So instead of adding another opinion to the pile, I went back to the source — the investors who have actually lived through the crashes, not just read about them. People who have real skin in the game, real track records, and real frameworks built over decades of being wrong, losing money, and coming back sharper.

First up: Paul Tudor Jones.

A Quick Disclaimer Before We Start

I want to be upfront about something. I am a value investor with a quality tilt. I don’t time markets, I don’t trade macro, and I have no interest in predicting the next crash.

But every now and then, an interview comes along that stops me in my tracks.

This is one of them.

Paul Tudor Jones recently sat down with Patrick O’Shaughnessy. Two intellectually serious people, talking honestly about markets, history, and risk. No performance, no hot takes. Just decades of hard-won pattern recognition being laid out in plain language.

I’m not sharing this because I want to trade like PTJ. I’m sharing it because understanding how the best minds analyse market structure and historical bubbles makes you a better investor regardless of your style. Even as a long-term value investor, ignoring the macro environment entirely is its own form of arrogance.

So here’s what I took away.

Who Is Paul Tudor Jones?

If you’ve never heard of him, here’s the short version: he is arguably the greatest macro trader alive.

He founded Tudor Investment Corporation in 1980, starting from the cotton trading pits. He called and profited from the 1987 Black Monday crash, one of the most violent single-day collapses in stock market history. In 2008, he was inducted into the Hedge Fund Manager Hall of Fame alongside George Soros, James Simons, and Seth Klarman.

He doesn’t just manage money. He thinks about markets at a structural level that very few people can match.

When PTJ speaks, it’s worth slowing down and listening carefully.

Lesson 1: Every Big Crash Has the Same Root Cause

PTJ’s starting point is deceptively simple: almost every major market accident traces back to too much leverage, usually derivative-inspired.

1. 1987 was 100% portfolio insurance. Without it, a routine 15% correction. With it, a historic crash.

2. 1998 was Long-Term Capital Management. A massively leveraged derivatives book, wrong-sided, that nearly took down the financial system.

3. 2000 was different. No derivatives trigger. Just a slow, relentless cascade of IPO unlocks flooding the market with new equity supply, and no buyers left to absorb it.

Today, he sees echoes of 2000 more than 1987.

For a decade, buybacks have been quietly retiring 2-3% of market cap every year, keeping supply tight and prices supported. That math is now reversing. Hyperscalers are diverting cash to capex, a wave of IPOs and unlocks is coming, and the new supply will largely be funded out of existing tech stocks. His base case: a rolling top, not a sudden crash.

Lesson 2: The Price You Pay Into an Index Determines Everything

This is the part that should give every long-term investor pause, myself included.

The S&P 500 is one of the greatest wealth-creation vehicles in history. But that spectacular long-run track record comes with a critical asterisk that rarely gets mentioned. Those returns are an average across 100 years, including long stretches where you could buy the market at P/E multiples of 6, 7, or 8. At those valuations, the math of compounding works powerfully in your favour.

The problem is entry point. PTJ is direct: buying the S&P at today’s P/E of 22 has historically produced negative 10-year returns. That’s not a forecast, that’s what the data shows across history. Valuation at entry is destiny over the long run.

The index isn’t broken. The price you pay for it is.

This is why as a value investor I keep coming back to individual stock selection with a margin of safety rather than broad passive exposure at these levels. Owning great businesses at reasonable prices remains, in my view, the most reliable path through whatever environment comes next.

Lesson 3: The Mean Reversion Math Is Sobering

US stock market cap is now 252% of GDP. In historical context:

Every significant bear market since 1970 has seen a mean reversion roughly every 10 years back to longer-term historical P/E levels. If that happens here, PTJ estimates a 30-35% decline in equities.

But it’s the downstream consequences that make this particularly dangerous. A 35% drop on a market worth 252% of GDP translates to a wealth destruction equivalent to 80-90% of GDP. Capital gains taxes, roughly 10% of US federal revenues, collapse toward zero. The fiscal deficit blows out. The bond market gets hit. And you get a self-reinforcing negative spiral that extends far beyond stock portfolios into the real economy.

His conclusion: we are clearly in a sovereign debt bubble, and as a country, the US has never been more over-equitized than it is today.

What I Take Away From This

I’m not changing my investment approach based on this. I’m not going to cash, I’m not shorting the market, and I’m not trying to call the top.

But I am being more deliberate about what I own and what I pay for it. In an environment like this, the quality of the business and the price you pay matters more than ever. Overpaying for mediocre businesses has always been a mistake. At 252% market cap to GDP, the margin for error is simply thinner than it has been in a very long time.

PTJ isn’t telling you to panic. He’s telling you to think carefully about the structure of what you own.

That’s a lesson any investor, trader or not, can use.

More lessons from other great investors coming in the next few issues.

That’s Buffett’s mental model for a great business.

At the 1995 Berkshire Hathaway Annual Meeting, a shareholder asked Buffett and Charlie Munger what fundamental rules of economics they habitually got right. Buffett’s answer cut straight to the point:

“We’re trying to find a business with a wide and long-lasting moat around it, protecting a terrific economic castle, with an honest lord in charge.”

Three elements. Castle. Moat. Lord. Simple enough to remember, powerful enough to filter out 95% of investments.

What creates a moat?

Buffett listed several sources. A moat can come from being the lowest-cost producer in an industry. It can come from a natural franchise built on service. It can come from a brand sitting in the consumer’s mind. Or from a genuine technological edge.

But here’s the catch he immediately added: all moats are subject to attack. Capitalism is a system designed to erode advantage. If you have a big castle, people spend their careers figuring out how to cross your moat.

Munger translated this cleanly: moats are essentially advantages of scale — economies of scale, market dominance, scale of intelligence. The honest lord maps to low agency costs in economics textbook language.

The distinction that really matters

The most useful thing Buffett said in that exchange wasn’t about moats in general. It was about types of moats and which kind you want to own.

He drew a hard line between two categories of businesses:

Type 1

Be smart once

One great decision protects the castle for decades. Even poor management can’t ruin it. Think: TV network affiliates in the 1970s, dominant newspapers in a one-paper town.

Type 2

Stay smart every day

Competitors are in your store tomorrow, reverse-engineering your edge. You can never coast. Retailing is his canonical example and the moat leaks unless you keep digging.

The newspaper publisher’s honesty

Buffett shared a story that stuck with me. A southern newspaper publisher was doing extraordinarily well. Someone asked him the secret to his success.

His answer: “Monopoly and nepotism.”

He wasn’t being self-deprecating. He was being accurate. He understood that the structural advantage of owning the only newspaper in a town, a Type 1 moat that overcame almost any personal deficiency. The moat did the work.

What this means for your investing

When you’re evaluating a business, Buffett suggests asking a few hard questions:

• Why is this castle still standing?

• What will keep it standing 5, 10, 20 years from now?

• How much does the moat depend on the genius of the current leader and what happens when they leave?

• Is this a Type 1 business (be smart once) or a Type 2 business (stay smart always)?

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Buffett’s ideal is obvious: terrific management at a terrific business. But when you have to choose between the two, always pick the terrific business.

The moat does most of the work. The lord just has to not blow it.

Source: 1995 Berkshire Hathaway Annual Meeting transcript. Buffett and Munger in conversation with shareholders.

Williams broke the strike zone into dozens of squares. He knew exactly where his sweet spot was. Wait for a pitch there, and he’d hit .400. Chase something on the lower corner, and he’d fall to .235. Same batter. Same ability. Just different discipline.

Buffett’s takeaway is one of the most important idea I’ve encountered in investing.

In baseball, patience has a limit. If the count goes to 0–2 and the ball clips the edge of the zone, you still have to swing. Otherwise, you’re called out. The game forces your hand.

In investing, there are no called strikes.

You can watch a thousand companies go by. You can sit still for months, even years. Nothing forces your move. The only way you get a strike is if you swing and miss.

That’s an enormous structural advantage.

And I’ve been throwing it away.

I’ll be honest. I fall into this trap constantly.

The market moves every day. Something is always going up. Someone in my feed is rotating into something new. A chart looks compelling. A thesis feels urgent. And before I know it, I’m swinging not because the pitch is good, but because doing nothing feels irresponsible.

This is exactly what Buffett warns against.

You’re standing there, bat on your shoulder, and the audience is yelling: swing, you bum. Over time, that noise gets inside you. The pressure isn’t from the game. It’s from the crowd. And the crowd is relentless.

What makes it worse is liquidity. Stocks can be traded in seconds, at almost zero cost. That should be a massive advantage: no lock-ups, no friction, just clean access to great businesses. But Buffett is clear: most people turn it into a disadvantage. They confuse the ability to act with the need to act.

A farmer doesn’t check land prices daily and wonder if he should sell. A private equity investor can’t exit on a whim. The illiquidity forces patience. Stock investors have no such constraint, so they manufacture urgency instead.

Buffett even said markets today exhibit far more casino-like behavior than when he was young and that the casino now resides in many homes and daily tempts the occupants. He wrote that decades ago. It’s more true now than ever, with apps designed to keep you trading and notifications engineered to create anxiety.

Rule #1, as he puts it simply: never lose money. Every unnecessary swing is a chance to do exactly that.

In his 2024 shareholder letter, Buffett put a number on it.

The arena we operate in has been and will be rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.

A couple. Not dozens. Not every quarter. A handful of great decisions across an entire investing life is enough.

A single winning decision can make a breathtaking difference over time. Berkshire’s Apple position. Coca-Cola. American Express. These weren’t the product of frantic activity. They were the product of waiting, sometimes for years and then swinging hard when the pitch was right.

As Buffett wrote in the letter: mistakes fade away; winners can forever blossom. What matters isn’t your batting average. It’s your slugging and the magnitude of the right calls, not the frequency of all of them.

So here’s the reframe that I keep coming back to.

Inactivity is not laziness. Waiting is not weakness. Doing nothing when pitches are bad is not a failure of discipline. It is discipline.

The market will always be loud. There will always be something to trade, something to react to, something that looks like opportunity if you squint hard enough. The skill is in knowing the difference between a pitch in your sweet spot and one on the edge — and having the conviction to let the bad ones go.

Buffett once said that the problem isn’t that the pitches aren’t there. The problem is psychological. If you let the crowd get to you, you’ll swing anyway.

So the real question isn’t whether you know the theory.

It’s whether, when the noise is loudest and everyone around you is acting, you can stand there with the bat on your shoulder and wait.

That’s the game. And most of us, myself included, are still learning how to play it.

Each week I share a learning from some of the best investors. Sources this week: Warren Buffett’s Becoming Warren Buffett interview, Ted Williams’ The Science of Hitting*, and Berkshire Hathaway’s 2024 Annual Letter.*

A few years ago I realized something slightly embarrassing.

I could read earnings reports, follow company earnings calls, and build valuation models.

But whenever someone said something like:

“This AI data center requires 300 megawatts of electricity.”

