Aristotle’s advice: Q325 letter to partners

Dear partners,

Year-to-date as of September 30 2025, Stone Sentinel Capital (“SSC”) made 45.3% while the S&P 500 Index (“S&P”) gained 14.8%. Figures are gross returns in USD. Year-to-date returns are not annualized.

The S&P has bested the majority of active investors. Investors, no matter how high-flying, eventually succumb to gravity that is the S&P.

Your manager cannot fly and is contented to walk slightly ahead of the S&P.

Although returns cannot be guaranteed, your manager targets an unspoken goal of at least 10% excess annual returns over the long run.

Practical wisdom

Charlie Munger quipped that “the trick is to learn most lessons from the experience of others … The more hard lessons you can learn vicariously rather than through your own hard experience, the better.”.

Your manager agrees.

Yet the vast majority, including your manager, are less intellectually competent than Munger.

We may read the same books that he did but learn much less.

Thankfully there is a saving grace.

We can learn from experience.

Your manager thinks that experience is most effective for some lessons.

Readers of the GFC know about the near-60% decline in the S&P over 18 months.

But would they comprehend the invasive self-doubt common among investors when assets more than halved?

Would they behave right when the world goes crazy around them?

Knowing the right behavior is not the same as behaving right.

The bridge between the two is the experience of reality.

Struggling with how best to apply the knowledge of the right behavior in the real world, volatile or otherwise, is the only way to learn how to behave right.

The struggle is essential for phrónesis, which Aristotle differentiated from sophia.

Sophia is theoretical wisdom. It refers to universal and unchanging knowledge in domains such as science and mathematics.

Phrónesis is practical wisdom. It is about variable and contextual knowledge necessary for living well in the real world.

Sophia is about truths in ideal states. Phrónesis is concerned about the application of truths within the boundaries of reality.

If sophia is represented by theoretical physics, phrónesis would be analogous to engineering.

Aristotle thought that the happiest life was the contemplative life that had both kinds of wisdom.

In describing the happiest life, he might had inadvertently described how investors ought to think and behave.

Your manager thinks of the ideal state as owning a stock with:

• Certainty. Your manager’s analytical toolkit must be applicable to the nature of the business.

• Low downside risk. The stock is unlikely to decline in a large range of future scenarios.

• High rewards. The stock can appreciate significantly in some future scenarios.

The practical state is far from neat definitions.

Businesses change. Competitors merge. Managers are replaced. Vendors are bought.

The brutal reality of capitalism constantly alters risk-reward equations. Mostly gradually. Sometimes quickly.

Cognitive biases complicate the observation of reality.

Months and years of research and ownership equate to massive invested effort, biasing the investor to own the stock even when its reality indicate otherwise.

Fortunately previous letters have outlined a starting point to avoid bias.

James Carse advocated being open to possibility and change by not having strong expectations of specific outcomes.

The stronger the expectations, the more dread experienced when they differ from reality, the slower the responses to reality.

Building on Carse's ideas, your manager attempts to moderate between strong and weak expectations.

Commit to conviction and yet be ready for change.

This is not different from what F. Scott Fitzgerald wrote:

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”

The investor is only agile to reality by neither committing blindly to a thesis nor abandoning it easily.

Doing so is intellectually and psychologically challenging because it opposes the inherent human need for consistency.

Paraphrasing from the late Munger, investing is never intended to be a majority sport.

Unforced and forced errors

Your manager screens roughly 80,000 global stocks to pick 5-6 positions. When exploring ideas, your manager does more skipping than digging.

Discussing ideas that are skipped and previously owned ought to be as important as discussing current positions.

FINV and CLA are former core positions worth discussing because each illustrates a distinctive form of error.

FINV is an example of an unforced error, which is avoidable and can be perceived as a variable expense in investing. Your manager deserves tomatoes for making unforced errors.

CLA represents a forced error, which is unavoidable and can be seen as a fixed expense. Investors are bound to make forced errors.

However, errors may not result in significant loss of capital.

Your manager prizes certainty above all.

Hence positions are sold at the moment of uncertainty to minimize losses or, if your manager is lucky, take profits.

More importantly, selling uncertain stocks leaves more resources - both financial and intellectual - for other more certain stocks.

The benefits are two-fold. The avoidance of loss is obvious. The potential for profit should not be neglected either.

The shifts between certainty and uncertainty can happen at any time.

Your manager spends most of his waking hours thinking about core positions and is willing to update convictions at any time.

All these thinking mostly do not result in significant changes to core positions. However, your manager is decisive and moves quickly when shifts are warranted.

Your manager does not dread updating convictions and exiting positions. There will always be new ideas. If not now, there surely will be.

What your manager truly dreads is the inability or unwillingness to face reality and react appropriately.

As mentioned, FINV illustrates an unforced error on your manager's part.

Your manager was initially impressed by the company’s technological lead in connecting small-ticket borrowers to lenders and low capital needs that supported near-20% ROE. With near-50% executive-insider ownership and single-digit PE, the stock appeared to have the potential to be a home-run.

However, another round of thinking after owning the stock revealed that your manager may had underestimated the extent of competitive intensity.

