7 | Aaron Pek, Value Investing in Malaysia and the ASEAN growth story

My guest today is Aaron Pek. Aaron is the author of Value Investing Substack, was previously equity fund manager overseeing both a Malaysian and an Asia Ex-Japan portfolio with AUM of about USD 100 mil, and is currently setting up his own equity research outfit.

In this conversation, we cover value investing, Malaysia and the ASEAN growth story, and adding value when networking.
I hope you enjoy my conversation with Aaron Pek.

Show Notes:

[00:00:32] – [First question] – Introduction and Why Aaron started invested
[00:02:05] – His interpretation of value investing principles
[00:08:05] – Value investing principles Aaron disagrees with
[00:10:22] – Views on risk and how to minimise
[00:13:12] – Dealing with emotions in investing
[00:15:30] – Malaysia’s growth story
[00:24:36] – How can Malaysia not achieve their growth story?
[00:27:44] – What should foreigners know before investing in Malaysia?
[00:32:54] – Underrated skill or experience?
[00:38:22] – Plans for the future?

Connect with Aaron:

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Kalani Scarrott (00:13): My guest today is Aaron Pek. Aaron is the author of Value Investing Substack, and was previously an equity fund manager overseeing both the Malaysian, and Asia X Japan portfolio, with assets under management of around 500 million ringgit, which is about 100 million U.S. Dollars. He’s currently setting up his own equity research outfit, and in this conversation we cover value investing, Malaysia and the ASEAN growth story, and adding value while networking. I hope you enjoy my conversation with Aaron Pek.

Aaron, thank you so much for being here, but I think just maybe to get started, I’d love to hear maybe your early influences, and why you got into investing, how it all started for you.

Aaron Pek (01:08): Sure. My dad used to be an entrepreneur, and I’ve always wanted to follow in his footsteps, but as time went on, I realized that business was a really high-risk high reward endeavour. You could do very well overnight, and you could also do very badly overnight. So for somebody like me, I felt it didn’t meet my risk tolerances and my personal risk tolerance, but I was still interested in business as a concept. When I discovered value investing, I realized eventually that basically, it was investing in businesses. Because you just think about what the average large-cap CEO, how the average large-cap CEO thinks, it’s very similar to how a value investor thinks, the strategic concepts and philosophies are all there. I mean, most large-cap CEOs don’t get into the weeds, and move things around, it hooked me because you were also able to manage the risk through diversification, and as a result, it was the best of both worlds for me, both from the risk side as well as the reward.

Kalani Scarrott (02:05): In terms of value investing theory, and sort of principles, what’s been your personal interpretation of Graham and Buffett’s popular value investing principles?

Aaron Pek (02:13): Basically, the way I understand value investing to me can be boiled down to two quotes by the value investing legends. The first is by George Soros. He has a quote that says that, “It’s not whether you’re right, or wrong that’s important, but rather how much you make if you’re right, and how much you lose if you’re wrong.” the wisdom behind this quote can be seen when you observe the realities of a stock market. The way we tend to judge our own performance is through the lens of hindsight. With the benefit of hindsight, we tend to look back, and we try to… We judge ourselves, assuming that we had the benefit of hindsight from the future. Whereas, when you are making the investment decision for the far future, you tend not to have the benefit of hindsight. In fact, you never will have the benefit of hindsight. This concept of being able to identify the future through superior analysis I feel is a flawed one, because, for the simple reason that the future doesn’t exist yet, and when you’re talking about the macro environment, anything in the world can happen. Just think about COVID, it was a complete black swan event, and yet it affects your portfolio.

“It’s not whether you’re right, or wrong that’s important, but rather how much you make if you’re right, and how much you lose if you’re wrong.”

I don’t think that it is ideal to use this DCF approach, the traditional contemporary finance approach to valuation of our stocks. Rather, the best we can do is make guesses about the future. Basically, you understand the landscape well enough, the investing landscape well enough, so that you can sort of make guesses about the possible future outcomes, maybe 10 to 20 of them, and you have a gut feel based on your familiarity with the landscape of what the likelihoods of each of those outcomes, as well as the potential impact of those outcomes. No matter what happens, you’re sort of prepared, and you know what actually to take almost immediately, because you’ve already done the work.

