in the books showed paintings they had hoped to sell to him. Ford finally understood. “But gentlemen,” he exclaimed, “what would I want with the original pictures when the ones right here in these books are so beautiful?”

Duveen prided himself on studying his victims and clients in advance, figuring out their weaknesses and the peculiarities of their tastes before he ever met them. He was driven by desperation to drop this tactic just once, in his assault on Henry Ford. It took him months to recover from his misjudgement, both mentally and monetarily. Ford was the unassuming, plain-man type who just isn’t worth the bother. He was the incarnation of those literal-minded folks who do not possess enough imagination to be deceived. From then on, Duveen saved his energies for the Mellons and Morgans of the world – men crafty enough for him to entrap in his snares.

The tone of the fringe activities in the past two-plus years in Asia has changed from one of healthy doubt to that of “craftiness”. Most of every private investors and high-net-worth entrepreneurs these days believe that they are “crafty enough” to invest in the right “art piece”, the right lottery-like multibagger company and exit at the right time and avoid losses during this evolution of the muddle-through bubble period. After all, the negative news and expectations are supposed to be already all out there in the market and prices have already impounded these informational content. In some sense, they resemble the sophisticated investors whom art dealer Joseph Duveen – the VCs, PEs, dealmakers – sought to court: “the Mellons and Morgans of the world – men crafty enough for him to entrap in his snares.” Sometimes, we ourselves determine the kind of people whom we attract and value investors who are lifelong learners are never crafty enough – we are simple-minded folks who appreciate the value of having a authentic dialogue with a group of like-minded people who genuinely care about one another.

Also, what are the implications of the recent merger of Korea’s top mobile gaming operators Com2Us and Gamevil? What are the 4 key Bamboo Innovator takeaways?