Founders will continue changing the world
The best companies in the world today are founder-led
Their success has come from a fundamental structural difference between founder-led companies, versus the usual run-of-the-mill type. It comes down to the very fabric of what motivates a company and how decisions are made. The corporate virtues of drive and alignment are difficult for most to get right; they cannot be bought with money, they can only be proliferated by individuals who possess them.
Many try to replicate the feeling of ownership with short-term monetary incentives, but it simply is not the same. Ultimately, a bed is best made by those who will sleep in it.
Our philosophy is to invest in those with skin in the game; a genuine vested interest (more than just annual bonuses) to see a company succeed over the long-term, who also have the power to make bold decisions about the strategic direction of the company when necessary. We have found this combination of long-term drive plus freedom to make bold decisions is a powerful propellant for corporate success.
We are particularly fond of founders who create new products and services. These founders push the boundaries of how we live and work. They are hungry to succeed, to create a legacy. These are the founders we want to join forces with over the long-term; not those who are too content, happy to sit on their laurels, or worse yet, start-up types who look to flip and make a quick buck. To be clear, we are not start-up investors; there are plenty of opportunities to invest in founders creating new products and services via public markets.
The opportunity in new products and services extends beyond just technology. Our philosophy is to find new ponds from all industries and to maintain a balanced spread – the common theme remains hungry founders, creating new markets.
Risk & return
Risk comes from not knowing your investments, not the volatility of price movements
It is easy to become overly enamoured with headline return numbers. Just as most car enthusiasts gravitate to the time it takes to reach 100km/hr, the quality of brakes and airbags can be easily overlooked. Speed is nothing without safety. Investing is no different. There is no sense in outsized returns if the risk borne is exorbitant.
There are very few free lunches in financial markets, but our goal is to take the biggest bite that gives the least amount of indigestion. Our philosophy is based on the premise of any good sports team – a strong defence will lead to good offence.
Let us not misunderstand though, risk is very different to volatility. Risk is not volatility, despite what modern financial theory suggests. To us, risk is about business, its general uncertainty and issues that may adversely affect the actual prospects of a company – this is the real risk of any investment. Conversely, the concept of volatility is a pure mathematical measurement as defined by financial theory. It focuses exclusively on the standard deviation of stock price movements; a separate concept from the underlying happenings of the business.
The distinction is important as stock price movements do not always reflect the true underlying prospects of a company. Markets always overreact, prices always swing wildly; what may appear as a volatile company, may in fact be a low-risk investment over the long-term. Volatility, like echoes in a room, dissipate as the time horizon lengthens.
The converse is also true. Opportunities can appear as low volatility investments, but actually present great risk over the long-term. Large, institutionalised companies with bureaucratic decision-making process possess inherently low volatility but can represent high risk over the long-term if they become stagnant and unwilling to explore new opportunities. Not taking enough risk is risky in itself.
This is why we invest in founder-led companies. In particular, those that are creating new products and services. These are the first movers who face less competition in their industries. In other words, as long as a sensible price is paid, all else equal, it is less risky to invest in future-orientated companies because they face fewer competitors, have more options to grow, and are not subject to price wars which characterise commoditised industries.
Hungry founders. Creating new markets. Buy these companies at reasonable prices. These principles will continue to be a staple of how we balance risk and reward.
Growth & value
Growth and value relate only to price; quality is what determines long-term success
Growth and value investing are two sides of the same equation. It comes down to price. They are in fact equivalent concepts striving for the same outcome, the goal being to buy high quality companies. The only difference is the sliding scale to which each style is willing to compromise on price. Improvements in information dissemination today has led to increased market efficiency, meaning it is harder, but not impossible, to find quality companies at large discounts. More competition to find cigar butts means rarer opportunities for bargains.
Market psyche flips between different states like tidal flows; there will be years when prices are high, which then over time recede back in the opposite direction. But these cycles span years, shifting imperceptibly like tectonic plates, like a rope that skips once every few years. Waiting and timing the entry point perfectly when growth flips to value, or vice versa, is impossible. Moreover, the opportunity cost of waiting for years to time the skipping rope can be costly, even if it is eventually done perfectly. We choose to participate and adjust in real-time, rather than sit on the sidelines and wait years for the perfect timing that may never come.
Our philosophy is to invest in quality companies and enter when their prices are sensible. A poor-quality company at a deep discount is still a poor company. Price alone is not the sole determinant of investment success. Quality is the most important factor that determines long-term success. In our investment universe of founder-led companies, at any point in time, there will exist some that are overpriced and some underpriced – we shift our capital depending on which state the market is in. We have both ‘growth’ and ‘value’ companies in our portfolio, and we skew our allocation based on the individual opportunities that arise. Our style is not rigid; it is adaptive. But above all else, the investment must meet our hurdles for quality.
Concentration & diversification
The world’s top 800 companies have created all the wealth over the past 30 years
We make fewer, but more concentrated bets. Our philosophy targets the opportunity set available to investors – evidence shows only the top 1% of all companies can generate significant outperformance over the long-term, about a third generate positive returns, and the rest destroy wealth over the long-term. Our philosophy is to target the top 1% of companies by being highly concentrated in our portfolio. This reflects the level of confidence we require before we enter into a position. We only take big bites, not small nibbles. If we are not prepared to take a full swing, then we would rather wait for the next opportunity.
Diversification is like alcohol. The first few drinks are great but keep continuing at your own peril. The same is true for a portfolio. There is an optimum number of companies in a portfolio that can achieve bare minimum diversification. Every additional stock above the optimum has diminishing value and drags on performance. Constructing a portfolio is much like building an airplane – use the least number of components to keep the weight down, but just enough to achieve safety and aerodynamic airflow.
Instead of diversification by the number of stocks we hold, we think about diversification by the number and types of customers we service. Although the number of companies we hold is small, they service a wide variety of customers. Our approach is to achieve maximum customer spread with the least number of investments. Some investments may service customers ranging from individuals, small business to enterprises, thus providing excellent spread across customer types. Others may specialise in certain industries or geographies. It is the overall customers belonging to a portfolio that provide shelter from risk, not necessarily the number of companies. Put simplistically, it is possible to achieve effective diversification with only a few companies that service a wide range of customers.
Our philosophy is to be concentrated as opposed to scattered.
A balanced portfolio must also address the risk of styles coming in and out of favour, which is why we toggle between those companies the market considers ‘growth stocks’ and ‘value stocks’, depending on the prevailing conditions. Our approach is the same for industries, which can fall in and out of favour capriciously. Cultivation and maintenance are necessary to ensure balance is retained.
Through this all, a common theme remains true – they are all founder-led companies.