…I had no idea whether that was big or small.

Mathematically I understood the number.

But I didn’t feel the scale.

And that’s when I realized something important.

Many good investors are not just good with numbers.

They are good at translating numbers into reality.

Why This Matters

Markets constantly throw numbers at you:

• gigawatts of electricity

• millions of tons of metals

• billions of dollars of investment

• thousands of acres of land

But if you cannot visualize those numbers, they remain abstract.

Your brain reads them, but they don’t mean much.

Experienced investors do something different.

They instinctively convert numbers into something real.

This habit makes the world much easier to understand.

The First Rule: Always Convert Numbers

Whenever you hear a number, try to translate it into something tangible.

For example:

Instead of thinking: “1 gigawatt of electricity”

Think: “Electricity for roughly 100,000 homes.”

Now the number becomes intuitive.

Or take oil.

Global oil consumption is roughly 100 million barrels per day.

One barrel contains 159 liters.

That means the world burns roughly: 16 billion liters of oil every day.

Suddenly the scale of the energy system feels very different.

This simple habit of translating numbers changes how you see industries.

The Trick: Memorize a Few Anchors

You don’t need to memorize hundreds of statistics.

You only need a few mental anchors.

Once you know these, you can estimate almost everything.

Electricity

1 kilowatt (kW) ≈ a hair dryer

10 kW ≈ peak electricity usage of a house

1 megawatt (MW) ≈ electricity for about 100 homes

1 gigawatt (GW) ≈ electricity for about 100,000 homes

Now when you hear:

“AI clusters may require several gigawatts of electricity.”

You immediately realize:

That is equivalent to hundreds of thousands of homes.

Oil

1 barrel of oil = 159 liters

Global oil consumption ≈ 100 million barrels per day

Which means the world uses roughly: 16 billion liters of oil every day.

That is the scale of the modern energy system.

Weight

Anchoring weight to familiar objects helps.

1 kilogram ≈ a laptop

10 kilograms (with loads) ≈ a suitcase

100 kilograms ≈ a person

1 ton ≈ a small car

So when a mining company reports 2 million tons of production, you can imagine roughly:

Two million cars worth of material.

Land

Area is another measurement people often struggle to visualize.

A useful anchor is the acre.

1 acre ≈ roughly a football field

100 acres ≈ a golf course

So if a solar farm requires 5,000 acres, you can picture: 5,000 football fields of land.

The Second Level: Understanding Systems

Once you get comfortable translating numbers, the next step is understanding systems.

The world economy runs on a few enormous systems:

• energy

• food

• metals

• transportation

• infrastructure

When evaluating an industry, a useful question is:

How big is this relative to the system it belongs to?

This is where investing starts to become interesting.

Example: Turning One Number Into a System

Now let’s apply the framework we just discussed.

Suppose the industry eventually builds 100 GW of AI data center capacity by 2030.

At first glance, this is just a number. But the whole point of the mental model we discussed earlier is to translate numbers into real-world systems.

So let’s unpack it step by step.

Step 1: Translate the Electricity

A useful anchor is:

1 GW ≈ electricity for about 100,000 homes

So if the industry builds 100 GW of AI infrastructure, that is roughly equivalent to the electricity consumption of:

10 million homes.

Already the picture changes. This is no longer just a technology story.

It is also a power infrastructure story.

Step 2: Translate the Compute

Next, we can ask how much compute this power might support.

A modern AI accelerator typically consumes roughly 700 watts, but once we include servers, networking, cooling, and power overhead, the all-in system power can be closer to:

1.2–1.5 kW per GPU-equivalent.

If we divide 100 GW of power by roughly 1.3 kW per GPU-equivalent, we get:

around 70–80 million GPU-equivalents.

Now we are no longer talking about thousands of chips.

We are talking about tens of millions of high-performance accelerators.

Step 3: Translate the Hardware Spending

High-end AI GPUs today can cost somewhere in the range of $25k–$35k.

If you multiply that by tens of millions of units, the implied hardware spending becomes enormous.

A useful investor rule of thumb is:

1 GW of AI capacity roughly corresponds to $20 billion of GPU hardware.

Which means 100 GW could imply $2 trillion of accelerator hardware over time.

This is one reason the AI infrastructure buildout is attracting so much attention across the semiconductor industry.

Step 4: Translate the Physical Infrastructure

The story does not stop with GPUs.

AI data centers are typically built in large campuses, often ranging from 250 MW to 1 GW each.

If the industry ultimately deploys 100 GW, that might require something like:

100 to 400 large AI campuses globally.

Each of those sites requires:

• land

• buildings

• cooling systems

• substations

• grid connections

What started as a semiconductor story quickly becomes a global construction and energy story.

Step 5: Translate the Materials

Even the materials requirements become significant.

Electrical infrastructure alone can require roughly 20–40 tons of copper per MW.

For 100 GW (100,000 MW), that implies something on the order of:

2–4 million tons of copper.

For context, global copper production today is roughly 22 million tons per year.

So the AI buildout could represent a meaningful share of annual supply.

Step 6: The Hidden Bottleneck

There is another interesting layer to this system.

Even if demand exists for tens of millions of GPUs, the semiconductor supply chain cannot expand instantly.

Today, one of the most discussed bottlenecks is advanced packaging capacity, particularly technologies like TSMC’s CoWoS, which are required to assemble modern AI accelerators with high-bandwidth memory.

In other words, the pace of AI infrastructure deployment may depend not just on chip design or demand, but on something more specific:

how many advanced packages the industry can assemble each year.

Why This Exercise Matters

We started with one simple number:

100 GW.

But once we translated it into real-world terms, that number implied:

• electricity for 10 million homes

• tens of millions of GPUs

• hundreds of large data center campuses

• millions of tons of copper

• massive expansion of the semiconductor and power supply chains

This is the habit I wanted to highlight earlier.

When investors see a number, they should not stop at the number.

They should ask:

What system does this number imply?

Because once you learn to translate numbers into the systems behind them, you start to see the world and investment opportunities much more clearly.

A Habit That Changes How You Think

Over time this becomes automatic.

Whenever you hear a number, your brain asks:

• How big is this really?

• Compared to what?

• What physical resources are required?

Most people never build this habit.

But once you do, you start seeing the world differently.

Because investing is not just about analyzing companies.

It is about understanding how the real world works.

In the Next Post

Understanding scale is only one part of thinking like an investor.

Another important skill is learning mental models that help you make better decisions under uncertainty.

In the next post, I’ll share some of the frameworks that have influenced my thinking the most.

These include ideas like:

• second-order thinking

• opportunity cost

• inversion

• probabilistic thinking

They are simple ideas, but they can significantly improve how you evaluate investments.

How Buffett evolved from cigar butts to compounding machines, and why time is the friend of great businesses

This clip is taken from the same Terry Leadership Speaker Series lecture in 2001, where Buffett reflects on one of the biggest mistakes in his investing career and how his thinking evolved over time.

One of his most famous admissions is this:

Buying Berkshire Hathaway itself was a mistake.

At the time, it was a classic “cigar butt” investment — a struggling textile business that looked statistically cheap, with one last puff of value left.

Early in his career, Warren Buffett was deeply influenced by Ben Graham’s philosophy: buy things that are cheap.

He would look for what he called “cigar butt” stocks, discarded, ugly businesses trading far below intrinsic value, with just one last puff of value left. Statistically cheap, often unloved, and seemingly low risk.

And to be fair, it worked. Many investors have made a lot of money with this approach.

But over time, Buffett realised something important:

Cheap businesses come with hidden costs.

Even if you buy them at a discount, the underlying economics are often so poor that the gains are limited, temporary, or simply not worth the effort. Management quality is usually mediocre, reinvestment opportunities are weak, and the business itself continues to deteriorate.

In other words, you’re constantly fighting the business.

Buffett has since called this approach one of his biggest mistakes.

The turning point came with Charlie Munger, who pushed Buffett to shift from buying “cheap companies” to buying “wonderful businesses.”

The idea is simple, but profound:

A great business compounds over time.
A bad business does not.

Even if you pay a fair price, or what feels like a slightly expensive price, a high quality business with strong returns on capital, pricing power, and durable competitive advantages will continue to generate value for decades.

Meanwhile, a cheap business often stays cheap or worse, destroys capital.

This philosophy became the foundation of Berkshire Hathaway’s success.

It’s why Buffett moved away from textile mills and struggling companies, and into businesses like Coca-Cola, See’s Candies, and American Express.

The real lesson is not about valuation alone.

It’s about the interaction between price and quality.

A cheap price cannot fix a bad business.

But a great business can justify almost any reasonable price if held long enough.

For investors, this is a constant trap:

We are naturally drawn to things that look “cheap.”

But cheapness without quality is often just value illusion.

This idea is also what influenced me to start this blog in the first place.

Over time, I’ve come to realise that investing is not about finding what is cheapest, it’s about identifying what is truly great.

Since then, my process has become much simpler, but also much harder:

I keep reviewing my companies, asking one question, which of these are truly the best and most importantly, within my circle of competence?

• Not the cheapest.

• Not the most beaten down.

But the ones with the strongest economics, the longest runway, and the ability to compound over time.

I am still constantly reviewing my personal portfolio to ensure it is truly high quality, at least by my own standard.

Because in the end, returns don’t come from what looks cheap today, they come from what continues to get better over the next 5 to 10 years.

Time is the friend of great businesses, and the enemy of poor ones.

See you on the next one!

I am starting a new segment every Wednesday where I share how the best investors in the world think and invest.

We will learn directly from the best - beginning with the GOAT, Warren Buffett with a simple goal: to get better and help others do the same, and each post will be paired with short video clips so you can learn and watch at your own pace.

This clip is taken from one of Buffett’s best lectures at the Terry Leadership Speaker Series in 2001.

He famously started by testing the mic with “1 million, 2 million, 3 million”, which is quite funny to think about today because if he were doing it now, it would probably be “1 billion, 2 billion, 3 billion”.

More importantly, this lecture is one of the clearest explanations of intrinsic value you will find, and in my view, it captures how Buffett really thinks about investing.

Intrinsic value

Buffett defines intrinsic value as the present value of all the cash a business will generate from now until judgment day. At its core, investing is actually very simple.

“You are laying out money today to receive more money in the future. “

That is all investing is.

This is why a bond is easy to value, because the cash flows are printed and you know exactly what you will get.

A stock, however, is different. The cash flows are not printed, and that is where the job of the investor comes in. To turn that stock into a bond by estimating what it will pay you over time.

This applies to everything, whether it is Coca-Cola, a farm, an apartment, a machine, or even oil in the ground, because at the end of the day the only thing that matters is how much cash it will generate, when you will receive it, and how certain you are about it.

And if you think about Coca-Cola being worth over $100B, the real question is not what others think, not what the chart shows, and not what the market is doing, but whether you would actually pay that amount today for all the cash it will produce over the next 100 to 300 years.

