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Lunch at the Tribeca Grill with: Christopher Tsai

Published by The New York Sun on 2005-07-20

When Christopher Tsai was 11, he took $100 that he'd earned from gardening chores and bought five shares of a re-insurance company called NAC Re. He sold those shares in less than a year for $125.

Now, 19 years later, Mr. Tsai handles a portfolio of $17 million, and he's still making handsome profits.

"From that first trade, I thought of nothing else but finance," Mr. Tsai said. "I couldn't wait to come home from school to read Value Line and other literature about markets. Every day I ordered annual reports of companies. I began making modest investments. It was an obsession."

If Mr. Tsai seemed precocious -- after all, how many 11-year-olds have heard of stock markets, let alone invest in them -- his father, Gerald Tsai Jr., spurred him, however quietly.

The older Mr. Tsai, now 75, was a towering figure on Wall Street. Shanghai-born and Boston-educated, he'd transformed Fidelity Investments into a mutual-funds juggernaut. He then led American Can -- the first Chinese-American to head a Dow Jones 30 company. Mr. Tsai went on to become CEO of Primerica Corporation, and later of Delta Life Corporation.

"It was very helpful having him around," the son said. "He educated me about price/earnings ratios and other arcane terms at an age when most other kids were still learning geography and grammar."

Wasn't it, well, difficult having a legend for a father? Wasn't there pressure, however subtle, to match his accomplishments?

"No," Mr. Tsai said. "That's because I have never competed with my father. In any case, how do you compete with a legend? I'm very close to my father -- he's my mentor."

Mr. Tsai acknowledged, however, that sharing a surname with his father has indeed been invaluable. It opened doors for internships at companies such as Gabelli Asset Management. And after his graduation from Middlebury College in Vermont, it got him into Bear Stearns, where he worked as an equities analyst.

And when Mr. Tsai decided to open his own company in 1997, Tsai Capital Corporation, his name helped him to raise $1 million from friends and family members. Those friends included a Chinese restaurateur who'd entrusted Mr. Tsai with $400,000 while he was still in his teens, an investment that the youngster multiplied several fold.

These friends and family members have done well by their investments. Mr. Tsai manages separate accounts for 18 clients; the minimum investment for individuals is $250,000, and, for institutions, $1 million. Chicago-based Morningstar has given Tsai Capital a much coveted four-star rating.

For the last five years, Tsai Capital has brought investors 11.34% annually, gross of fees, and a cumulative return of 71.13%. Over the same five-year period, Standard & Poor's 500 Index registered an 11.32% decline, and Russell's 1000 Growth Index lost 42.11% cumulatively.

What is the secret of his success?

"I'm long-term oriented," Mr. Tsai said. "And I'm extremely painstaking about research."

That means Mr. Tsai spends close to 50 hours studying each of the 19 large-cap companies in his portfolio. These companies are culled from a master list of 2,000 America-based multinationals. The in-depth research means digging into companies' balance sheets and business operations to identify "undervalued growth stock-investment opportunity that others have missed -- and therefore mispriced," Mr. Tsai said.

Translation: He identifies companies with a revenue growth of 5%-plus over a five-year period; he's drawn to those that have high return on equity and return on invested capital; he's attracted by those organizations that have above-average profit margins, and whose projected annual earnings are at least 10%.

This usually gives him a cohort with high brand-name recognition and customer loyalty. His method also turns up companies with adept management, a history of solid corporate governance, transparent accounting practices, little debt, and few intangible assets.

"I follow a conservative, fundamentals-based strategy," Mr. Tsai said.
Such a strategy involves buying stocks of no more than 20 companies at any given time. About 25% of his portfolio changes each year, Mr. Tsai said. Investments are sold only when a company's fundamentals are expected to significantly deteriorate, or when its risk factor increases.

"It takes a tremendous amount of self discipline to stick to the strategy," Mr. Tsai said, noting that he prudently -- and, as it turned out, wisely -- stayed away from the high fliers during the go-go Internet years. His study of markets had shown that comparable market excitement had resulted in the "bubbles" of electronics stocks in the 1970s, and of biotechnology stocks in the 1980s. When a company is selected by Mr. Tsai, it's a safe bet that it's gone through exhaustive scrutiny.

Flowing out of the Tsai method of selection, his top 10 holdings right now include Walgreen, Wal-Mart, Johnson & Johnson, Bed Bath & Beyond, UPS, Wrigley, and Gillette. Two of those companies -- Johnson & Johnson, and UPS -- are among the six non-financial corporations with a triple-A rating by S&P.

"I do the worrying for my clients," Mr. Tsai said. "Tsai Capital has produced the high returns with a level of volatility [beta] or risk that is about half of the market's. I'm very risk averse. Preservation of capital is number one for me."

Would he have gone into the finance business had his last name not been Tsai?

Mr. Tsai smiled.

"Of course," he said. "I love what I'm doing. I can't imagine doing anything else. And whether my father stays in finance or not, I certainly will."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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