FINV seems to have few competitors now. Is its technological lead so strong that peers are discouraged from competing? Or does the slowdown in consumer spending make little economic sense for peers to compete?

The latter appeared more convincing than the former. If consumer spending were to improve in China, the low barriers to entry in the industry would encourage a flood of competitors vying for market share.

FINV’s technological lead did not appear sufficient to maintain market share should economic conditions improves.

CLA is an example of a forced error.

The stars appeared to have aligned for the turnaround of CLA. Activists with track records and large stakes revamped the capital structure and sold underperforming segments. The remaining business is a direct-to-consumer software subscription business that had been growing slowly and priced at a single-digit FCF multiple.

Yet the activists and their competent CEO appeared to have missed the mark on accelerating growth. Growth had reversed to contraction without a credible plan for improvement.

That FINV and CLA were errors does not mean they will be so in the future. Your manager is willing to own them again should there be sufficient certainty.

Portfolio update

SSC is currently invested in 5 stocks that are listed in public markets in Hong Kong, Malaysia, Spain, and the United Kingdom.

As mentioned in previous letters (here and here), Grupo Empresarial San José (GSJ) is still a core holding.

A recent addition is Able Engineering Holdings (“Able"). Able is engaged in building construction and RMAA (repair, maintenance, addition, and alteration) projects for Hong Kong public works.

Able trades below cash and 6x earnings despite double-digit growth in revenue and net income for the past 2 years. Fundamentals seem strong with double-digit ROE, stable FCF, and consistent and growing dividends since 2022. Topping off the story is a roughly 9% dividend yield.

The catch may be an office building that is carried on the books at roughly the same value as Able's market value.

The building was developed at the cyclical peak and has already been impaired once because of near-record high vacancy rates (17%) in the Hong Kong office market. Kowloon East, where the building is, reports even worse vacancy at 24%. Fears of additional impairments appear to depress the stock.

The stock appears to offer substantial upside even considering worst-case impairments.

A FCF multiple of 8x seems conservative for Able that has a six-decade operating history, government-issued licenses for large public housing projects, and strong growth of near-3x EBIT and 2x net income in past 3 years supported by strong government spending.

Applying that to normalized FCF of HKD 350m results in a target of 2.7b market value (vs 1.4b today).

The impaired office building is held at 1.34b on the balance sheet after an initial 13% impairment. Another 25-35% impairment, if materialized, will match severe GFC-style downturns.

The severe stress test would shave 380-540m off the target market value, leaving 2.2-2.3b left and implying plenty of upside and substantial margin of safety.

It’s unlikely for Hong Kong offices to remain in a permanent trough given the region’s dynamism and role as a key financial center for China.

Geoffrey West, in his seminal work “Scale”, wrote about how cities do not die like companies and biological organisms do. Cities are social and informational networks powered by human interaction and innovation. Because cities continuously import resources, reinvent themselves, and adapt, they are far more resilient than living beings and most companies.

Further upside may be warranted when leasing and sentiment improves in the office market. China’s ambitious plans to integrate Hong Kong with the Guangdong–Hong Kong–Macao Greater Bay Area (GBA) will result in greater demand of public housing, directly supporting Able’s business.

Another recent addition is Protasco.

Listed in Malaysia, Protasco is a micro-cap conglomerate with 10 segments. There are only 3 core profitable segments that are masked by losses from non-core segments.

The most important segment is road maintenance underpinned by long-term concessions with the federal government and state authorities. Protasco has more than 20 years of operating history and maintains over 16,000km (~10,000 miles) of roads. The maintenance segment is supported by two other segments - engineering & consultancy services, and trading & manufacturing which supplies pavement materials (asphalt premix, bitumen), construction materials, and highway safety equipment.

Core segments accounted for 89% of FY24 revenues but an astonishing 125% of FY24 net profit. This is because of losses from 4 out of the 7 non-core segments.

Chairman and co-founder Dato’ Sri Ir. Chong Ket Pen (Chong for short) is the key capital allocator and the largest insider with a 30% stake.

He clearly had misallocated capital but appears to be righting the ship.

In an effort to boost low valuations (2.4x PE, 0.4x book), management led by Chairman Chong has been evaluating options to monetize non-core assets. The first non-core asset sold earlier in 2025 was a private university.

More sales of non-core assets are expected. Your manager is particularly interested in ~100 acres of freehold land in De Centrum City, anchored by universities within a 10 km radius and about 20 km south of Kuala Lumpur city center. Recent transactions imply the land is worth MYR 109-174m (vs book value of 91m).

At about the mid-point of estimates, the land bank is worth the entire market capitalization of Protasco.

Valuing the core segments (with 70m normalized earnings) at an undemanding 7x earnings results in 490m. Adding the low-end estimate of the land bank and assigning a zero to other non-core segments lead to roughly 600m (vs 130m market cap and 200m EV).

Protasco also used to pay dividends until 2019. A one-cent dividend would cost about 5m, which seems well-covered by 184m cash and 50m normalized FCF. 190m debt seems similarly well-covered too.

If dividends resume, the company would send another signal that it’s on the right path to proper capital allocation.

Your manager welcomes questions and comments at mg@stonescap.com.

At your service,

Marcel Gozali