That’s all for today!

I will be sharing more from this lecture and potentially from Berkshire AGMs as well, so if there is anything you want to learn from Buffett, Munger, Terry Smith or other top investors, let me know and I will try to find the best clips to cover.

Out of all the interviews Terry Smith has given, this is probably one of the best. William Green, the author of Richer, Wiser, Happier, is a superb interviewer who delves deep into Terry Smith’s early life.

In this post, I’ll skip over his investment philosophy, which has been extensively discussed by many authors on Substack, including myself. Instead, I want to share the lesser-known stories about him and the most important life lessons I’ve learned from this interview. Enjoy!

Sources: BILLIONAIRE BRIT by Richer, Wiser, Happier

Terry Smith is often mentioned in the same breath as Warren Buffett, and for good reason. Both share an unwavering commitment to fundamental analysis, a focus on high-quality companies, and a long-term investment horizon.

Yet, where Buffett embodies a life of understated simplicity, Smith embraces a decidedly more lavish existence. This stark contrast, evident in his residence on the luxurious island of Mauritius and his passion for collecting high-end cars, (more than 200 of them) isn't merely a matter of personal preference.

It's a reflection of a journey marked by a dramatic transformation, a journey that began in the stark realities of working-class East London. While their investment philosophies align, their personal lives couldn't be more different, a divergence deeply rooted in Smith's own remarkable story, which we'll explore in detail.

Early Life: Forged in Resilience & determination

“You don’t get out of where I was to where I am without a lot of determination.” — Terry Smith”

Raised in poor East London, his father was a truck driver from a family of twelve, forced to quit school at 14, smart but trapped until asbestos from work killed him. His mother, kind and honest, worked tough jobs like cleaning and making brooms in a cramped home with no hot water or indoor toilet.

Smith recalls, “In the harsh winter of 1963… we had outside toilets and they froze over… we were sent home from school… for about six weeks… we also had an outside toilet at home, which also froze over.” This hard start fueled his drive to escape, leading him from poverty to billionaire status.

An important aspect of his early life was his intense interest in martial arts, particularly boxing. His uncle, a former boxer, introduced him to the sport, and Smith found a sense of belonging in the tough environment of boxing gyms. This passion extended to Muay Thai, with Smith training in Thailand and supporting a young fighter in Mauritius.

Smith's admiration for boxing legends like Joe Frazier, and Frazier's famous quote, "I kept knocking him down and he kept getting up," reflects his own approach to life. It highlights the importance of resilience and the refusal to be defeated, qualities that define his journey from poverty to wealth.

Lesson: Tough times can make you strong if you keep pushing. His parents’ struggles taught him to fight for more while staying decent, showing that where you begin doesn’t set where you end—it’s your grit that matters.

Mid-Life: Carving a Path of Independence

“I’ve reclaimed the moral high ground a notch too high for people’s comfort zone.” — Terry Smith”

During the 1970s and 80s, Smith began his professional career, marked by pivotal decisions that shaped his future: picking the tough road, taking responsibility, and holding his own view. Here’s the gist.

First, pick the hard stuff. After getting his degree in 1974, Terry didn’t know what to do: “I didn’t have a clue what I wanted to do.” He interviewed everywhere—Barclays, NatWest, Unilever—and chose Barclays because “the one that gave me the toughest interview” felt right. It wasn’t easy, but it pushed him.

Second, take on more. At Barclays, he started small, balancing accounts, but got sent for an MBA, then thrown into fixing their finance mess. By his late 20s, he was running things when his boss sailed off: “I did his job when he was away… early responsibility.” He didn’t wait—he jumped in.

Third, stick to your take. At 33, at BZW, he said “sell” Barclays—his own company’s stock. Bosses freaked: “You’re going to have to leave.” He left, but he was right. At 37, at UBS, he wrote Accounting for Growth. His boss said, “Stop this book.” Terry refused: “The book’s mine, not yours.” Fired, sued, but it hit number one.

Lesson: Embrace challenges, take initiative, and stay true to your beliefs—even when it’s risky. Growth comes from discomfort, leadership is about action, and integrity often demands sacrifice.

Late Life: The Inevitable Trade-offs

“If you’ve had an intense time, it can be difficult to switch it off… you may not be very comfortable to be with at that time.”

His challenging career path led him to take the ultimate step—starting his own fund, Fundsmith. With its core philosophy—“Buy great companies, don’t overpay, and do nothing”—he not only built one of the UK’s largest funds but also helped educate investors like me to think long-term and invest wisely.

However, high achievement often comes at a cost. Smith acknowledges that his relentless focus on success has sometimes clashed with personal relationships. As he puts it, “Some people can’t buy that. They want to be the center of your world, and you say, well, you can’t always be there.”

His reflections mirror Charlie Munger’s observation: many great investors /entrepreneurs struggle to balance personal and professional success, with divorce being a common outcome. Munger’s wisdom on the power of low expectations resonates here.

Lesson: : Success often involves trade-offs. It's essential to understand and accept these trade-offs, and to find a balance between ambition and personal fulfillment.

Conclusion

Terry Smith's journey, revealed through William Green's insightful interview, is a striking example of transformative success. From the stark realities of East London poverty to the luxurious shores of Mauritius, his life story transcends mere financial achievement. While sharing investment philosophies with legends like Warren Buffett, his personal life diverges dramatically, reflecting a unique path marked by both ambition and sacrifice.

Smith's early life, forged in hardship, instilled a relentless drive that propelled him through a career of bold decisions and unwavering principles. This grit, coupled with his sharp analytical skills, led to remarkable financial success. However, this relentless pursuit came with trade-offs, particularly in personal relationships, reminding us that even extraordinary achievements have their costs.

Ultimately, Terry Smith's story serves as a powerful reminder that success is a complex journey, demanding both resilience and an understanding of the trade-offs involved. His life encourages us to reflect on our own paths, balancing our ambitions with the pursuit of a fulfilling life.

Note: I highly recommend all my readers to listen to this podcast as there are many more word of wisdom by them which I didn’t manage to cover in this post. Thanks for reading!

Disclaimer: I might own stocks that mentioned in this podcast and this post is merely for educational purpose. It is not an advice to buy or sell the stocks. Invest at your own discretion.

Will Thorndike Interview

583KB ∙ PDF file

Download

Download

As promised, here’s the second part of my analysis of Will Thorndike’s interview, which I am excited to share with my readers. I’ve been a long-time admirer of The Outsiders, a book that offers a remarkable perspective on capital allocation, long-term investing, and the personal characteristics of exceptional CEOs.

This follow-up focuses on the new takeaways from Will’s discussion, refined into key themes and actionable insights for both investors and business leaders.

For those interested in my earlier review of the Lundin Empire with Rob Vinall, click here to read more.

If you’re new to The Outsiders, author Will Thorndike embarks on a quest to uncover exceptional CEOs—leaders he calls "The Outsiders." These CEOs stand out for their extraordinary ability to deliver sustained, market-beating performance. The criteria for identifying an Outsider CEO are as follows:

• 20% CAGR in Shareholder Returns

  • CEOs must achieve at least 20% compound annual growth rate (CAGR) in total shareholder returns over their tenure, showcasing exceptional value creation.

• Industry-Agnostic Excellence

  • These CEOs excel across diverse industries, proving that their strategies and principles—particularly around capital allocation and long-term thinking—transcend specific sectors.

• Long-Term, Peer-Outperforming Consistency

  • They must deliver consistent results over long tenures (typically 15-20 years) and significantly outperform their industry peers, demonstrating sustained and superior execution.

His findings reveal that the best-performing CEOs are nothing like the typical charismatic, high-profile leaders most people expect. In The Outsiders, Thorndike profiles eight exceptional CEOs, each of whom delivered extraordinary performance during their tenure, far surpassing their peers and industry benchmarks.

The outsiders profile

The Outsiders share four distinct characteristics that set them apart from traditional corporate leaders and I have included quotes from the interview by Will.

1. Unique characteristics

“The personal characteristics were interesting. People generally associate CEOs with being charismatic, strategic, visionary types. Those aren’t the adjectives you’d use for this group. Instead, you’d describe them as pragmatic, flexible, cool, rational, humble, data-oriented, and contrarian.

Surprisingly, all eight were first-time CEOs. That might be the most surprising finding in the whole book. “

Typically, in large organizations, CEOs are often chosen based on extensive prior experience in executive roles, with the belief that seasoned leaders are more likely to ensure stability and predictability.

However, these eight first-time CEOs brought a fresh perspective, unburdened by entrenched corporate norms. Their lack of traditional executive backgrounds likely contributed to their contrarian approach, as they weren’t necessarily bound by the conventional wisdom that often guides corporate strategy.

Their traits—pragmatic, rational, and data-oriented—suggest that they were more inclined to question assumptions and seek evidence before making decisions. This mindset would naturally position them to challenge established corporate practices.

2. Capital allocation

“What stood out was their approach to running their companies. It was very different from their peers but strikingly similar across this group of eight. For example, they typically did not pay dividends, seeing them as tax-inefficient due to double taxation. Instead, they selectively repurchased shares—and when they did, they tended to do it aggressively. “

One of the defining features of these CEOs’ strategy was their stance on dividends. In corporate America, dividends are often seen as a sign of financial health and stability. However, these CEOs viewed dividends as tax-inefficient due to the double taxation they entail—first at the corporate level and then at the individual shareholder level.

Instead, they favored selective share repurchases. This approach is particularly telling of their value-oriented mindset. Share repurchases can be a powerful tool for returning capital to shareholders when executed at the right time—specifically when a company’s stock is undervalued.

The fact that they repurchased shares "aggressively" indicates a keen awareness of market dynamics and a commitment to capital efficiency. Rather than committing to regular dividend payments, they chose to deploy capital opportunistically, maximizing shareholder value in a way that is less predictable but potentially more effective over the long term.

3. Merger and acquisitions

“They were sporadic users of M&A as a value creation tool. When they did pursue acquisitions’, they had an excellent track record—a very high batting average—unlike the general pattern for corporate America”

Another crucial aspect of their approach was their use of mergers and acquisitions (M&A). Unlike many large companies that pursue acquisitions as a primary growth strategy, often leading to mixed results, these CEOs were highly selective. They engaged in M&A only when they saw clear opportunities for value creation.

This selective approach suggests a disciplined focus on maintaining strong return on investment (ROI) and avoiding the pitfalls of overexpansion or empire-building—a common trap in corporate America.

Their high "batting average" in M&A contrasts sharply with the broader pattern in the corporate world, where many acquisitions fail to deliver the expected synergies or financial returns. This track record underscores their ability to discern between genuinely value-creating opportunities and those that simply expand the business without improving its core profitability.

4. Culture

“Another interesting theme was how they ran extremely decentralized organizations. That’s often overlooked. While the book focuses on resource allocation, their decentralized structures were just as significant.

