Interview #81 : Roger Fan (RF Capital Management)
Searching for obscure, quality, and undervalued companies from across the world.
For this issue we have the pleasure of interviewing Roger Fan, Founder and Chief Investment Officer of RF Capital Management.
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Hi Roger, thanks so much for taking the time to do this interview.
Can you please tell readers about your background and how you got involved in investing?
Before we dive in, thank you for the opportunity to do this interview with you. I’m familiar with your work, and I think it’s a fantastic resource for students, private investors, and investment professionals.
So I've always been interested in business. My parents came to the U.S. from Taiwan in the early 80's. They've always been business owners - primarily fast food restaurants and convenience stores.
I remember shopping for inventory at wholesale clubs, stocking the shelves, working the cash register, and counting the money after closing in the summers and after school starting at age 5 all the way up until I left for college. In fact, I’ve heard my parents tell stories of when they used to bring me along with them to work when I was a baby, so it was even earlier than that!
So I learned what work ethic and grit looked like from an early age. Liquor stores, fast food restaurants, and food courts are not easy businesses to run by any stretch.
However, your options are limited when you immigrate to a new country and you don't speak the language. Both my parents also didn't have college degrees. That's probably why they emphasized education so much and steered me towards medicine.
In college, I took the full pre-med course load, volunteered in hospitals, completed summer internships, conducted research in labs, and secured professor recommendations. I was also scoring well on my practice MCATs.
However, I decided to become a hedge fund manager in my senior year, so I never ended up sitting for the exam.
In hindsight, it may have been the wrong decision because I didn’t have the resume or experience to land a prestigious investment banking job straight out of undergrad. However, I have my dream job now as CIO of RF Capital, so it all worked out!
Ironically, I discovered value investing while I was working in hospitals and clinics during my freshman year. That led me to Warren Buffett, Charlie Munger, Ben Graham, etc. I read all the books that I could on investing.
I also remember going to Borders and reading all of the books in the investing section. Eventually, I thought I knew enough about investing and starting investing my parent’s money and my own in May 2008.
I’ve always said it was the perfect start to my career because I learned how to invest real money during a preceding bull market and the Great Financial Crisis that followed. Making at least 2x to 3x on every investment certainly gave me confidence.
I only had one breakeven investment and one losing investment where we lost less than 1% of assets. I enjoyed investing so much that I was conducting investment research and managing the portfolio before classes, after classes, and on the weekends.
I even took the full economics course load to get a better understanding of economics and how finance worked. I was just a language requirement short of getting a double major.
After graduating, I worked for three years before going to law school. I decided on law school because I felt like it was a better option than getting an MBA.
The skillset that you gain from law school is directly transferable and much more valuable for investing than what you would get out of an MBA program. So I went to law school and focused on corporate law classes in my second and third years. After graduating, I launched RF Capital and here we are today. That’s how I got into investing.
What does your ideal investment look like?
My ideal investment would be a company with a sub-$100M market cap. The business would have high revenue, earnings, and free cash flow growth.
On the balance sheet side, the company would be net cash with no debt and would trade at a discount to net current asset value. EV/EBIT, EV/EBITDA, P/E, and P/FCF multiples would all be low single-digits, P/Tangible Book and P/NCAV would be less than 1, and ROIC above 20%.
With that being said, very few companies fit that financial profile and you often times have to compromise. But the idea is to find egregious mispricing’s in the markets.
Beyond the numbers, the company would also be a niche business with a dominant market position. Margins and return on invested capital would be steady historically and growing.
Additionally, I would be able to project normalized earnings with a high degree of confidence over the next 2 to 3 years.
Additionally, the business would be obscure with little to no institutional ownership. There would be minimal to no coverage by buy-side analysts or even retail investors.
However, there would be high insider ownership with recent insider purchases. The management team would be shareholder-oriented with great capital allocation skills. Board members would also own significant stakes in the company and bring a diverse set of experiences that compliments the management team.
Finally, I’d be able to figure out why the opportunity exists. When a company fits all of the criteria, there’s usually something wrong with the industry or the business itself.
High-quality businesses tend to be expensive. They wouldn’t trade at single-digit multiples or provide high IRR’s unless there was something wrong with it.
Similarly, I would be able to determine what event(s) would move the stock price. “Value traps” tend to occur because there’s no catalysts and the short thesis wasn’t properly considered.
Although that is the ideal investment, I’m perfectly fine with other types of investments as long as they meet our hurdle rate.
Stable, free cash flow-generative businesses, net-nets, turnarounds, cyclicals, high-yield bonds, special situations, etc. are all fine.
I just prefer the high quality business at deep value prices because you can take large positions and hold for many years without making many other investment decisions, which would reduce your error rate.