This brings us back to George Soros quote, which is, “It doesn’t matter whether you’re right, or wrong that matters, but what you make if you’re right, or what you lose if you’re wrong.” it’s basically the same philosophy as, “History is written by the victors.” Where we start from the present as a reference point, and interpret the past using the present. Whereas when you were in the past, and you’re trying to identify the present. That’s not the way it works isn’t it? You can’t actually with true superior analysis identify the future, for the simple reason that the future hasn’t existed yet, and there are way too many moving parts as far as the stock market is concerned. The best you can really do is just try to guess the future, doesn’t matter whether you’re right, or wrong, but you do have a very clear idea of the potential outcomes, and your potential impact. It’s what you make if you’re right, and what you lose if you’re wrong. That I would say is the first philosophy.

The second philosophy can be encapsulated in Benjamin Graham’s quote, which is, “An investment operation is something which promises the safety of principle, as well as an adequate return.” note how he uses the word “safety”, or “principle”, the keyword “safety”, or “principle”, as well as “adequate return.” this is in direct contrast to how most equity investors think, which is maximum return. Oftentimes, we don’t really think about safety, or principle, and also note what other asset class actually fulfills this criteria, of the safety of principal, and adequate return. It’s very akin to bonds isn’t it? When you’re buying a bond, you tend to care more about the safety, or principle than the return, as long as the return is adequate, you’re fine with it. I think, at least that’s my personal interpretation of what Graham meant from this quote in the context of buying stocks. He was trying to find a stock which had the same risk reward as a bond, you could have a higher return, but you… You could have higher risk, but you better have high return as well, it’s not a Dogecoin kind of scenario, To The Moon kind of scenario.

The real key component is safety, or principle, because as you know most value investors, they always go on and on about marginal safety, and if you actually take a walk down history, you’ll note that a lot of Graham’s, as well as Buffett’s approach to investing prioritize the safety of principle. Just very quickly give you one example, most people when they look at Graham’s habit of investing in net-net stocks, what they tend to focus on is that because he is buying things at below working capital, he is able to easily liquidate them, and realize the return, in a very assured way. What I think not enough people spend time on, on this narrative is that, assuming that for whatever reason he fails to achieve his objective of liquidating the working capital, because he bought that the stock at such a depressed price, in all likelihood he would be able to resell those shares, at zero loss to another smart investor, for the simple reason he picked the stocks up at below working capital right?

He has secured his downside, and he is happy with the upside. I think that’s something that value investing really does emphasize on versus contemporary finance, where contemporary finance really focuses a lot on the upside, with very little focus of downside. The typical sales side report has a risk section of about three paragraphs, while value investing really focuses to the downside, and only gives the same, flip consideration to the upside.

Kalani Scarrott (08:05): In terms of the principles of value investing, is there anything typically you’d disagree with? Is there anything that you find isn’t quite current, or you differ in your investing thoughts compared to classic theory?

Aaron Pek (08:35): I don’t think the problem is with the value investing crowd, the problem is with the contemporary finances interpretation of value investing. Because what contemporary finance defines as value investing is actually the value factor, where you’re investing in low earnings multiple stocks, whether it’s price earned price… P/E Ratio, P/B Ratio, that’s what Graham used to do, in his time. People griped a lot about how in this day and age, where everyone has a Bloomberg terminal, that’s no longer feasible. Which is true, but the first principles don’t necessarily rely on investing in low earnings multiple stocks. Because think about what value investing means, my personal interpretation of it is that value investing is simply buying something for less than it’s worth, when it’s a low earnings multiple stock, you’re buying a stock for less than you think it’s worth. If it’s a high earnings multiple stock like Amazon, you’re buying it because you think it’s less than it’s worth, the future cash flows far exceed even the higher earnings multiple that it’s commanding. It doesn’t necessarily have to be the value factor, or the growth factor, there’s no such dichotomy.