They had very few people at corporate headquarters, with autonomy and prestige pushed down into local business units to an extreme degree. In at least half of the cases, the decentralization was almost radical compared to peers.”

Perhaps the most radical aspect of their management style was their commitment to decentralization. This approach is often overlooked in analyses of corporate performance, but it can have a profound impact on a company’s agility, innovation, and overall efficiency.

By maintaining "very few people at corporate headquarters" and pushing "autonomy and prestige down into local business units," these CEOs created organizations that were highly adaptive and empowered at the local level.

Decentralization allowed these companies to operate more like a collection of small businesses rather than a monolithic corporation. This structure enabled faster decision-making, greater accountability, and a focus on operational excellence in each business unit.

It also likely contributed to a culture where innovation and entrepreneurial thinking were encouraged, as local managers had the freedom to make decisions tailored to their specific markets.

Of course, he does mentioned that culture is something hard to preserve and some great companies did suffered from it when a new CEO took over. A good example is 3M where the company failed to preserved its good culture of innovation and instead focuses on juicing returns.

Commodity moat

“One area I’ve come to appreciate more is the power of these ideas in commodity businesses. For example, CNX Resources, where I’m involved, is a commodity energy business. Applying a long-term equity value per-share optimization philosophy is, in itself, a competitive advantage.”

What stands out in this interview is the intriguing concept of a "commodity moat." Typically, industries like homebuilding, subprime hire-purchase loans, or oil and gas are perceived as lacking durable competitive advantages due to the inherent commoditization of their products or services.

Rather than focusing on traditional sources of competitive advantage like branding or patents, these leaders optimize what matters most in such industries—free cash flow per share growth.

By prioritizing efficient capital allocation, minimizing unnecessary costs, and leveraging timing (such as aggressive buybacks during undervaluation), they convert what would normally be low-margin, high-risk businesses into value-generating machines.

A great example is NVR, a homebuilder that employs an option strategy for land acquisition, allowing it to optimize return on capital. Instead of tying up significant cash in owning large land banks, NVR secures options to purchase land only when needed, minimizing risk and maximizing capital efficiency—a stark contrast to its peers in the building industry.

Another standout is Constellation Software, a company that has perfected the art of acquiring vertical market software businesses. Constellation has achieved remarkable long-term returns by consistently acquiring small, niche software businesses, focusing on operational efficiency and decentralized management.

These examples highlight how skilled capital allocators can turn what might appear to be mundane or highly competitive sectors into high-performing, capital-efficient businesses by optimizing where it matters most. Their success lies in their ability to rethink traditional industry norms and apply strategies that enhance free cash flow and shareholder value over time.

Distinguishing the Best from the Pretenders

Finally, the human element is perhaps the hardest to predict. CEOs are often highly skilled at their jobs and exceptionally convincing when presenting their company’s competitive advantage over rivals. A striking example is Valeant Pharmaceuticals, where even some of the best investors were swayed by the CEO’s compelling narratives and short-term results.

However, based on Will Thorndike’s 40-year career, he believes there are two key indicators that help distinguish the best CEOs from the pretenders: their precise use of vocabulary and their unwavering focus on per-share value creation.

“For CEOs, I think it comes back to communication. Can they crisply articulate their edge in their industry? Do they genuinely think in terms of per-share value creation? If a CEO uses those exact words—“per-share value creation”—it’s a strong indicator. Vocabulary and clarity of thought are powerful signals for distinguishing the real deal from pretenders.”

This quote underscores the importance of clear communication and precise thinking in identifying exceptional CEOs. Great leaders have the ability to crisply articulate their competitive edge within their industry, demonstrating not just an understanding of their business but also a strategic clarity that sets them apart.

It’s not enough to talk about growth or success in generic terms; outstanding CEOs can pinpoint exactly what gives their company an edge—whether it's superior operational efficiency, innovative approaches, or exceptional capital allocation.

Closing thoughts

Will Thorndike’s interview reinforces the timeless principles of The Outsiders while offering fresh insights into their application in today’s business environment. The emphasis on disciplined capital allocation, decentralized management, and long-term thinking remains as relevant as ever—especially in industries where competitive advantages are scarce or fleeting, such as commodities or cyclical sectors.

For investors, the challenge lies in identifying CEOs who possess not only the vision but also the clarity to articulate their edge in terms of per-share value creation. These are the leaders who transform businesses into compounding machines, even in unglamorous industries.

As we look for the next generation of Outsider CEOs, let’s stay focused on the core principles: humility, pragmatism, and a relentless commitment to optimizing shareholder value. And as always, I welcome your thoughts and experiences—what strategies have you observed or employed to spot the real deal among business leaders? Please also share with us your best capital allocator and grow together. Let’s continue this conversation below!

Lastly, to all my subscribers who celebrate Chinese New Year, I want to wish you a joyful and prosperous celebration! May this new year bring happiness, good health, and success to you and your loved ones. I’ll be taking next Monday off to join the festivities, so I’ll see you all after Chinese New Year. Have a wonderful celebration! 🎉

Disclaimer: I might have positions in the above posts and receive no fees for writing the post. I am not affiliated or have any role with the company. Opinion is my own and this post is just for educational purpose. It is not an advice to buy or sell the stocks. Invest at your own discretion.

Last weekend, RV Capital hosted its 2025 Annual Gathering in Engelberg, Switzerland. While many are familiar with Warren Buffett’s annual meeting, RV Capital's gathering remains relatively under the radar, which is surprising given the depth of insights shared there.

Personally, I found the discussions to be highly thought-provoking and immensely enjoyable. Rob Vinall, the founder of RV Capital, has been kind enough to share all the interviews from the event on YouTube. However, it puzzles me that these conversations have received so few views, considering the quality of the content.

Here are all the links to all the sessions :

Mountainside Chat with IPCO CEO Will Lundin

Rob and Andreas' Annual Q&A

Mountainside Chat with Will Thorndike, author of "The Outsiders"

Panel: Women in Investing with April Li, Cynthia Maasry, Franziska Reh and Amelie Vinall (moderator)

Panel: "Is China Investable?" with Sofia Hou, Yixin La, Fred Liu and Graham Rhodes

To help spread Rob's message and the valuable lessons from these discussions, I wanted to share some key insights that resonated with me. In particular, I found the episodes featuring Will Lundin and William Thorndike to be especially compelling. Their perspectives offered a wealth of actionable wisdom that I believe many investors could benefit from.

If you haven’t already, I’d encourage you to check out the recordings on YouTube. It’s a treasure trove for anyone looking to deepen their understanding of investing and thoughtful decision-making. Hopefully, I’ll have the chance to attend one of Rob’s gatherings in person in the future—it’s certainly an experience worth aspiring to.

This year’s RV Capital Annual Gathering spanned about six fascinating hours of discussions. Each session offered its own unique insights, and I’ve decided to dedicate three separate write-ups to conclude this incredible event.

For this first piece, I’ll focus on the chat with the CEO of International Petroleum Corporation (IPCO), which delved deeply into the company’s strategy, leadership, and future prospects. Stay tuned for the next two write-ups, and let’s dive in! (If you are eager to listen to them all, please go ahead!)

Mountainside Chat with IPCO CEO Will Lundin

Note: I am hoping to transcribe the Youtube video but it is hard work. Anyone has any good free software application recommendation for me to do it quickly, please let me know so I can share it across with my readers.

For those following Rob Vinall’s investment activities, you may already know that he initiated a position in International Petroleum Corporation (IPCO). In addition to IPCO, Rob has also recently invested in Aker BP, a leading oil exploration and production company based in Norway.

For those unfamiliar with IPCO, it is a diversified upstream oil and gas company with operations in Canada, Malaysia, and France. The company produces approximately 50,000 barrels of oil equivalent per day (boepd) and has proven and probable reserves (2P) of around 500 million barrels. Furthermore, IPCO holds an additional 1 billion barrels of contingent resources, presenting substantial potential for future growth.

Summary

The fireside chat between Rob Vinall and the CEO of International Petroleum Corporation (IPCO) covered various topics, including the CEO’s personal background, IPCO’s operations, and broader industry insights.

The CEO shared his journey growing up in a family deeply rooted in natural resources, where entrepreneurial values and a long-term focus were instilled. He emphasized the Lundin Group's legacy of building successful companies across mining and energy sectors, with a strong owner-operator mindset and significant family ownership.

The discussion highlighted IPCO’s business model as a diversified upstream oil and gas company with operations in Canada, Malaysia, and France. Key achievements include growing production to ~50,000 barrels of oil equivalent per day (boe/d) and maintaining a strong balance sheet with low leverage.

The BlackRod project in Alberta, a major oil sands initiative, was discussed as a transformative venture for the company, targeting substantial production growth and long-term cash flow.

Capital allocation was a central theme, with IPCO focusing on share buybacks, disciplined investments, and strategic acquisitions. The CEO highlighted the company’s ability to navigate the volatile energy market by maintaining operational flexibility, a strong balance sheet, and a long-term approach to value creation.

The conversation also touched on the importance of energy security, the evolving role of oil in a transitioning energy landscape, and the company’s commitment to responsible operations.

Here are my key take away:

On Leadership and Legacy

IPCO’s leadership is deeply rooted in the Lundin family legacy, which has a long history of success in the natural resources sector. The Lundin Group oversees 12 publicly traded companies across mining and energy, with a common theme of substantial insider ownership and long-term strategic focus.

This owner-operator mentality, coupled with a commitment to aligning management incentives with shareholder interests, has fostered a culture of disciplined capital allocation and value creation.

On Capital Allocation Strategy

Capital allocation lies at the heart of IPCO’s success. Since its spin-off in 2017, the company has completed five acquisitions, deploying ~$940 million in capital, which has already generated over $2.5 billion in free cash flow. Share buybacks are a key part of IPCO’s strategy, with management repurchasing shares at significant discounts to intrinsic value.

Despite these buybacks, the company has maintained a strong balance sheet, ensuring flexibility to pursue further growth. Organic projects, such as the BlackRod development, are also central to IPCO’s strategy, balancing immediate returns with long-term growth potential.

On BlackRod Project

The BlackRod project is a cornerstone of IPCO’s future growth. Located in Canada, this asset contains an estimated 1.3 billion barrels of recoverable resources, making it one of the company’s most significant fields.

The first phase, sanctioned in 2023, focuses on 220 million barrels of reserves and is expected to produce 30,000 boepd starting in 2026. With regulatory approval to expand production to 80,000 boepd, BlackRod represents a major long-term opportunity for IPCO and could add billions of dollars to the company’s valuation.

On Disciplined Approach to Cyclicality

Operating in a highly cyclical industry, IPCO adopts a disciplined approach to mitigate risks. The company’s low-cost structure and strong balance sheet allow it to weather downturns and capitalize on opportunities during market troughs.

