Hidden Assets

"To

invest in something that's popular when it's popular is the kiss of death," says Amit Wadhwaney, manager of the New York-based Third Avenue International Value Fund. Indeed, there's no more reliable way of earning dismal long-term returns than betting on what's hot. Consider some of the many ill-fated outbreaks of investor madness that have gripped Asia in recent decades: the giddiness over Japanese stocks in the late 1980s, the Hong Kong property bubble of the 1990s, euphoria over Chinese red chips in 1996-97, and the mad rise of Thai banking stocks before the carnage of the 1997-98 Asian financial crisis. Today, as always, there are pockets of mania that could well end in mayhem—from the Shanghai property boom to delirious foreign investment in overheated Indian midcap stocks.

For contrarians like Wadhwaney, 51, investing is a matter of avoiding manias and searching instead for bedraggled castoffs that are cheap precisely because the in-crowd won't touch them. "I don't buy prime merchandise," he says. "I buy stuff that's fraught with discomfort. I buy some terrible things." Yet these terrible things produce terrific returns. Wadhwaney's $1.26 billion mutual fund has racked up annualized gains of 22.5% since its birth three-and-a-half years ago—double the rise of a comparable index of non-U.S. stocks. (I've entrusted his firm, Third Avenue Management, with some of my own money for nearly a decade, though I don't own any of the stocks mentioned in this column.) At times, his willingness to buy what everyone else regards as toxic can seem almost reckless. In 1998, Wadhwaney—then running a hedge fund for Third Avenue—loaded up on imploding shares of the Noble Group, a Singapore-listed shipping and commodities firm that was losing money; he subsequently rode it to a fiftyfold gain. "The Asian crisis was just madness," he says. "It was wonderful."

These days, as usual, Wadhwaney thinks the herd is heading in the wrong direction. For example, although he grew up in Bombay, the center of India's boom, his fund doesn't own a single Indian stock. "People are paying ridiculous prices on promises of the future," he says. As Wadhwaney sees it, "the future is an imponderable. Most people's prognostications are a very poor use of time." Nobody can reliably predict which way the stock market will move or what a company's earnings will be, he argues, so the key is to focus on the present, appraising a company's existing assets and buying the stock only if those assets seem to be grossly undervalued. Typically, he then holds the stock for years until it comes right, refusing to sell unless it gets "egregiously overvalued." He explains: "Most people want action now. We don't care. Trading is so stupid—it's the enemy of good investing."

So what should the patient bargain hunter be buying in Asia today? Wadhwaney suggests looking at out-of-favor Japanese stocks such as Asatsu-DK Inc., an advertising agency that's "extremely cash rich," well positioned in an industry that's ripe for consolidation, and "very cheap." He also likes Nichicon Corp., a producer of aluminum capacitors—ubiquitous components in electronic products. It's an acutely cyclical industry that's deeply depressed, but Nichicon—like every company Wadhwaney owns—is so well capitalized that it will undoubtedly survive while he waits for the downturn to pass. In the meantime, he adds cheerfully, "it could get a lot worse. I hope it does, actually, because I'll be able to buy more."

Elsewhere, Wadhwaney has been snapping up shares in a Taiwan venture-capital firm, Hotung Investment Holdings, which trades at less than half the value of its net tangible assets. He also likes BIL International, a Singapore-listed company that owns thousands of acres in Hawaii that it may or may not succeed in developing; a hotel chain in London; and royalties from oil and gas production in the Bass Strait. Based on his "ultraconservative" appraisal of these hard-to-value assets, Wadhwaney thinks the stock trades for at least 30% less than it's currently worth. Then there's Liu Chong Hing Investments, which owns an exceptionally well-financed Hong Kong bank, as well as property in mainland China. The stock, listed in Hong Kong, trades at a 50% discount to its net asset value. It could take years for other investors—or acquirers—to notice how undervalued it is, but when you find something this cheap, says Wadhwaney, "you buy and buy and buy—and then you wait."

Tempted? Probably not, if you're as impatient as most investors. But Wadhwaney doesn't mind if you don't share his enthusiasms. As he puts it, "I don't like hanging around in crowded rooms."