Munger, Charlie Munger actually has said before that all intelligent investing is value investing, you could even extend this to a house, or a car, or getting married to somebody, if you want to go to the extremes. All intelligent investing, where you’re getting a good ROI on it, with a sufficient margin of safety is considered value investing. I don’t think there is really an issue of, are you investing in low multiple stocks? Are you investing in high multiple stocks? Are investing in dividend stocks, it’s really about the principles of having safety, or principle, and adequate return.

Kalani Scarrott (10:22): Yeah. You spoke about all investing is value investing, and I think along similar lines for me, how I think about it [risk] is, everything is risk. When someone says, “Oh the stock market’s too risky, or individual stocks are too risky.” So is driving down the street. How do you approach risk, and value investing? Is it just trying to minimize risk through getting those quality businesses at a fair price?

Aaron Pek (10:42): Sure. Many value investors have actually described risk as the permanent loss of capital, which aligns with Graham’s quote about safety, or principle. Obviously, with all things that are good, they eventually become cliche and lose their original meaning. Here’s how I interpret risk myself. Think about how risk is uncertainty that has been measured, that’s the textbook definition of risk. Uncertainty is basically a risk that cannot be measured, or has not been measured yet. That’s really what we are worried about, because think about COVID, when is COVID… Let’s say you were to buy an airline stock. When is COVID going to end, that’s an uncertainty, because you can’t measure it, and therefore you can’t model it, as far as valuations are concerned. I talk about risk, what I see is that we’re trying to guarantee an outcome. Basically, risk reduction to me means that we try to eliminate uncertainty, or minimize uncertainty as much as possible.

Through the elimination, or mitigation of risk, and uncertainty, we can gain a more certain visibility of the return. For instance, if you were afraid of COVID, you might hedge yourself with a put option, that’s reducing risk. That’s also in the context of avoiding the permanent loss of capital, I think this is a more intuitive concept to follow than simply asking somebody to follow some kind of road formula, with regards to risk. Risk is definitely not volatility in my view. I think the reason why contemporary finance considers volatility as risk is because drawdowns do matter in the professional world, whether you’re dealing with a retail investor, or an institutional investor, people just hate drawdowns. In the context of drawdowns, yes, volatility does, can be interpreted as risks, but for us value investors, the best bargains tend to be when stocks have fallen, and when you try and catch a falling knife, you can fall further, volatility kind of works against us as a metric of risk, and I align a lot with what most other value investors think in terms of risk, which is permanent loss of capital, as opposed to temporary loss of capital.

Kalani Scarrott (13:12): Yeah. You mentioned drawdowns, and the large volatility, which probably leads into emotions in investing. How do you deal with the emotions that come with investing large drawdowns, and how do you go about, I guess managing that?

Aaron Pek (13:24): Sure. I’m going to draw a quote from Game of Thrones, there’s a man called Petyr Baelish, or his nickname being Littlefinger, one of the characters in Game of Thrones. In one particular scene, he was speaking to his prodigy, whose name was Sansa, and he was teaching her about how to approach war, and his quote was, “See everything in your mind.”, “Every possible series of events is happening all at once, see everything in your mind, look at things this way, and nothing will ever surprise you.”

I think it also aligns back with George Soros quote about, “It’s not whether you’re right, or wrong that matters, it’s how much you make if you’re right, and how much you lose if you’re wrong.” what he’s doing is thinking about probable outcomes, many different outcomes, as opposed to trying to identify a single certain outcome, and he’s thinking in terms of probabilities, as well as impacts. This allows him to envision all possible broad outcomes that might happen, such that the moment they happen, he doesn’t panic, he already has a backup plan, and he’s just exercising plan from his playbook, and this allows you to stay in control, in fact, in terms of emotional state, because you already have prepared for the outcome.

George Soros is actually very well known for being a master at cutting losses. The reason why I think so is because of this, he has already prepared for all possible outcomes, and the moment something happens, he just takes action based on his plan. If something falls out of his radar, for instance, a black swan event like COVID, he just cut the loss, because it’s not within his framework, and therefore not within his control. The new information, which he could not have expected by virtue of it being a black swan event occurs, he would just take the loss, and move on. Obviously, this is not an answer about how do you avoid losses, but it does provide a very strong foundation for how to stay in control, of your emotional state.