IPCO’s operational control over its assets provides the flexibility to adjust production based on market conditions. While the company traditionally avoids extensive hedging, it strategically employs it during periods of significant capital expenditure or debt maturity to protect downside risk.

On ESG and Energy Transition

The CEO addressed concerns about investing in oil and gas amid climate change discussions. He emphasized the ongoing global need for oil, particularly in emerging markets where dense, reliable energy sources are critical for economic development.

IPCO is committed to reducing emissions through operational efficiencies and technological advancements, ensuring it remains a responsible player in the energy sector while contributing to energy security worldwide.

On Competitive Advantages

IPCO’s competitive edge stems from its owner-operator mentality, with the Lundin family and management owning significant stakes in the company. This alignment enables the company to pursue long-term value creation rather than short-term market gains.

IPCO’s consistent delivery within production, cost, and cash flow guidance further strengthens its credibility. With a resource life exceeding 27 years, low decline rates, and significant growth potential from projects like BlackRod, IPCO offers a unique combination of stability and upside in the oil and gas sector.

On Future Outlook

IPCO’s future looks promising, with projected free cash flow of $900 million to $1.8 billion from 2024 to 2028 (assuming $75–$95 Brent). Beyond 2028, free cash flow could reach $1.75 billion to $2.8 billion over the next five years, exceeding the company’s current market cap. This cash flow growth provides IPCO with significant optionality to return capital to shareholders, pursue strategic acquisitions, or further develop its resource base.

Conclusion

In conclusion, the conversation with IPCO’s CEO at the RV Capital Annual Gathering provided an in-depth look into the company’s disciplined approach to capital allocation, long-term growth strategy, and alignment with shareholders. The insights shared highlight IPCO’s unique position in the oil and gas sector, balancing operational excellence with a forward-looking mindset.

This discussion is just one of the many fascinating sessions from the gathering, and I’m excited to share more in my upcoming write-ups. Stay tuned for the next post as we continue to explore more from this event!

Note: It's important to recognize that Rob has a vested interest, and conducting independent research is always essential to avoid outsourcing our thinking. While he generously shared the insightful interview, and I find the idea compelling, it currently falls outside my circle of competence. However, it has intrigued me to delve deeper into the company and the industry as a whole.

Paying Tribute to Hindenburg

Before I wrap up this post, I want to take a moment to pay tribute to Hindenburg Research, a renowned short seller known for their independent and incisive analysis. Their track record has been exceptional, and their write-ups are typically of remarkable quality—though I would note a perceived decline in quality since their coverage of the Adani case. (My personal opinion!)

It’s unfortunate to hear that they are closing their short-seller fund and he wrote a good farewell note. Click here to read further if you are interested. While some attribute this decision to the inherent stress of short-selling or possible security fraudulent activities (hard to verify), it’s undeniable that being a short seller is an extraordinarily challenging endeavor.

My first encounter with Hindenburg’s work was their investigation into SmileDirectClub, a company claiming to disrupt the orthodontics industry with its transparent braces through the DTC channel. Hindenburg effectively debunked these ambitious claims, particularly highlighting questionable uses of shareholder funds, such as the family’s purchase of a private jet under the guise of corporate needs.

Eventually, the company declared bankruptcy, a fate largely attributed to poor governance and predatory behavior. This demonstrated their deep research and sharp insight in exposing vulnerabilities.

It’s also important to acknowledge that short sellers have vested interests and will go to great lengths to highlight the flaws in their targets. However, I believe that in most cases, they strive to bring to light issues that might otherwise remain hidden. As investors, it is ultimately up to us to evaluate whether their revelations signify genuine concerns or are overstated.

Another critical point to consider is the broader market environment that may be making it increasingly difficult for short sellers to operate effectively. While I couldn’t find comprehensive reports directly linking the closure of prominent short-seller funds—such as Jim Chanos’s recent downsizing or Hindenburg’s potential challenges—to overall market overvaluation, the connection feels intuitive. (Please feel free to share with me any good reports)

With the S&P 500 persistently breaking record highs, skepticism toward individual companies is often overshadowed by the euphoria of a booming market. In such conditions, short sellers face significant obstacles, both financially and reputationally.

This brings to mind the timeless quote: "The market can remain irrational longer than you can remain solvent." This reality underscores the inherent risk of short-selling, where timing is everything, and market exuberance can defy logic for extended periods.

In conclusion, short sellers play a crucial role in maintaining market integrity. If a company is fraudulent, their efforts expose and address those issues, protecting investors. Conversely, if a company is legitimate, their activities can create opportunities to buy shares at exceptionally attractive prices. Either way, their presence fosters greater transparency and accountability.

Disclaimer: I might have positions in the above posts and receive no fees for writing the post. I am not affiliated or have any role with the company. Opinion is my own and this post is just for educational purpose. It is not an advice to buy or sell the stocks. Invest at your own discretion.

As the year draws to a close, it’s hard to believe that a year has already passed since Charlie Munger’s passing. In this rare interview, Li Lu Munger’s close friend, mentee, and the founder of Himalaya Capital, opening up about his personal loss (recently, he just lost his daughter) and sharing the timeless wisdom he learned from Munger.

Notes: His interview is in mandarin and if you can read in mandarin, click here to read. If not, my friend @EugeneNg_VCap has a translated version for your reference.

Li Lu Charlie Munger (dec 2024)

1.42MB ∙ PDF file

Download

Download

Who is Li Lu?

Sources: Li Lu: The Man Who Impressed Charlie Munger by Quartr

Li Lu is a prominent investor and the founder of Himalaya Capital. He has earned global recognition as the trusted asset manager of Charlie Munger’s family funds. Despite Munger’s legendary reputation, he entrusted Li Lu with the responsibility of managing a significant portion of his wealth—a testament to Li Lu’s extraordinary investment acumen and adherence to value investing principles.

Li Lu’s close relationship with Munger extended beyond finance. Their collaboration was built on trust, shared wisdom, and a mutual commitment to lifelong learning. This unique bond allowed Li Lu to gain unparalleled insights into Munger’s philosophy, which he now carries forward.

Here are some of the most striking takeaways from Li Lu’s insights that transcend investing to touch on life, rationality, and humanity. The TQI take!

The Power of Role Models

Munger embodied the rare ideal of consistency between thoughts, actions, and values. For Li Lu, Munger wasn’t just a teacher but a role model who never disappointed. In over 20 years of collaboration, Li Lu found Munger’s actions consistently aligned with his principles.

“Each of us needs role models in life, and I have found many. But it is rare to find someone whose behavior consistently inspires you without compromise.”

This idea serves as a reminder to seek role models who inspire not just through their accomplishments but through their character.

Lifelong Learning: A Non-Negotiable

If there’s one trait that defined Munger, it was his relentless pursuit of knowledge. Munger’s commitment to lifelong learning wasn’t limited to investing but extended to exploring wisdom across disciplines. For instance, Munger read Barron’s for 50 years and made only one investment from it—an example of disciplined curiosity.

This underscores a critical lesson: Never stop learning. Knowledge compounds, much like wealth, and staying curious is key to sustained personal and professional growth.

Value investing: Beyond the Numbers

Munger’s approach to investing expanded Benjamin Graham’s principles into a philosophy for identifying and holding exceptional businesses. Li Lu highlighted two pillars of Munger’s investment innovations:

1. Buy Great Companies at Reasonable Prices:

   • Munger shifted the focus from deeply undervalued stocks to great companies with the potential for long-term value creation.

   • This strategy, employed at Berkshire Hathaway, emphasized holding quality businesses through thick and thin.

2. Fishing Where There Are Fish:

   • Munger encouraged investors to build expertise in areas rich with opportunities and to operate within their circle of competence.

   • This principle applies broadly: success comes from focusing your efforts where they are most likely to bear fruit.

Li Lu also pointed to BYD, a Chinese electric vehicle company, as a prime example of Munger’s principles in action. Despite market volatility, their steadfast belief in BYD’s value creation has paid off immensely over decades.

The Rationality Framework

For Munger, rationality was more than calm decision-making. It encompassed four levels:

1. Universal Wisdom:

   • Ground decisions in first principles and facts.

   • Rationality starts with understanding reality as it is, not as you wish it to be.

2. Multidisciplinary Thinking:

   • Munger’s "latticework of mental models" combined insights from various fields to solve complex problems.

3. Avoiding Systematic Errors:

   • Munger identified 25 cognitive biases that hinder rational decision-making, outlined in The Psychology of Human Misjudgment. Recognizing and mitigating these biases is crucial.

4. Respecting Common Sense:

   • Munger’s mantra, “copy what works, avoid what doesn’t,” reflects his respect for time-tested principles. Success often lies in simplicity and practicality.

Broader Reflections on AI and Humanity

Li Lu extended Munger’s lessons to the pressing challenges of today, particularly the rise of artificial intelligence. While AI holds transformative potential, it also poses existential risks. Li Lu emphasized that managing AI’s development responsibly will require unprecedented global collaboration.

This aligns with Munger’s broader vision of rationality and cooperation. As Li Lu put it:

“Munger believed deeply in the power of collaboration, particularly between nations like China and the United States. His hope for permanent cooperation is a legacy worth pursuing.”

Key Takeaways

1. Seek Consistent Role Models: Look for individuals whose actions align with their values.

2. Commit to Lifelong Learning: Never stop seeking wisdom, both within and beyond your field.

3. Invest for the Long Term: Focus on quality businesses, operate within your circle of competence, and tolerate short-term volatility.

4. Embrace Rational Thinking: Avoid cognitive biases, apply first principles, and respect common sense.

Conclusion

Munger’s wisdom, as shared by Li Lu, offers timeless guidance not just for investors but for anyone striving for excellence and meaning. His lessons remind us that success is built on principles, patience, and the relentless pursuit of betterment. By embodying these ideals, we can honor Munger’s legacy and wield the “sword” he left for those ready to continue the journey.

Lastly, before I end this, I'm really curious about the last stock he picked that doubled from the time he started investing. It's incredible to think that a 99-year-old can outperform me in stock picking—unless, of course, he's Charlie Munger! If anyone knows more about it, please share!"

A friend of mine share with me this interview featured Tony Deden, the Chairman of Edelweiss Holdings and it instantly left me with a lasting impression. Edelweiss, guided by Mr. Deden’s unique approach, operates quite differently from most investment firms.

It’s a multi-family office that doesn’t actively seek to raise money. Instead of holding cash, they prefer to hold physical gold. They invest in public securities with a time horizon that spans multiple decades, and they place a strong emphasis on the resilience of the businesses they invest in.

Anthony Deden Transcript

9.41MB ∙ PDF file

Download

Download

Since then, I have been looking forward for more contents from him but he is actively trying to avoid the public eye. Luckily, Ian Cassel (the founder of Microcap club) is able to convinced him otherwise - A conversation with Anthony Deden.

In this article, I’ll distill some key takeaways from that conversation and share the lessons I believe are most relevant for fellow long-term investors.

