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Rick Mazur: Charles, how are you doing well? Great to have you. So I wanted to have you on because you have an interesting story. You have a book, you have many different things going on, and I think it would be good for people to hear from you and get some good information. So just briefly tell us how you started grew up everything like that.
Give us a little background of your history.
Charles Sunnucks: Yeah, sure. So, my accent is probably a bit of a giveaway. I’m British. I was born in London. I did most of my education here, but I later went out to China for university there. And I lived there for four years. My wife’s Chinese, so I brought a bit of China back to London, where I’m now based with my two daughters.
And investing has always been very much a passion for me.
Rick Mazur (2): So you speak multiple languages as well.
Charles Sunnucks: Yeah. Yes. Yeah. Although it’s waned a bit, yeah, when I was out of China, I did my degree in Chinese economics and trade.
Rick Mazur: And you run an investment fund. And is that what you’re doing right now, still, or?
Charles Sunnucks: or? Yeah, so I was formally at Jupiter asset management, which is. London listed fund manager. I think it’s about $50 billion under management. I wasn’t managing all of that. I co-managed on the emerging market fund there, a London-listed investment trust. So, that was the primary kind of means that I’ve been investing more recently.
I’ve been writing the company valuation book, which has taken most of my time. Also, investing on my behalf is on the side as well.
Rick Mazur: Your own money?
Charles Sunnucks: Yes, very much so.
Rick Mazur: How long did the book take you to write?
Charles Sunnucks: Well, I expected that it would take me two to three months. I targeted about 50,000 words, and I can normally trot off a thousand words in a day. So I thought it couldn’t take that long, but it took me about five months. What I’ve found with writing is that There’s a lot of reading around the topic. No matter how comfortable you feel with a topic, you always want to read more understand differences of opinion where you may be wrong.
So there was a lot more reading around to get the book completed than I anticipated. So I would say yeah, for four or five months in total.
Rick Mazur: And primarily to go back a little bit, you deal with alternative investment analysis valuation or how, what is your specialty?
Charles Sunnucks: Yeah, I might say my special specialty is long-term equity investing. And that’s the type of approach I advocate in this book as well. What you learned there, though, is more broadly applicable to that. So those were the kind of shorter-term horizons that could also apply and equally those seeking to invest in alternatives, options, derivatives, and fixed income. There’s plenty in there that would also be applicable for those looking at those asset classes.
Rick Mazur: Do you trade on the London exchange or the US markets as well?
Charles Sunnucks: I have traded things in the US market as well. So there’s say no matter which country you’re in, if you’re a tech stock, the US is still the most attractive market for it.
So especially when I used to look at China, for instance, I run a kind of different China fund as well, actually, alongside the emerging market fund. Many tech stocks there, Alibaba, jd.com, NetEase, these all kinds of us listed companies. And in fact, many of the most attractive and high growth businesses in China are listed in the US
Rick Mazur: yeah. Cause I think a lot of people Who are listening, who are thinking about investing. And want to put some money to work they’re just trying to figure the stock thing out. They don’t know what to do. They don’t know where to go. They don’t know how to value a company properly.
Everybody wants to jump on the Bitcoin bandwagon, and the game stop and all that other kind of stuff. And that’s great for the short term, but I don’t think that’s something, obviously; for years and years in the future, you need to have something more solid. And you’re more of a value fundamental type of guy value of the company. Look at the cash flow and all that. Kind of stuff?
Charles Sunnucks: Yeah, I was thinking it pigeonholed into being a value investor. Although I think the term value investing is slightly silly in itself. Everybody should be going into kind of buying assets, not because they’re overvalued because undervalued, and well, I would say I got a very strong valuation discipline when I go to buy a company. Typically I like higher growth, structural growth opportunities. So businesses that I feel comfortable not just grow in the coming years, but we’ll say the coming decades. And very much I agree with you. There’s plenty of people out there interested in this field. And indeed, I very much wrote this book because I was one of them a decade or so ago, and I found it very frustrating trying to find some material, how to learn, how to invest in the company very much adequately. You’ve got a range. You got a lot of content, which is too simple, perhaps that you can pick up of a website, how to do simple multiples and quite often a little bit of information is more dangerous than none at all. You suddenly feel perhaps overly confident without mastering the forces that affect the company’s long-term value.
And then, at the other end, you got a whole host of very academic, very complex, not particularly accessible work. So this book, I hope, is just a mid-road in that sense for somebody who wants to make informed investment choices and be able to look beyond just the headline multiples or the headline kind of valuation techniques that individuals often use.