Kalani Scarrott (15:30): Yeah. No, I love that answer. Maybe to transition more to the Malaysia side of equities. What are some overall themes, and trends that you’ve seen that are positive for equities in Malaysia like? What are you excited about as an investor in Malaysia?

Aaron Pek (15:43): I think that Malaysia actually has a very interesting story to tell. I feel that it’s going to be one of the biggest beneficiaries of the ASEAN growth story. The ASEAN growth story is basically the China growth story today. Basically, once every 30 to 50 years, the manufacturing base, the centre of the manufacturing base, global manufacturing centre shifts across the world. Think about in the post-war period, it was in America, and then later on it was in Japan, and to some extent, South Korea, and Taiwan. For the past, call it 25 years, it was in China. The reason is because manufacturing tends to be involved with low value add items, I mean, we’re referring to the bulk of manufacturing, which is low-value items. You tend to want to have your low-value items being manufactured in places with low cost, like for instance, China 20 years ago, land was cheap, and labour was plentiful. Compared to setting up a base of operation in America, you would imagine that you have to deal with much higher labour costs, and even union costs, and stuff like that right?

The thing about China is that right now, it’s experiencing what America was experiencing 30 years ago, which is that as it graduates into a first-world economy, the labour pool starts to become more expensive. Therefore, it makes sense for businesses to shift their base of operations as far as manufacturing is concerned to a different region which is cheaper. Where is the most likely place to go to? It’s ASEAN. Firstly because of its proximity to China, and secondly because compared to other similarly developed economic blocks, Asean is really the most stable, politically speaking. Obviously, you can draw a comparison to the first world countries, ASEAN is nowhere near that level. Compared to places like Latin America, or Russia, or Africa, we’re the best, that’s why Vietnam has been attracting a lot of FDI [Foreign direct investment], because it’s literally bothering China, and businesses find it so easy to just shift manufacturing operations to Vietnam, where the labor pool was a lot cheaper.

The narrative is that in roughly 30 years time, the rest of ASEAN also benefit from the same Vietnam growth story. We call this ASEAN growth story. Eventually, businesses will also seek to shift their locations beyond Vietnam into the rest of ASEAN. Here’s why I think Malaysia has a very interesting outlook, because think about the polity makeup of ASEAN. You have places like Myanmar, Laos, Cambodia, Indonesia, Singapore, and Malaysia, and the Philippines. Of these countries, I think the next beneficiary after Vietnam would most likely be Singapore, because first of all, it has a sanctity of rule of law, as well as a low corporate tax rate, and a good business environment. There’s only so much land in Singapore, and I don’t think there’s enough land literally. If you covered every square inch of Singapore with factories, there will still not be enough land to build factories for global businesses.

They will inevitably be thinking after Singapore, where next? Where in ASEAN next? I think that next beneficiary will be Malaysia. The main reason being that the Malaysian population consists of 25% Chinese, and I know some may say that, “Oh, this may sound a bit racially discriminatory.” but that’s not where I’m coming from. It’s simply the fact that businessmen tend to prefer familiarity. You just imagine if you were doing business with an Indonesian, and you accidentally step on his toes for whatever cultural reason, and you lose your entire FDI, possibly billions of dollars. That’s just not something you want to risk, you rather just deal with somebody who you are familiar with, even at the expense of being seen as racial preference, because that really doesn’t matter at the end of the day for business, in Malaysia, you already have certain urban areas, which have pockets of Chinese population that are thriving with business. I think what happens is that you will see after Chinese businesses have saturated Vietnam and Singapore, they will start considering Malaysia as the next space of manufacturing operations.