1. The Power of Concentration and Conviction

"For many years I would make one investment with everything I had... you need a sense of conviction that's completely different from the type of conviction most people have. It's the same thing as if you were buying an entire company.

Deden began his investment journey by focusing intensely on a few well-researched opportunities. He would often invest everything he had into one or two things, holding these positions with strong conviction.

This resonates deeply with my belief in the power of concentrated investments. (I don’t think it is for everyone) When you have thoroughly analyzed a business, understand it inside out, and have a clear thesis, concentration can lead to outsized returns.

The trick here is knowing what not to do, knowing what not to read, knowing what advice not to take - Start with exclusion. It is exactly the same with Charlie Munger life long advice - “All I Want To Know Is Where I'm Going To Die So I'll Never Go There”

2. Value Beyond Price

"I didn't say cheap, I said mispriced. It's a big difference... Generally, cheap things are cheap because they're not worth very much. But occasionally, the market errs."​

One of the most enlightening points Deden makes is the distinction between cheapness and value. A “cheap” asset is not necessarily valuable; instead, Deden focuses on “mispriced” assets—those where the market has not recognized the true underlying value.

This subtle but crucial distinction reminds us that value investing is not about finding low prices but about identifying businesses that the market has misunderstood or undervalued for reasons that may not be immediately apparent.

3. Understanding the Business

"You ought to start with the journey as if you were buying a private company... If you don't know anything about this business, you don't know what can go wrong. Forget the financial accounts. Do you know the business?"

Deden emphasizes the importance of truly understanding the business you are investing in. He likens this to buying a private company—you should know the ins and outs of the business, its management, its customers, and its competitive landscape.

This approach aligns perfectly with a long-term, buy-and-hold strategy. If you don’t thoroughly understand the business, you are merely speculating. And speculation is a game that we, as long-term investors, should avoid.

4. The Importance of Management Alignment

"Do the people who run the business are owners and do their objectives match mine? Because if the guy who runs the business is a renter... that's not something that I want to be involved in."

Deden’s insights into management alignment are particularly instructive. He advises that investors must assess whether the people running the business have their interests aligned with those of the shareholders. He thinks that 80% of the success or failure of a company comes from people.

He cautions against companies where management views themselves as "renters" rather than "owners," highlighting the risks of investing in companies led by individuals who lack long-term commitment. Interestingly, he thinks that small cap European companies practice this better than the American counterpart. They hardly issue any stock options to anyone.

For us, this means digging deep into management’s history and incentives, ensuring that they are invested in the company’s future just as much as we are.

5. The Hidden Risks of Financial Statements

"Remember that accounting was never meant to be a tool for valuation... It's only normal that the people who manage the company do whatever is necessary to get the price up."

One of the more sobering lessons from Deden is his view on financial statements. While these documents are essential, they often fail to capture the full picture of a company's potential or its risks. Deden reminds us that accounting was never intended as a tool for valuation—it was meant for accountability.

As long-term investors, we must look beyond the numbers and understand the qualitative aspects of a business. This means focusing on the economic reality of the business rather than just its financial presentation.

6. Gold as a Reserve, Not a Speculation

"The reason we own gold as a reserve asset is rooted in something fundamental... The risks we do not take owning gold could fill volumes... The absence of unwanted risk is the center of our investment approach.”

Deden also discusses his view on gold, not as an investment, but as a reserve asset. This is a critical distinction. He sees gold as a form of insurance—a way to protect capital from the uncertainties of the financial system, rather than as a vehicle for speculative gains.

7. The Importance of Endurance and Culture

"Sometimes they're the second, third, fourth generation. And that strong owner has a culture that has infused into this organization. That is perhaps more important than anything else."​

And that strong owner has very important principles as to the amount of debt they should have and the purpose for the debt, or when they should expand and when not. Or whether they should put money into improving their products or not, et cetera. They also have sticky customer bases.

Lastly, Deden’s focus on the endurance of businesses—often family-owned companies that have thrived for generations—is a powerful lesson in long-term thinking. These companies, according to Deden, succeed because of their strong cultures and conservative management practices.

They avoid the pitfalls of short-termism and are built to last. For long-term investors, identifying businesses with these qualities can lead to stable, lasting returns.

Conclusion

Anthony Deden’s investment philosophy is a masterclass in long-term, value-oriented investing. His emphasis on understanding the business, aligning with management, and focusing on the long-term health of a company rather than short-term price movements, offers invaluable lessons for all of us who practice a buy-and-hold strategy. As a long-term investor, we must constantly seek out businesses that not only offer value but are also built to endure the inevitable ups and downs of the market.

Deden’s insights remind us that true investment success is not about chasing the next big thing but about patience, discipline, and a deep understanding of what we own. As we continue on our investment journey, these principles will serve as a strong foundation for building portfolios that can stand the test of time.

Bonus points

At this point, you must be curious about his portfolio. He never disclose his holdings but we know that he has a watchlist of about 150 companies. We can roughly guess his holdings by going through all his previous interviews and writings. Below is a list of companies that he might own (I can be wrong and he might sold it. So, invest at your own discretion.) Happy investing!!!

1. TFF Group (TFF)

2. Bakkafrost (BAKKA)

3. Robertet (RBT)

4. Emmi (EMMN)

5. Lotus Bakeries (LOTB)

6. Franco-Nevada (FNV)

7. Ems-Chemie (EMSN)

8. Seaboard (SEB)

9. Hal Trust (HAL)

10. Bucher (BUCN)

I strongly advise anyone to go through the transcript as I might miss something important. If you are like me who thinks that Anthony Deden investing principal resonate with you and you are looking for more content on him, click here to enjoy more of his writings. That all for today and thanks for spending your precious by reading it.

Disclaimer: I might have position in the company mentioned and receive no fees for writing the post. I am not affiliated or have any role with the company. This post is just for educational purpose and it is not an advice to buy or sell the stocks. Invest at your own discretion.

I came across this document shared on X with the title: how to succeed in Mr. Beast production. Anyone interested can click here to read. It is an interesting piece of documents detailing how Mr. Beast becomes the most subscribed youtuber in the world. I am not trying to promote his contents (can be controversial) but the scaled of his followers (316mil as of the day I am writing) are unprecedented.

Source: A screenshot of his philanthropic videos

The reason I am writing this is because of my personal observation of how the most successful people in the world has an obsession's over things that they are truly passionate. If we follow them closely, we can see it clearly on how they built the most successful business of all time. Lets start with Mr. Beast whose real name is Jimmy Donaldson.

So far, I think Trung Phan on X did the best in summarizing Mr. Beast Obsession's on making his video successful. Below is how Mr. Beast trying to explain minute by minute on how to hook viewer.

His obsession over creating the best content on YouTube should continue to propel him to be very successful in his field for the near future.

Coincidently, The Alchemy of Money, one of my favorite writers on Substack also share a post about Mr. Beast with the title: A Lesson on Obsession: Robert Caro and Mr. Beast. It is beautifully written and highly recommend anyone to read it. (I promise that I didn’t know he is going to write about this topic.)

How about other leaders:

Jeff Bezos is famous for his obsession's on delivering the best value to his customers. Amazon has grown into a goliath in the e-commerce space.

“We’re not competitor-obsessed, we’re customer-obsessed. We start with what the customer needs and we work backwards.”

Or Warren Buffett on his obsession's on investing. He spent every days reading over 500 pages of materials to learn about the world.

“He has always been extreme in his level of concentration, going into a room with a pile of books and papers and emerging hours later, as if time had no meaning.” from snowball by Alice Schroeder,

Or Steve Jobs on his obsession’s with design and perfection. Apple product is best known for quality and seamless user experience.

"Design is not just what it looks like and feels like. Design is how it works."

Feastables

Note: Mr. Beast promoting his chocolate brands

Many influencers are releasing their own products as their fame grew and same goes to Mr. Beast. His most successful venture is likely to be the Feastable chocolate. (The previous Feast burger failed miserably but it didn’t stop him from creating another brand) The Bear cave author, Edwin Dorsey is likely to be one of the most vocal advocate rooting on his success. Click here to read his negative report on Hershey.

However, I think otherwise. I don’t think Feastable chocolate will do well in the long run. My thesis lies on the word focus. I rarely see anyone did well in everything because there is a limit on our time. There is always a trade off between the choices made. (If you said Elon Musk, I might have to agree with you on this, but I think he is an outlier)

Until I see signs of him going all out with feastable chocolate, it is unlikely that they will win over the legacy players like Hershey, Kit Kat (under Nestle group) who has spent decades to perfect the art of making chocolate.

My thesis on why Mr. Beast chocolate will not be as successful as his media production can be controversial but I am convinced that it will be right in the long term. Time will tell but I appreciate their effort in disrupting the old guards and spur innovation.

Finding the best company

Finding leaders who are obsessed with their visions and capable of executing them effectively can be rare, but it’s one of the most valuable indicators of long-term success that I've identified in my years of investing. It is an underappreciated quality that often separates good companies from truly great ones, where the leader's relentless focus and passion drive exceptional growth and innovation.

I know that Warren Buffett often mentioned this:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

I agreed but I also see cases where leaders made a different just like all the leaders I mentioned above. They created a culture that will thrive for the years to come. It is definitely something I will constantly look out for my investing years.

Conclusion

The success stories of Mr. Beast, Jeff Bezos, Warren Buffett, Steve Jobs and many others highlight how obsession, when directed toward a meaningful goal, can lead to extraordinary results. It’s not enough to be passionate or talented; the willingness to go beyond conventional limits and immerse oneself completely in the pursuit of excellence can be the key to success.

Obsession has a unique way of pushing individuals to innovate, take risks, and stay committed even when faced with challenges. Whether it’s creating viral content, delivering exceptional customer experiences, or designing revolutionary products, the obsessive drive is often what separates good from great.

If you made it this far and find this article useful, a like or share will greatly motivate me to write further. Thank you!

Disclaimer: I might have position in the company mentioned and receive no fees for writing the post. I am not affiliated or have any role with the company. This post is just for educational purpose and it is not an advice to buy or sell the stocks. Invest at your own discretion.

I found that a lot of investors only discuss their biggest winner but not biggest loser. To me, both are equally important and I am here to make a dissection on why would I made this mistake and how to correct from it. It is my personal experience and the mistake I made is called outsource thinking.

I think it is common to fall under trap of Halo effect where when someone better or smarter is investing in a stock, it must be wise choice. Imagine that some of the smartest thinkers like Elliot Turner and Nobert Lou (i respect both of them and often read their writings) invested in this stock, it feels like I am shielded from mistakes.

I am outsourcing my thinking to them and failed to realize that it might not fall within my circle of competence. That is why I put a lot of emphasis on circle of competence and only invest in company that I can understand as well as only invest in really high quality business. You can read my previous post on My personal archive - The road to become a successful quality investor.

