INVESTMENT ADVISOR MAGAZINE - - June 2005

Catching Up With...Christopher Tsai
by William Glasgall

Chris Tsai started managing money at the age of 16 when he convinced the owner of a Chinese restaurant in his hometown of Greenwich, Connecticut, to let him pick some stocks. But Tsai was no stranger to the business. As the son of legendary asset manager Gerald Tsai, Chris grew up reading Value Line and stock charts.

Fourteen years later, following internships with his father and Mario Gabelli and a stint as an equity research analyst at Bear Stearns, the younger Tsai is now running Tsai Capital, a New York investment company that manages separate accounts. His large-cap equity growth account has turned in an average annual return of 10.15% for the five years ended March 31—some 1,300 basis points ahead of the Standard & Poor’s 500—although over the past 12 months the account was down 7.29%, versus a 6.69% gain for the S&P. Tsai currently manages $15 million in 18 accounts. He spoke with Editorial Director William Glasgall.

Glasgall: You run a concentrated portfolio.

Tsai: My goal is to wind up with a portfolio that is 20 of my best ideas. I start with a universe of 2,000 companies, the 1,700 large and mid caps in the Value Line book and some small caps as well. Of these, about 50 make the cut, and then it’s a question of valuation. I’m very skeptical.

Is there one valuation metric that you depend on the most?

I like to analyze companies based on discounted cash flow. I use a 12% discount rate. The value of a business is the present value of cash that can be taken out over the business’s life, plus any other net asset value like non-income-producing real estate. I won’t buy a stock unless it’s selling at a 15% to 20% discount to my model.

Which are some of the stocks you like?

I have been buying AIG. I’m very concerned [about allegations of corporate accounting wrongdoing], but the valuation, even with a restatement of book value, is more than reasonable. I own U.S. Bancorp. It is growing earnings in excess of 15% a year—great for a bank. It has a 20% return on equity and a 4.3% dividend yield. It is also a takeover candidate. But it’s selling at 11.5 times earnings. This is deep value.

How long do you hold stocks?

My portfolio turnover is 25% a year, on average.

But you’re a growth manager.

I don’t think growth and value can be separated. The greater the growth, the greater the value.

Do you visit companies?

Before I make an investment, I will offer to meet with a company. I won’t speak with a company after I buy the stock. I’d rather talk with their competitors. It’s a lesson Edward Johnson II [the founder of Fidelity Investments] taught my father.

Does your father still give you advice?

A lot. We still have conversations every week about the market.

Performance as mentioned in the article reflects the deduction of all trading expenses and is before advisory fees (in conformity with industry presentation standards). The client's return will be reduced by the advisory fees that Tsai Capital charges for the management of an account. The reported data reflects past performance. The principal value of an investment will fluctuate. Past performance may not be indicative of future investment results. Past performance does not guarantee future results. Performance changes over time and currently may be significantly different than stated. For current performance information and fees, please call us or visit www.tsaicapital.com.

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