You can actually see the Malaysian government making adjustments to accommodate this process for the far future. They’re partnering with the Chinese government, they’re doing hedging agreements, they’re developing the border between Singapore and Malaysia, which is the state of Johor, and they’re involved in certain infrastructure projects, under the one belt one road. Compare this to the other states of ASEAN, Indonesia is perhaps the country who gets the most attention in terms of FDI. Indonesia unfortunately suffers from a significant lack of bureaucracy. Getting anything done probably involves a bribe of some sort, and they also have a very strong socioeconomic identity in terms of socialism, the president is a proud socialist. Sorry, is it? Yes it’s the president, he’s a proud socialist. The socialist identity tends to bleed into business, in around 2014, many Malaysian companies actually tried to take advantage of the Indonesian growth story, by virtue of the fact that it has the biggest Muslim population, and I think it’s the fourth largest population in the world, in terms of countries.

They went there, and I would say 90% of them came back licking their wounds. One of the differences in business culture is that they’re very cutthroat, and they’re very protectionists. Indonesian businesses as you can imagine in most emerging countries tend to be very large, and very consolidated. When a foreign entrant comes in, they’ll just dump the price, and make you bleed until you exit, it’s the typical cutthroat strategy. It’s not very conducive for a foreign business to enter. Whereas Malaysia doesn’t suffer from that perspective. Think about Vietnam, it’s a communist government, which means you’re always going to be worrying that the government can nationalize your business at any time, if it becomes too attractive. Myanmar is just simply not ready to accept foreign businesses, neither Laos or Cambodia, which basically do not even register on the global map. Philippines is also, it’s basically like a Mexico, ASEAN Mexico, where they have huge drug wars, and a flamboyant Trump-style president.

I’m not saying that Malaysia is great, compared to the rest of the world. Compared to the rest of ASEAN, it’s basically The United States. Also maybe I’ll just very shortly add one last thing, which is that we have very strong levels of bureaucracy, which means that applying for business permits, or applying for export permits, these kind of things, they’re very straightforward, and also, our institutions are strong. We have very strong regulators. I would say that our regulators in the form of capital market regulators, the central bank, the securities commission, as well as the boards, they are first world level, on par with the likes of the U.S. Also, despite a lot of political volatility, as evidenced by the constant changing of the guard at the political administration level, the social makeup of the polity is not really conducive to radical people. The likes of Thailand, where you have the whole politics split between the yellow shirts, and red shirts right?

In Malaysia, neither the heavily conservative rural base, nor the left-leaning, the progressive urban grassroots base are king makers in any particular Malaysian general election. The king makers tend to be the centrist Malays in the Malay heartlands, who don’t particularly have strong leanings to the left or right. I mean, it’s the same for the U.S., you can have very strong right-wing base, you can have a very strong left-wing political base, but end of day, it really comes down to the people on the fence, that determines the outcome of election. While you can have a lot of political volatility in Malaysian politics, there is really little risk of social upheaval, due to these political risks.

Kalani Scarrott (24:36): Yeah. You mentioned some of the risks for other ASEAN countries. When talking about Malaysia, what do you think is the risk that Malaysia doesn’t live up to their ASEAN growth story like? What has to happen for them not to achieve their potential do you think?

Aaron Pek (24:52): It’s not all hunky-dory in Malaysia. For instance, they have very high debt to GDP for an emerging country. To be fair, I think most emerging countries right now have the same problem. Malaysia’s debt to GDP according to Fitch Ratings is around 77%, if you include contingencies and guarantees. That’s a staggeringly high amount for an emerging nation, which does not have control over printing your fiat currency, full control rate. Also, about 20% of its government revenue is still dependent on oil sources, which can be very volatile as compared to very stable tax sources. Absent the ASEAN growth story, which is an exogenous factor that is outside of the control of Malaysian government, I really question how they could potentially maintain their historical growth level of, call it 4-5% GDP, growth, because there’s a lot of headwinds working against them. For instance, over the past 20 years, since The Asia Financial Crisis in 1997, we have not even had a single budget surplus, and it has been consistent by these deficits, which means we have been borrowing for growth.