The thesis

If you are my regular reader, you would know that I am a big fan of Nick sleep. I am fascinated by the idea of share scale of economy. It means sharing the saving that gain from scale and thereby create a strong flywheel effect that is hard to compete. I am obsess with this business model and hope to invest in company that practice this religiously.

Then, I came across this company called Naked Wine and it was pitched by Elliot Turner. He did a great job on explaining the company and I hope that I can be half as good as him. Click here to read his fantastic work.

The company seems to fit the idea of share scale of economy. It is a wine subscription business that aim to eliminate middleman (wholesaler and distributor) by connecting the winemaker directly to buyer. Then, the company would markup 40% and any excess of saving will be passed directly to their customers.

The story sounds compelling from a few perspective:

Sources: TQI capital

The independent wine makers will have access to a scale platform due to Naked wine commitment and therefore can focus on making good wines without distraction. The excess saving from bypassing the wholesalers/retailers can be passed to customers. Cheaper but better wine should in theory attract more customers and lead to more wine makers joining its ecosystem. This will create the so called network effect from the process.

In addition, the platform has attracted millions in reviews which in theory will give them a better recommendation system to target their customers and create another flywheel effect. Everything sound so appealing if the business can scale. That is a big “If” and the business overestimate their ability to sell due to Covid and eventually stuck with large amount of inventory and face liquidity issues.

The mistakes:

1. I am not a wine drinker and failed to recognise that it is not within my circle of competence. Will the customers continue to order through online or it is just a covid effect? I believe wine drinker should understand this better.

2. Does share scale of economy works in every business model? My view is that if the customers couldn’t recognise the savings that passed to them, it would be disastrous to the company. There is no comparison to be made like Costco. You can easily compare Costco price to other retailers to know if it is a bargain, but would you be able to tell if some random wine is really cheaper and better quality?

3. I failed to recognise the base rate effect where most business will fail. Most poor business can’t last more than a decade and I should pay more attention on track record.

4. Most importantly, I “outsource” my thinking and failed to exercise my own judgement. The reason that we shouldn’t follow others ideas is because we might not have the conviction like them. It can be that I am early but not wrong. However, if I have no conviction to hold through the drawdown, I would have sold it before it became a multi-bagger. Thus, you can’t skip the basic work (read annual report, think like a businessman, run through checklist, etc) that will make you a great investors.

Conclusion

Hopefully my readers can learn something through this post and keep in mind that investing is simple but not easy. Please do your own due diligence and don’t let others to persuade you otherwise. I believe that most people shouldn’t invest on their own and it would better off to invest in index fund as mentioned by Warren Buffett. Unless you are truly passionate about investing and willing to go extra mile for it, it is just a tough game to beat it consistently.

Lastly, I am going to Hongkong next week to attend AGMs and meets some private investors. Thus, I will be away for a week and come back the following week. Hopefully, I can share some take aways on my Hongkong trip in my next post. If any of my readers are interested to meet me up in Hongkong (2/06/2024 - 07/06/2024), I am more than happy to meet for a coffee. Cheers!!! Just shoot me an email or direct message me.

Disclosure: Please do your own due diligence. This post is merely for education purpose and my curiosity to the world. Cheers!!!

Source: Powered by Befunky

Backed by the great response on my previous post of Nick Sleep under the mastery, I will continue the series with another investment legend that I admire - Terry Smith. He is often known as the UK Warren Buffett but he thinks that he is more like Charlie Munger, a very straight talking and no-nonsense guy. Regardless, these are some of the most successful fund managers in the world. There are plenty of things to learn from them.

The series will be separated into a few parts:

1. Part 1: Terry Smith investment philosophy

2. Part 2: Terry Smith shareholders letters and lessons

3. Part 3: Terry Smith mental model and case study

Sources: Fundsmith website

Terry smith started his own fund - Fundsmith in 2010 and successfully outperformed the market by over 3.7% annually throughout the life of the funds. The fund compounded at 15.4% for over 12 years. It is something that I hope to achieve for my long term investing career.

I have created a compounding table to constantly remind myself on how powerful is the power of compounding but it takes time and nobody want to get rich slowly as often reminded by Warren Buffett. In the era where everyone is looking for quick gain and YOLO (The GME and AMC gangs), I think that it is getting better for investors who are being patient and willing to take the road less taken.

Source: TQI calculation

So, what is the secret to his impressive performance? He has a very simple mantra:

1. Buy good companies

2. Don’t overpay

3. Do nothing

What does buy good companies mean to him? In his owner manual, he place out his thoughts as follow and explained each of them:

• high quality businesses that can sustain a high return on operating capital employed;

  “An important contributor to this is repeat business, usually from consumers. A company that sells many small items each day is better able to earn more consistent returns over the years than a company whose business is cyclical, like a steel manufacturer, or “lumpy”, like a property developer.”

  “However, not all companies which sell capital goods or which sell to businesses are outside our investible universe. A business service company may have a source of consistent repeat business, and some capital goods companies earn much of their revenue, and sometimes more than all their profits, from the provision of servicing and spare parts to their installed base of equipment. These can satisfy our criteria.”

  It make senses as consumer could delay or defer their purchase on capital goods during economic downturn but not food and toiletries. Thus, some of his holdings include Clorox, Colgate, Unilever, etc. The other types of companies are those that practice the razor and blade models such as Gillette (shavers) and Otis (elevators).

• businesses whose assets are intangible and difficult to replicate;

  “The kinds of intangible assets we seek are brand names, dominant market share, patents, distribution networks, installed bases and client relationships. Some combination of such intangibles defines a company’s franchise.”

  His rationale is simple as tangible assets can be replicated given enough money and banks are always happy to fund anyone who wanted to compete. However, intangibles are so much harder to replicate and these companies tend to remain discipline during the easy credit period. As a result, they invest better and thus better ROCE.

• businesses which do not require significant leverage to generate returns;

  “The companies may well have leverage, but they don’t require borrowed money

  to function. For example, financial companies (such as banks, investment banks, credit card lenders, or leasing companies) typically earn a low unleveraged return on their capital. They then have to lever up that capital several times over with money from lenders and depositors in order to earn what they deem to be an acceptable return on their shareholders’ equity.”

  Terry Smith was a banking analyst and that is why he avoided banks. He understand the dangers of leverage and how it can be brought down easily when the company is loaded with debt. (To avoid permanent capital loss)

• businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;

  “Our definition of growth is that they must also be able to reinvest at least a portion of their excess cash flow back into the business to grow while generating a high return on the cash thus reinvested. Over time, this should compound shareholders’ wealth by generating more than a pound of stock market value for each pound reinvested.”

  Growth is easy if there is no restrain of capital. The company could acquire growth by going on an acquisition spree and thus, high EPS growth but it is at the expenses of future return. Nifty Fifty is the best example during the 1960s and 1970s where “blue chip” companies bought out their competitors to grow but it was destined not to be sustainable. A good business is those that can generate high return with little capital. See’ candies is a good example on how little capital it required to run the business and generate great return.

• businesses that are resilient to change, particularly technological innovation;

  “An important contributor to resilience is a resistance to product obsolescence. This means that we do not invest in industries which are subject to rapid technological innovation. Innovation is often sought by investors but does not always produce lasting value for them.

  Developments such as canals, railroads, aviation, microchips and the internet have transformed industries and people’s lives. They have created value for some investors, but a lot of capital gets destroyed for others, just as the internet has destroyed the value of many traditional media industries.”

  In essence, market is always excited about innovation but it is likely not the best options for long term investors. This is because it is hard to spot them and correctly predict how it will evolve (at least not for me and him) over the years. Artificial intelligence or electric vehicle is some of the best example currently that I will avoid. It is best to stick to long established products and industries. However, can’t predict doesn’t means stop learning. We need to keep learning and this is one of best traits of the investment legends.

• We only invest when we believe the valuation is attractive

  “Our aim is to invest only when free cash flow per share as a percentage of a company’s share price (the free cash flow yield) is high relative to long-term interest rates and when compared with the free cash flow yields of other investment candidates both within and outside our portfolio.”

  “Our goal is to buy securities that we believe will grow and compound in value, which bonds cannot, at yields that are similar to or better than what we would pay for a bond.”

  Terry smith often uses free cash flow yield as a benchmark for his portfolio valuation as cashflow is a better measure than accounting profit. The reason is simple as accounting profit can be easily manipulated and only cash matters for running a business.

  Note: FCF means Free cashflow after tax and interest but before dividends and other distribution and adding back any discretionary capex to avoid penalizing companies that invest to grow

Lastly, Charlie Munger always like to say, invert, always invert. It is good to learn about good business but also bad business. We must avoid them at all cost (the bad one). Terry Smith shared a very useful table during his 2023 AGM meeting which I have summarised in my previous post.

Sources: 2023 Fundsmith AGM

Next, it is also important to supplement your thesis with great fundamental. This is where the financial knowledge came into play. Terry smith has his own ways of keeping track his portfolio companies performance quantitatively and it was beautifully laid out by him in the table below. I find it useful for myself to keep track of my personal portfolio.

Sources: 2023 shareholder letters

Lastly, after learning about his thought process, what are the companies that fit his criteria? Below is his top 10 holdings as of 2024. Of course, the list changes over the years but the fundamental understanding remain the same, only invest in high quality companies and pay a fair price. 13F is a good source to learn about all his positions and dataroma is a great archive for it. Give it a try.

Lastly, I would like to encourage my readers to spend some time reading the original documents as I might misunderstand his true meaning. However, I will try my best to deliver his messages to investors who wanted to hone the skills to high quality investing.

Disclosure: I am not affiliated to any of the authors or writers and didn’t receive any monetary compensation. It is merely for education purpose and my passion for investing. I might own stocks pitched by them and please do your own due diligence. Cheers!!!

Investment strategies are as diverse as the individuals who pursue them. To maintain clarity and consistency in my approach, I've curated a personal investment compendium. It's a repository of principles and practices that reflect my commitment to high-quality investing and may offer insights to others seeking similar goals.

I will be splitting it into 4 segments:

1. My Investment philosophy

2. Investment criteria 

3. Investment research steps

4. Valuation

1.My Investment philosophy

I would called myself a value investor but through the years of learning about investing, I eventually pivot into quality investing. These changes came from my realization that the value investing concept is simple but not sustainable. Let me explain why: Value investing is simple because all you have to do is buy something that is worth $1 at $0.50 and sell it for a profit when it reaches its intrinsic value.  

However, there will be issues like value traps, poor management, etc. It is cheap for a reason. For example, it could be cheap on the books (ie: market capitalisation worth less than cash, low P/B, etc) but if the management is unwilling to unlock the value and it could last for a long time, the long-term return to shareholders will be poor.

Besides, it will also be a constant hunt for undervalued companies and not sustainable in the long run. There are always exceptions such as Mohnish Pabrai, a great value investor who made hundreds of millions of dollars by using this strategy. You could read more about him in his book Dhandho investor. 