Rick Mazur: So you’re not a technical analysis guy so much?
Okay. That’s which is fine. Yeah. Some people believe in technical analysis, some people believe in valuation everybody’s got their take. We deal with day trading a lot that deals with obviously more technical analysis cause it’s shorter term, but we get a lot of people who also ask, Hey, we have some extra capital here.
We want to diversify it. What do we do? I like to buy some stocks and pick some stocks and, or funds, but they just don’t know how to do it, so that’s not my forte either I’m not a specialist in that, by any stretch of the imagination.
So how did you come to decide that this is the way you want to do invest. That might be a hard question, but why not technical analysis versus more value or long-term stuff?
Charles Sunnucks: Yeah, sure. So I enjoy looking at and understanding companies. And so that, that was the, I enjoy speaking to people, speaking to management, getting to know the businesses.
And so that, that was the real driver. I had looked at the kind of technical analyst lists shorter-term stuff, but in my view, that was a bit more of a lonely road. There’s far less engagement with others, the company, investor relations, financial drain, and all that kind of weld that you don’t get with technical analysis. As you perhaps do, it gets with longer-term fundamental investing where you feel you’re a part of a company’s journey rather than perhaps just the past.
For the official term,
Rick Mazur: well, I advocate that people should take this into their own hands. I know back in, especially in 2008 when the crash happened there, I had money invested on my own, and I also had money with a financial advisor. And what I found out was when the market dropped 40%, they lost as much as I did. And I had, I consider myself not knowing what I’m doing too much. So I always tell people if you can put the time and the effort and get some skills, which, again, I know going back to your book can probably provide people. You could probably do just as good, if not better, than giving your money to somebody.
Not that’s a bad thing. I do believe again in diversifying, and it’s spreading it around. But Certainly, it’s something people can do. And your book, when you talk about this, would work in any market, right? It doesn’t matter if it’s developed or emerging or anything like that.
Charles Sunnucks: that. Yes. I wrote it.
So it’s it could be used for any company, any industry, any market developed or emerging? Lots of my experiences are in emerging markets, but plenty of the examples and anecdotes in the book are actually for developed companies as well. And although they touch on short-term investing, I do think it does. There’s quite a bit of content there that would be helpful for those that, want to combine the two.
So, for instance, if you understand short-term events in terms of materiality and effect on the company’s long-term value, I think you can sometimes understand and frame short-term opportunities. Perhaps this works a bit better when you have a broader understanding of the forces that affect the company.
Rick Mazur: I know a lot of people who want to invest. They know the US markets. They want to invest in other markets like China, but you hear all the time, especially in the US, where I don’t trust the China numbers. You don’t know what’s going on there, so how is somebody supposed to. Value something if they can’t even trust the numbers. I know it’s probably a matter of picking the right companies, but is there any advice you can give somebody regarding what to look for?
Charles Sunnucks: for yeah. First, I sympathize with anybody that wants to stick with their market and stick with what they know.
I think if you’ve got limited time, that makes sense. In terms of China, it’s a fascinating market, obviously a huge country, a real scope of work. And opportunity. And, as you say, there have been quite a few incidents where the numbers haven’t stacked up at the macro level or company level.
And it must be said, and in my view, China does have some of the most attractive bottom-up opportunities of any asset class. It’s because it’s got that reputation as a country for perhaps lower corporate governance standards which are some of the issues that you perhaps get being a developing nation. But I hear what you’re saying. I always tell how people fully appreciate that China is a higher-risk economy if you go and put your money there.
Rick Mazur: Exactly. I was reading up on you a little bit, and you use the. Term Behavioral bias. What is that? And how can we avoid it?
Charles Sunnucks: it?
Yeah, so the behavioral bias section of the book, I think, is certainly one of the more interesting chapters. It’s something that kind of, we very much all fall short of fundamental impact. Technical investors don’t quite have this problem often.
a, There’s a great quote from Warren Buffett. He said investing success doesn’t correlate with IQ after you have above a score of 25. Once you have ordinary intelligence, you need the temperament to control urges that get others in trouble. And there’s a whole host of these behavioral biases.
It’s a bit of investing field, and it’s the key breakdown, which people normally do cognitive biases. Emergent and emotional biases say cognitive biases, such as anchoring, where psychologists have found that people tend to rely too heavily on the very first piece of information that they learn.
Even if that piece of information isn’t particularly relevant, say for it for investors, for example, there are various ways that anchoring can commonly manage historical values such as acquisition price or high watermarks. Although these numbers may be irrelevant to a company’s value quite frequently, as an investor, you will think you’re, you’ll think of a company’s value in terms of where you had purchased it rather than what is calculated, the fundamental value should be.