That has been the main contributor to our roughly 4-5% average GDP growth over the years. Think about absent debt, it’s probably going to drop closer to 3%. Here’s the thing, we can’t really borrow anymore, if you’ve been following Malaysian news, financial news, you actually will realize that… It has been allowing withdrawals from its pension funds. Normally, a pension fund’s purpose is to prepare for your retirement, before they release funds to you. Now they’re allowing us, people like me to withdraw early, in order to stimulate the economy. It’s well within the confines of unconventional monetary policy, the likes of QE, keeping in mind that for Malaysia, QE is not really an option.

This kind of unconventional monetary policy only happens because our debt levels are way too high, and the government just simply does not have the capacity to borrow more to further stimulate the economy. Kind of like reaching some sort of debt ceiling, that unlike the U.S., we can’t just race into perpetuity. As a result, I think there are a lot of headwinds, The Malaysian urban polity is not incorrect to feel concerned, in the absence of the Asean growth story. Assuming this Asean growth story materializes, I think that all this will just be wiped away, because it’s like a disruption. The entire industry gets taken along with it, but for the positive. As far as what is within Malaysia’s own control, I think there’s a lot more that can be done.

Kalani Scarrott (27:44): Yeah. Nah, I love it. In terms of foreigners looking to invest in Malaysia, or who might be new to it. I know you’ve spoken previously about the makeup of the Malaysian index being heavily skewed towards key sectors like banking, utilities, and telecom. Could you just expand on that maybe, and highlight some key things that someone should know before they start investing in Malaysia, and maybe what they can expect if they invest in an index, or something like that?

Aaron Pek (28:06): From my observation of the habits of foreign investors in Malaysia, I think the biggest mistake you can make is investing in the Malaysian index. Because like you mentioned, it’s heavily weighted just towards a few key sectors, banking, telecoms, and utilities. Very similarly to how the S&P 500 is skewed towards big tech. These sectors tend not to be growth sectors, and if you’ve been observing KLCI, which is our S&P 500 equivalent index, there is simply no growth, I think the average growth of the KLCI over the last two decades is on par with a fixed deposit in Malaysia, something like 3 or 4%. It’s really, really low. If you were to look at the KLCI, obviously the natural conclusion is that there is no growth in Malaysia, it’s a failed state or something, whereas this… Okay, so this is the first mistake. The second mistake I think you can make is investing in only the constituents of the KLCI, you may not buy the whole KLCI, but you only invest in the big banks. You only invest in big telecoms, the big utilities, or even some of the other less key constituents.

When you do that, you’re basically also suffering from the same issue, to a lesser extent. Because what you’re doing is buying the most visible stocks, which all the foreign investors are buying, as well as the domestic investors. You can imagine that the share price will tend to be trading around fair value, and keeping in mind that the public shareholder does not make money from the economics of the business itself. He makes money from the difference between those economics, and the price requires a share set. If the price is high enough, it doesn’t matter how good the economics of the business is, you still won’t make much money, whereas you’re also exposing yourself to downside risk.

My personal recommendation to all foreign investors is to look at small to mid-cap space in Malaysia. There are tons, literally tons of businesses in the small and mid-cap space in Malaysia which are really well run right, and exemplify the same level of stewardship, as compared to the U.S. Companies, obviously by virtue of Malaysia being an emerging market. You will get bad apples here and there, but you also get good pears, or good oranges. I’m not saying that the entire Malaysian small market cap space is filled with these good examples, but there are certainly enough of them. If you go to my blog, valueinvesting.substack.com you will see some of my favorite ideas there, which are Innature, which is the body shop franchisee in Malaysia. Hibiscus, an upstream oil and gas brownfield operator, which doesn’t employ much debt. AirAsia, which I’m sure most you know about.

My personal recommendation to all foreign investors is to look at small to mid-cap space in Malaysia. There are tons, literally tons of businesses in the small and mid-cap space in Malaysia which are really well run right, and exemplify the same level of stewardship, as compared to the U.S. Companies, obviously by virtue of Malaysia being an emerging market. You will get bad apples here and there, but you also get good pears, or good oranges. I’m not saying that the entire Malaysian small market cap space is filled with these good examples, but there are certainly enough of them.

