A Conversation with Cao Nguyên
On investing in small companies and the importance of having a margin of safety
A huge percentage of trading on the Vietnamese stock exchanges is done by retail investors.
Many of these people look at the activity as a game, the equivalent perhaps of playing cards, and speculation is rampant.
But there are a few people who take a serious, intelligent, business-like approach to investing.
Cao Nguyên is one such investor.
He’s well-versed in the value investing literature, has a deep knowledge of many specific companies, and (if you speak Vietnamese) is well-worth following on Substack.
The last time we talked was this past January and the conversation was so good that, with his permission, I’ve decided to publish it below.
My questions, as you might guess, are in bold, and his responses follow right after—it is all, of course, not investment advice.
With that said, I hope you enjoy it.
What got you interested in investing?
I think investing, or value investing, is probably in our genes. If you’re truly compatible with investing, when you learn about it, you’ll immediately be attracted to it and you’ll know that your future lies in being an investor.
Ever since I was in school, I loved business, and whenever I walked down the street, I would look at the stores and think about their operating model, how they make money, and whether they make a lot.
After several attempts at running my own business, I realized it wasn’t really for me. But later, when I learned about investing, that I could just invest in good businesses, and they would have talented people running them for me, I thought, wow, that is great.
However, there are many great businesses out there. If it were as simple as just investing in them and reaping the rewards, wouldn’t it be too easy?
Exactly. Is this why you’ve repeatedly focused on having “a margin of safety” in your investments?
Well, as someone who loves reading books, I think that people who enjoy reading, especially business books, are more likely to have the investing gene.
After reading all the investment books published in Vietnam, it’s clear that the margin of safety is the ultimate important thing one needs to do to outperform the average investor.
In fact, in addition to guarding against estimates of future cash flows of a business being wrong, investing with a margin of safety also helps investors have a better psychological state with their investments.
I think I’m an extreme value investor, usually finding enough margin of safety to feel that even if the business doesn’t grow anymore, I'll still be okay with that investment.
All this was heavily influenced by Seth Klarman's book, Margin of Safety.
Recently, you had a big win in HGM, which produces rare earth metals and which has been a multi-bagger in less than a year.
Can you explain your thesis there?
Finding HGM was random. I usually have my own filter for good businesses, and HGM appeared during one of those filters.
The more I learned about it, the more I realized it met almost all of the 4M criteria:
the business operates in an easily understandable sector,
the exclusive moat is very large and will not diminish for at least the next 5-10 years,
the management holds a large stake in it (which is rare among state-owned enterprises), and
the margin of safety is sufficiently low with a P/B below 3 and ROIC or ROE above 30%.
We’ve talked before about a few small book publishers. What are some of the attributes that you like about these stocks?
I actually view investing in these stocks like investing in secured bonds which yield around 10% per year. Because investing in bonds here is not as easy or as safe as it is in the U.S., when I can’t find good stocks to deploy capital, I want to put my money into safe bonds—and these fit the bill.
What’s the security here?
The main collateral here is the real estate that these companies own, which can be as high as 800% of their market capitalization. Also, the textbook publishing industry still maintains a monopoly and is unlikely to suddenly decline due to competitive barriers.
How do you think about insider buying and insider ownership with these businesses?
As with any business, I consider insider buying as a plus point. However, if that business doesn't meet my personal criteria, I don't pay much attention to it at all.
Let’s talk about a company where management owns a huge percentage of shares: DTP. What do you like about this one?
I like that DTP is majority owned by the management. They are in the same boat as investors, and I think they are more motivated to develop their own business than businesses where the majority of the benefits belong to the state.
They will also have an advantage over state-owned pharmaceutical companies because they can decide to act quickly to capture market trends.
DTP is expanding in the personal consumption sector but in a smaller niche, they make more medicinal products. Health-conscious consumers may be their customers that the big guys don't pay attention to because the market size is not big enough for them to develop a separate product.
I still think the functional food sector will bring more profit margins, like Trapaco is doing, so if they can build a brand, they can take the market share of Trapaco and Tâm Bình, as well as spontaneous cosmetic brands of streamers or influencers.
Finally, how do you get comfortable investing in small companies that have few reports written on them and even fewer investors discussing them?
I actually love investing in small, little-known companies. Large companies demonstrate the efficient market theory quite clearly, but small ones do not as they are outside the filters of funds and securities companies.
With small-cap and nano-cap stocks, I actually have a voice in shareholder meetings.
I also love these companies because their lack of liquidity eliminates almost 90% of other investors. This allows me to invest patiently and, as I do not need to divest capital massively, this is a big and special advantage for me.
Thanks for answering all these questions.
My pleasure!