The other key field of behavioral biases is emotional bias. So a loss of version regressive. Over COVID confidence. Again, these all affect how we actively participate in equity markets. Understanding those and knowing how to overcome those can be very powerful in self-development and becoming a more objective, fundamental investor.
Rick Mazur (2): Yeah, I think that’s the key because it’s easy to Fall off the track, especially if you get emotionally caught up in everything, but besides the behavioral stuff, I know I just going back to the whole day trading thing you have to have rules, you have to have a formula that you follow to do things, and I guess people feel with longer-term trading you have more time. You’re not in a trade like we are maybe in a day trade for an hour or two. You might be in it for a month or two or a year or two years. And people feel like, Hey, I can get in, and I can just pull the trigger and see what happens and adjust if need be.
But I do think that before you put the trade on, you have to have a good rule set in place. So when it comes to people who are trying to invest, do you have any valuation tools or examples in the book that can help people specifically with here I’m interested in stock, a, B or C? What do I do? How do I go about looking at this?
Charles Sunnucks: Professionals the world over really break down valuation tools into two separate areas. One is intrinsic valuation, where you based the valuation of a company on the returns that it would generate over time.
And adjust that for what’s known as the time value of money and the risk. And the other one, which people probably recognize more, is relative valuation. And that’s the idea that similar assets should trade at similar. So just to take an everyday example for relative valuation.
For example, if you were to purchase a property, you would very likely look for similar properties down the road. Quite often, people will go one step further and look at the value of a property as price per square foot. In the same way, we can do that with companies as well. We can standardize the company’s valuation by anchoring the valuation performance metrics such as earnings or sales or cash flow and thereby getting a valuation multiple. So the most well-known multiple out there is the price to earnings multiple. And what that tells you is what multiple of earnings you’re paying for a company. For example, if a company is worth a hundred million dollars and produced $10 million of profit the last year, you could say it was worth ten times historic profit. And then, as an analyst, what you will do is you will look at similar companies with similar risk-return profiles and say, is this a fair value, or is it under or overvalued?
Rick Mazur: So it sounds like you can get a lot of good information on breaking everything down from the asset to the price, to what’s going on and everything, which will give you a good feel for making better choices.
Charles Sunnucks: And all of that information is very readily accessible. Yeah.Yahoo finance, Google finance, a lot of websites. Now you don’t have to calculate these multiples for yourself. You can simply go on some of these websites. They’ve got the peer groups. They’ve got the multiples already.
So you can make a quite quick assessment yourself, quite a high-level assessment of if a company may be worth doing further work on
Rick Mazur: So you just need to know once you make that assessment, you need to know the formula of doing a, B, C, and D to get to the point where, Hey, I want to pull the trigger on this thing and invest.
And that’s what the book helps with some sense, right?
Charles Sunnucks: Yeah. Yeah, exactly. So I’ll say in the book, I give a bit of a checklist, so I call it the core castle and moat approach. And it’s a way for really trying to make sure that your approach to investing is processed, driven rather than being perhaps affected by the paywall biases.
For instance, for the court for an assessment, you’d be looking at not just the capability of management but accountability. Let’s say, for example, our management paid in shares. So is there an independent indent board, et cetera, and alignment of interests? Yeah. Is what proportion of their enumeration is variable.
What proportion ownership do they hold? Okay. Et cetera. And then the cost parts of that would be simple as that, is it an attractive business with good prospects? Margins returns. And that final point, the moat from co-core costs and the moat IFC pinched this part of it off Warren Buffett’s, who talks a lot about economic moats.
And the idea is that you want to find a business ideally with a good moat meaning that those returns, the attractiveness of the causal, should more likely be sustainable over time is less at risk from competitive forces. So,
Rick Mazur: Ah, that’s good information. Everybody wants to know about the markets, and everybody wants to know how they can get information or read about people. So you have some books that you listed that you like, people always ask me about books. And I saw that you do have these books and a couple of them were interested in me. I’ve read a few of them myself, but not all of them. And.
The first one, I would just wanted to talk about a little bit. Was the accounting for growth? You liked that one, huh? A lot.
Charles Sunnucks: Yes. Yeah. That the chap that wrote that Terry Smith, he’s still a fund manager. He has a fund, Smith. But I thought that was very interesting.
