It is apt to follow up with this story after Jon’s previous article about delayed gratification.
I must give credit to one of our Value Investors Club members who brought up this analogy of the way we do value investing using the CNAV approach – it is like growing bamboo.
I researched about this analogy and found this story:
Michael, a farmer, was struggling to provide for his family. He was hoping to have a garden of 80 feet tall bamboo plants. There would be enough bamboo wood to be sold and the money made will provide the family for a lifetime.
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He got so excited about this idea that he immediately got down to plant the seeds. He diligently watered the spots every day and were anticipating the shoots to form. Like every human being, he wanted to see results immediately and he couldn’t wait for the plants to blossom. However, Michael’s enthusiasm didn’t dictate the growth rate of the bamboo plants. There were no shoots in the first few days. Nothing. Michael was disappointed but continue to water the ground.
Michael had to plant other crops which could grow faster to feed the family, while waiting for the bamboo to grow. He continued to water the plant every day but he still observed nothing. The other crops grew fast, but could only provide for the family for the short term. Michael was still hopeful for the bamboo dream.
A year passed. Nothing.
He continued to water and stared at the barren ground where the bamboo seeds lie. He felt his dreams and hopes are very far away. He started to think if the seeds had died.
The second year passed. Nothing.
Michael’s neighbours started to laugh at him. They do not believe in his bamboo dream. In fact, they think Michael was naive. The reactions and behaviour of his neighbours inadvertently affected Michael. He began to doubt himself – will the bamboo ever grow? Should he continue with his belief which could reap no reward in the future?
The third year passed. Nothing.
He has heard of the huge rewards that come with the belief of the bamboo dream. But he had yet to witness it. He stood over the bamboo seeds and cried in frustration. There was no evidence of life. He gathered his feelings and continued to water the seeds.
The forth year passed. Nothing.
Four years of hopes and belief, yet Michael had not reap any rewards. His neighbours have given up laughing at him. They thought he was perhaps crazy. They shook their heads as they watched Michael watered the grounds. It has become Michael’s habit to do so. He did it with no expectations of rewards whatsoever.
The fifth year passed. Nothing.
Michael is tired of keeping his bamboo dream alive. Tired to see no results day after day. It is hard not to believe the bamboo can grow after five long years. He questioned if he had done things wrongly. He felt he had wasted his efforts tending to his dream. The dream of a better life for the family crumbled in the harsh reality. But it was hard to give up watering after 5 years.
One morning, the neighbours were awoken by Michael’s joyous shouting. He was calling out to his family to witness the bamboo shoots growing out of the soil.
In six weeks, the bamboo grew to 80 feet!
Michael’s dream has came true, the bamboo plantation was more than enough to provide for the family in their lifetime.
Inspired by Michael’s success, his neighbours began planting their bamboo plants.
CNAV stocks are generally small cap stocks with low volume transacted. It is like bamboo seeds which show no signs of life. It is important to know that these CNAV stocks are probably the ten percent of the small- to mid-cap stocks listed on SGX. They are financially stable companies in debt free positions. These companies have assets to back their stock prices. In fact, you can buy their assets at half the price. Logically this should not happen if the market is efficient. Lastly, CNAV stocks should also have positive cash flow over the years to ensure their asset values are not eroded.
Although they are clearly undervalued, it is psychologically challenging to invest in them. It is also because of these difficulties that resulted in a lack of investors, and mispricing of these stocks to occur. The price discovery is weak when attention on these stocks are lacking.
I will describe the following psychological challenges faced by most investors. Although I wrote it based on those who practised CNAV investing, it can be relevant for investors using other investment styles that require some form of waiting.
Stage 1 – At the start, you may be very excited to implement a strategy you have learned. You took action to invest in some stocks and you are looking forward to their performance and you check the stocks regularly. Nothing. It didn’t move. There is no volume. Worse, it may even drop! It wasn’t how you expected. The disappointment is the same as the farmer who just planted the bamboo seeds. You wanted to see results for the effort and resources you have put in. But the reality crushed your expectations.
Stage 2 – While you stuck to your stocks, you hear your friends making few thousands a month with other strategies. They laughed at the stocks you have invested in and called them crappy. You get affected by the comments and wonder if you are doing the right thing. You felt like switching strategy. Why wait if you can make money within weeks?
Stage 3 – You feel despaired after waiting for so long and the stocks are still not turning in the profits. You felt like giving up but think that there is no urgency to offload the stocks. You continue to keep them without much expectations about the returns. You are numb to market volatility. Paper losses do not scare you. A little profits do not tempt you to take them. You just keep the stocks and monitor them once in a while. All of a sudden, the stocks gathered lots of activities and the price rose fast. The large returns made you feel the wait was very worthwhile.
Photo Credit: Daniel Peckham