Some of these stocks are trading at super depressed prices because of external environments, they are not within control of the company. Arguably, some do have risk, but they are definitely good ideas worth exploring. Not exclusively because they have very good business economics, but for a simple reason that their prices are trading at super depressed levels. You can make the same dollar in these stocks these Malaysian small midcap stocks, as you can arguably from Facebook, and Amazon, for the simple reason that there’s no competition, no one is looking at them. Just think about it, compared to an undercover stock in a micro-cap in the U.S., it’s very similar. Also if you were to visit my interview on the Asian Century Stocks blog with Michael Fritzell, who by the way is a phenomenal analyst, you see that I actually… There’s a breakdown of my investment talk process about the Malaysian small midcap space, as well as a very attractive… The stock I like the most now, to quote Warren Buffett, which is Berjaya Corporation.

I won’t go into detail here, but I actually did a recent interview with a bunch of guys in Malaysia, where I go to detail about what I like about Berjaya Corp. Feel free to visit there.

Kalani Scarrott (32:25): Yeah, links will be in the description. That’s Finance in Real Life podcast. F-I-R-L podcast, yeah.

Aaron Pek (32:31): Yeah. It’ll be in the FIRL podcast, which I think Kalani wouldn’t mind including, and…

Kalani Scarrott (32:37): Yeah, I’ll link in the description.

Aaron Pek (32:39): … I go into a lot of detail about first of all, AirAsia, second of all, Berjaya Corporation, and third of all, the macro environment in Malaysia. Do feel free to check it out. If you want to reach out to me on Linkedin for questions, that’s fine as well.

Kalani Scarrott (32:54): For sure. To move into my closing round of questions, what’s undervalued life experience do you think university age students don’t give weight to? What’s an underrated skill, or an experience that you think they should have?

Aaron Pek (33:04): Okay, I would say that one would be, don’t follow the mainstream, keep asking why. Contrary to common sense. Sometimes they say common sense is the least common sense. What’s popular in the mainstream isn’t necessarily the most correct thing. If you actually go beyond the mainstream by constantly reading value investing books, learning about history, you will actually get the sense that there’s a lot more to the world than what you hear in the news, or from rumours on Facebook. That will actually help to inform you about the way the world works, and as well as bring you more peace, and happiness in your personal life, because your mental models are more aligned with what’s actually happening in reality, as opposed to being told something, and the real world actually going against that framework.

Definitely be curious. I think that curiosity killed the cat, but it enlightened a human being. That’s one. The second one I would advise you is in terms of career experience, I do think that networking is very important, which is I think what a lot of people also share with me. The way to build a network, is to just start somewhere, somewhere small, and just build on it. Because as you know, the network effect compound, is compounding in nature.

You get to know one person, and he knows someone else, who may be able to help you. That person knows someone else who may have be able to help you even more. Don’t worry about not being able to not having a network, don’t worry about not having a robust network from the beginning, just start somewhere, and just slowly compound the network, over time. Eventually you get to a stage where you know enough people that if you’re looking for a new job, you can just give them a call, and ask them, “Hey, do you have a vacancy available?” that kind of thing.

Also with regards to networking, I would like to stress that networking is not about what’s in it for you, a lot of people tend to think that they go to networking events, they give out their business cards, and they say… They’re always going there with the goal of, “What’s in it for me?”, whether it’s a job, or connections, or money, whereas I think many respectable networkers, gurus you can call them, actually suggest the flip side, which is network with the idea that you’re doing it for them. You’re always asking yourself the question, “What’s in it for the other party?” What value are you contributing? Are you adding to that person’s life? Someone important who may be able to extend you a job offer one day be out of politeness extend one minute of their time with you. If they see that you’re only doing it for yourself, and there’s nothing in it for them, in all likelihood, they’re just going to politely excuse themselves, the same way that you politely entered their lives.