It’s quite a UK-centric book. I don’t know if you’ve. But it’s got it’s, and it’s
Rick Mazur: No, just parts of it. I haven’t read the whole
Charles Sunnucks: the whole thing. It’s quite a depressing book. In some ways, it’s called plenty of examples of how things also go wrong and what to look out for really to identify accounting issues, et cetera.
Rick Mazur (2): So in the accounting for growth book, it is depressing a little bit, but unfortunately, there are hard realities of sometimes these things happen. It’s all about watching out, and buyer beware type of thing. So but I thought that was a pretty interesting book myself. And then there’s Black Swan. We deal with something in day trading, but you always have to be prepared for the black Swan event. And what is the Black Swan event? What does that mean? And in our world, it’s hope for the best to prepare for the worst. Have your hedges on, you could wake up one day, and the market could be down. Anything could happen.
Some catastrophe in the world or whatever,
Rick Mazur: you just have to be prepared. You have to have a plan. You buy a company. And I’m expecting it or hoping that it does X or Y or whatever it is after you’ve evaluated a properly, of course, and taking the proper measures.
But you also have to know what’s going to happen when what if it goes bad? What if it goes against you? What if it goes south? Is it because of the valuation of the company or something changed in the company, or was it just a temporary blip, like with COVID now?
What did you do with COVID? Who knew that the market was going to go down 30% and then in a month be back at all-time highs
Charles Sunnucks: based
Rick Mazur: are at all-time highs but bounced back. That was crazy as well. I bet if you asked a lot of investors when the market went down 30%, where we are going lower, I’d bet a hundred percent of them probably would have said yes. And that didn’t happen. So I don’t know what that proves. I don’t know if that proves nobody knows anything or what it proves in the reason for diversification is that you have to buy your companies, you pick them.
And I was looking at things when the market went down there, like the airlines, and I’m like unless you believe that nobody’s ever going to fly again, it’s yeah, it could go down a little bit more. Still, it’s got to go back. It can’t stay down there forever, things like Boeing and just different companies.
But it’s a scary thing.
Charles Sunnucks: Yeah, having a fundamental approach, in my view, helps because it does allow you to look through the noise, and it has been pretty awful noise, but as long as you feel that a company is financial—robust resilient through a crisis like this. As you say, people will fly again.
People will consume again, go out again eat at restaurants. So all these companies over the long term, I think in 10, 5, 10 years back, hopefully, we’ll be looking back at this as a kind of blip in a company’s history rather than an earthquake. And I was quiet. I write quite a bit about this in the book, actually about understanding.
And it comes back to your point earlier when fund managers were losing you money over the crisis. Far too many people think about risk simply for diversifying across many companies, or many holdings say rather than factor risks. So what’s the actual underlying risk of the company is a risk, a higher high oil price.
Is it a political risk? And that’s quite different in some ways. And in that way, it doesn’t matter if you hold 5,000, 200 companies. If you can diverse by factor risk and emerging markets, can incidentally help individuals do that? You can reduce your drawdowns quite considerably.
Rick Mazur: Yeah, exactly.
I saw you have some quotes on your website, and I thought a few of them were pretty interesting. One by Peter Thiel, the most contrarian thing of all is not to oppose the crowd, but to think for yourself, it’s pretty interesting.
Charles Sunnucks: Huh? I
Rick Mazur: I think that there are so many people out there so often that just want to be Contrarian for Contrarian’s sake. And it’s so silly. You, you do get herd mentality and everything else, and that there are issues with that, but there’s, I think it is just a great quote in Canada.
Charles Sunnucks: Back to common sense.
Rick Mazur: I agree. A hundred percent. I’m also prudence is a not avoiding danger, but calculating risk and acting decisively, make mistakes of ambition and not mistakes of Slav. I liked that one as well. That’s interesting.
Charles Sunnucks: Matt Machiavelli, the prince. I think that one isn’t it.
Rick Mazur: Yeah, everybody just wants to
I feel that they have a little bit better grasp. Like I said earlier, And there are many things out there like you said, there’s a lot of tools like Yahoo, finance, and the internet came a long way over the years. So I think it’s great that you wrote the book, and hopefully, people will like it and pick it up and everything. Did you have anything else that you wanted to cover or go over
Charles Sunnucks: I think those were the main points. Some great questions. They certainly,
Rick Mazur: All right, Charles, I think we got some good stuff here. It was great having you on. I’m going to link to the book. In the show notes on the website, you can also go to the companyvaluationplaybook.com website to get more information about Charles. And it was great having you on
Charles Sunnucks: Great. Thanks for your time, Rick.
Rick Mazur: All right. Have a great day.
Charles Sunnucks: You too.