Felix Tong is a mechanical engineer with 20 years of experience managing his own money. He made his first stock purchase when he was in 7th grade, and as he became more sophisticated he experimented with day trading, swing trading, and options trading before finally settling on Graham and Dodd style value investing, which he believes is the best fit for his personality.
He spends much of his free time reading company annual reports and SEC filings. Felix uses fundamental analysis to uncover companies with a durable competitive advantage but that are suffering a temporary setback. He finds most of his investment ideas in the micro and small cap US markets.
Tong’s ideal investment is a company that sells affordable, non-durable goods with a high number of repeat purchases, and has a shareholder friendly management. These type of companies, however, rarely go on sale.
Tong manages Covestor’s Long Term Core Holdings model, which has a primary focus of “preservation of capital with some appreciation.” The portfolio is non-diversified (one stock may constitute up to 50% of the portfolio’s assets) and often holds a large cash position. Portfolio turnover is typically low:
Stocks of companies will only be purchased with a significant perceived discount to intrinsic value. Proper value investing requires discipline which will result in extended periods of the model holding a large cash position; this may cause under-performance during speculative markets. The model’s goal is to outperform the S&P 500 over an entire business cycle, typically 8 years.
Tong’s research method begins with screening and then a deep dive into specific ideas:
The model screens databases such as Morningstar and Value Line for companies with a dramatic fall in per share price (approximately 20% in a week). If the drop is a result of a fall in short term earnings, temporary market share loss, or the company is suffering from headline risk, the model manager will perform a more in depth investigation of the company.
The manager reviews SEC filing, and participates in conference calls and web casts to determine the shareholder friendliness of management. If the model manager finds that the management is sound, the problems temporary and the valuation compelling, only then will a purchase be initiated.
Zhu will sell companies once they approach his calculated intrinsic value:
With regards to companies that have wide moats (durable competitive advantages) the model plans on holding the stock forever, and is unlikely to sell the position unless the company’s competitive advantage is reduced, or the market values the security at several multiples over its intrinsic value.
Current top holdings include Sun Bancorp (NASDAQ: SNBC) and USG Corp (NYSE: USG).