Whereas if in that one minute elevator pitch, you could actually rather than going, and elevating the pitch about yourself, for instance saying, “Hey, I’m working in Goldman Sachs, I do this, I do this.” you say, “Hey, I’m working in Goldman Sachs, I can do this for you. I can make money for you.”, in that 30 seconds, or one minute, where he’s obliged to be polite to you, you communicate the fact that you are valuable to him, you can make money for him, or even if you’re a fresh graduate, you offer some kind of value add to him, he is going to be more interested to keep the conversation going beyond a minute, and most people are nice, you very rarely come across the sociopath who out of principal just does not want to extend a few minutes to be nice to you.

In that time when they’re nice, just show them also that you can be of economic benefit to them, and that’s how you build a network because then they have an incentive to reach out to you again. At the end of the day, it’s all business. It also aligns with the concept of marketing, where in the business you can have a very good product, but you also need to have a very good sales team, or a marketing operation. Networking is really the marketing arm of your carrier, whether you’re an IT programmer, whether you’re an investor, whether you’re an equity analyst, or a fixed income analyst. That’s the core business of your carrier, but networking is of the marketing the sales element of carrier, and this is not to say that the sales element is the only element, some people think you can get a hit in this field just through people’s skills. I’m not saying that it’s impossible, but in equity analysis particularly, and fund management, it does involve a lot of technical skill.

You can get so far with just people’s skills, but eventually you’re going to bump up against the guys who are good at both, and I would say that you do need to pay attention to your technical skills as well. Definitely also do not silence yourself into a technical aspect, do pay attention to networking, it will do wonders for your carrier.

Kalani Scarrott (38:11): Yeah. No I love that, because yeah, if you put enough value out into the world without expecting anything back, eventually it sort of just happens to return in spades, like it’s funny how it all works.

Aaron Pek (38:20): Yeah. At the end of the day, it’s business right?

Kalani Scarrott (38:22): Final question, what’s your plans man? What areas are you most curious about going forward? What’s the plan for the next five to ten years? Where you going?

Aaron Pek (38:31): I’m actually starting an independent equity research outfit. It’s a value investing sell side research outfit catered towards the global value investor, whether retail, or institutional, who is interested in participating in the Malaysian growth story. I almost feel a sense of obligation to bring out these stocks, these investment gems to the awareness of the global investing community. Because it is just a travesty that these treasures are not spotted, people tend to think about stock markets in terms of the efficient market hypothesis, where it’s so difficult to find a good stock idea. Whereas in Malaysia, I tend to find the opposite, it tends to be so easy for the simple reason that there’s just nobody here, there’s no competition here, and the stock prices are so low, whereas I would say the quality of corporate management here is on par with U.S. Stocks, U.S. Companies. Definitely check out Asian Century Stocks blog, Michael Fritzell, he’s the author. His coverage is mostly in the wider Asian region, but he just spent a proportionate amount of time in Malaysia. I find myself agreeing with a lot of his ideas, they’re really good.

Also check out this youtube podcast, a video podcast called the FIRL Guys. Like we mentioned just now, that’s F-I-R-L, Finance in Real Life. In contrast to many of the so-called stock market gurus, these guys actually do have some meat to the bones, they may not be institutional level, but they’re definitely high-quality retail level. Also definitely check them out. Yeah, if you want to reach out to me, just reach out to me on my Linkedin, I’m free for a chat anytime. If you consider yourself true blooded dyed in the wool value investor, I’d be happy just to be your friend, and maybe have a chat with you. In fact, I’ve done a few over the past few weeks alone.

Kalani Scarrott (40:31): I love that. Aaron, thank you so much.

Aaron Pek (40:33): No, thank you Kalani, it’s been a great pleasure talking to you.

Kalani Scarrott (40:36): If you enjoyed this podcast episode, be sure to check the website, compoundingpodcast.com. On the website you’ll find every episode complete with transcripts, show notes and other related resources. Also be sure to sign up to my weekly newsletter, Curated by Kalani, where I share what I’ve been reading, learning, and watching for that week. Same as the podcast, it’s compressed to impress and I aim for maximum return in the time invested. So sign up at kalanis.substack.com. You can also connect with me on Twitter @ScarrottKalani. Once again, links to all content mentioned will be in the description. But until next time, have a good one.