However, I believe that quality investing is a better approach in the long run. Even Warren Buffett has slowly evolved into a quality investor over time under the influence of Charlie Munger, his lifetime business partner. His famous quote “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price” shows how much he has evolved from a pure value investor to a high quality investor. 

There are some great high quality managers out there and Terry Smith, often known as the UK Warren Buffett is one of them. Terry Smith through Fundsmith often focuses on investing in quality companies. Its funds have outperformed the market by 2x since inception (15% compounded annually). You can find out more about him from his website and annual shareholder letters. 

His mantra is simple:

1.Invest in quality stocks

2.Don’t overpay

3.Do nothing unless its fundamentals change

Circle of competence

Before I dive deep into the steps in identifying great investment opportunities, there is a need to determine our circle of competence. It is a great filter to minimise my biases such as overconfidence, confirmation bias, halo effect, etc. 

So, when I am researching at any companies, the first question i ask myself is do I understand the companies? Ie: its business model, industry structure, unit economics, addressable market, source of competitive advantage, durability of moat, etc.  If not, it is better to move on to the next company. To quote Charlie Munger, they only have 3 boxes : “In”, “Out” and “Too hard”. 

Of course, I could build up my circle of competence, but the truth is that I only need to be right on a few of our investment decisions to have a great return of. Why not pick from something that I have an edge over others? You don’t get credit for solving a difficult problem. The market will not reward you for being smart but only those that are right.

Besides, I also try to avoid tough industries although we might potentially miss some of the greatest stocks of all time. These industries usually are capital intensive, highly competitive, low barrier of entries, highly complex business model,etc. In my recent Terry Smith AGM article, there is an interesting slide on tough industries which I replicated in here.

Lastly, I also try to avoid hype stocks or the next big things. For example, SPACs, Metaverse, AI, meme stocks like GME, AMC, etc.  I prefer boring and predictable business. Although it will limit our investable universe, it is necessary to protect me from taking unnecessary risk and being affected by herding effect (Fear Of Missing Out). A great example of a boring company would be Domino Pizza ($DPZ), a boring business that has compounded at 22% CAGR for the past 10 years. 

2.Investment criteria 

There are a lot of characteristics that I am looking for but below are some of the most important qualities that the companies should possess:

Qualitative criteria

1) It has stood the test of time. It means that the company has a long track record of outperforming the market.

2) It operates in an industry with structural tailwinds that will support (organic) top-line growth for the business. 

3) It is run by individuals with a long-term time horizon, integrity, and managerial skill. 

4) It has durable and sustainable competitive advantage (Moat, a term often used by Warren Buffett)

Quantitative criteria

5) It operation has an attractive normalized unit economics, high profitability and ROIC; and

6) It has a thoughtfully financed balance sheet (not highly geared); 

I purposely set a high bar for my investment criteria so that only the best will be included in our concentrated portfolio. I am looking at around 10-20 companies to ensure that each holding will have a meaningful contribution to maximise the total return.  

3.Investment research steps

Here comes the boring but crucial parts. There is absolutely no shortcut in researching a company. The following is a list of steps that could be useful in researching on the company (to be improvised overtime):

Where to look for ideas

There is no shortage of companies for me to look at. In total, there are more than 40,000 listed companies around the world as suggested by Aswath Damodaran, a professor who is kind enough to share his research. It is highly recommended to explore his blog.

However, those companies that meet my investment criteria and within my circle of competence would have reduce the investable universe to a size that is not burdensome for me. I estimated that there should be less than 1,000 that pass the initial test and eventually, only 100 stocks would make it into my watchlist. 

A good place to start searching for stocks is through the twitter financial community, a.k.a @fintwit. There are a lot of like minded investors who either wanted to win business or just to prove that they are smarter. (Need to follow the right people as well) Investing websites like value investor club is also a good place to hunt for potential stocks. Substack is also becoming a new breeding ground for good investment ideas.

Another place to look for high quality companies would be through following fund managers holding and annual letters. Dataroma and investment master class has the most comprehensive compilation that I have ever seen. 

Lastly, podcasts are getting popular among the investing community. Below are some investing podcast that i feel add value to me:

1. Business breakdown - Investing podcast.

2. This week in Intelligent investing - Investment thoughts and ideas

3. Acquired - Investment podcast on tech related companies.

Feel free to add more if needed as there is no shortage of good ideas but the will to look for one. To quote Peter Lynch, “he who turns over the most rocks win”. Once there is a potential target (Project punch card has a great presentation on how to kill an idea fast as well which i will explain further below) , we can move on to the 2nd stage. Conducting a deep dive into the company by learning as much as possible about the business.

Procedure

1. Read the company 10k (annual report), 10q (Quarter report), earnings call transcripts, proxy statement, etc

2. Make comparison between the years for the above documents especially proxy statement (on management incentive) 

3. Run through qualitative checklists. Please refer to below. 

4. Look for any red flags like history of fraud, poor capital allocation, high debt, poor earning quality, short seller report (be skeptical as they are incentivise to tear the company apart, use your judgment), etc

5. Make use of investment research tools such as 10k reader, TIKR to assist in financial data compilation

6. Read blogs by investment analysts (Use the fact, not the opinion)

7. Always perform a what could go wrong analysis on the company 

8. Summarize your findings into a report. Include value added portions such as assessing the unit economic, durability of the moat, management incentive, etc. Skip the repetitive parts by leveraging on other good investment analysts

9. Perform a mental model for the company valuation

10. Monitor the investment to ensure it is meeting the expectations set at the time of the initial analysis.

11. Conduct a post-mortem on stocks that didn't meet your initial expectation

4 hours to kill an Idea

1. Read 3 to 5 years of shareholder letters and management commentary

2. Do an Industry Map

3. Do a customer value proposition analysis (ie. on the “7 emotions” like greed, fear, sad, nostalgia)

4. Do a reverse DCF (Price implied expectations)

5. List Management, governance and key holders

“You need to be a business analyst first and a stock analyst second” John Lykouretzos

4.Valuation

After evaluating the company quality, it is time to value the company. It is a  crucial step to determine my long term performance. This is because overpaying for a high quality company could affect the compounded return. A great example would be Microsoft. if you have invested it during the 2000 tech bubble, it would take you 16 years to break even. 

Valuation definitely is the hardest part to get it right because there is no way to model human rationality. To quote Issac Newton “I can calculate the movement of stars, but not the madness of man”.  

There are a few ways to value a company such as Market approach, cost approach, income approach, etc. The most common valuation method is the discounted cash flow method (DCF). It is a simple method as Warren Buffett believes that the intrinsic value of the company is the present value of the future cash flow. However, this method has a big flaw where its terminal value is highly sensitive to discount rate and future growth rate. 

It is still a useful tool but having a good mental model is a better way to assess if the company current valuation is reasonable. For example, I like to use reverse DCF to determine how much future growth has been priced into the stocks and use my own judgement to decide whether is it expensive or cheap.

Of course, this is not a perfect method of valuing a company but it gives me a rough guidance. To quote John Maynard Keynes “It is better to be roughly right than precisely wrong.”

Investment horizon

Lastly, as a long term investor, ideally, the holding period for a great company if I am able to identify one, the time horizon is forever; however, there will be a lot of factors that force me to rethink my strategy. For example, there is a significant change of the underlying of its business, the valuation has reached an absurd level, change in management ownership and team, etc.  

A more rational approach would be to hold a company for at least 5 years to ensure that the company has sufficient time to return to its intrinsic value. However, if the initial assessment is incorrect, the best is to move on and avoid any loss aversion bias. 

Conclusion

It might not be the best but hopefully it gives you a good guidance on how I operate.  Investing is a lifetime learning experience and an eternal pursuit. Thus, I think we should be patient and when there is an opportunity, I will make sure I swing hard. “The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch” by Warren Buffett.

Lastly, let me share a great screenshot that summarises how a quality company will look like overtime to end this long winded article. 

Resources

Newsletter/Free blog (Can look at my recommendation list from Substack as well)

1. Value Investors Club - Free (45-day delay) investment idea writeups

2. Woodlock house - Chris Mayer (100 baggers author blog)

3. Eagle Point Capital - Value investor blog

4. Graham and Doddsviles - Student newsletter from Columbia Business school

5. Young Hamilton - 2 long investment thesis per month

6. Value and opportunity - European stocks (long)

7. Yet another value stocks - Free investment stock ideas

8. Compounder funds - Investing ideas.

9. Quality compounder - Long ideas

List of admired investors:

1. Warren Buffett

2. Charlie Munger

3. Terry Smith

4. Nick Sleep

5. Peter Lynch

6. Mohnish Pabrai

List of great books for investors:

1. The intelligent investor by Benjamin Graham

2. The Outsider by William N. Thorndike Jr.

3. The Snowball by Alice Schroeder

4. One up on Wall Street by Peter Lynch

5. A random walk down wall street Burton G.Malkiel

6. 100 baggers by Chris Mayer

7. Reminiscence of stock operator by Edwin Lefevre

8. Dhandho investor by Mohnish Pabrai 

9. You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits by Joel Greenblatt

10. The Psychology of Money by Morgan Housel

11.  Richer, Wiser, Happier by William Green

12. Where the Money is by Adam Seessel

13. What I Learned About Investing from Darwin by Pulak Prasad

Investment checklist (Copied shamelessly from the 10th Man blog)

This list is not exhaustive, and it could be modified further to suit your own investment style.

General:

1. Have we waited at least 3 months since we first developed our thesis and valuation expectations before deciding to buy the stock?

2. Have we bounced our investment thesis off an industry expert, or someone capable of providing a dissenting opinion?

3. Have we conducted a pre-mortem?

4. Does reporting consistently change and/or is it opaque?

Value Proposition & Customer:

1. What value is the business providing?

2. How does the business make money?

3. Can we define exactly who the customer is?

4. Is this a need-to-have, or a nice-to-have? Is this product or service critical to the customer?

5. What is the share of that customer's wallet? Is this offering a small percentage of the customer budget?

6. Is there a substitute for the product or service? If it didn’t exist, what would the customers or users need to do instead?

7. Does any single customer represent more than 10% of revenue?

8. Are any of their customers or customer cohorts ‘unhealthy’?

9. How are the customer end-markets evolving? What is the customer life-cycle? Do you touch them once every twenty years, or is it a monthly or yearly recurring touch-point? 

10. What is the customer retention rate? Can we find any customer feedback or commentary? Are there any recurring themes?

Competitive Advantage:

1. Can we identify a competitive advantage like network effects, brands, patents, regulated monopolies, high switching costs, first mover benefits, or scale? 

2. If we can’t clearly identify a competitive advantage today, can we identify signs that the business might develop one?

3. If the company’s CEO left tomorrow, how long would it take, if ever, to create a successful competitor? Are there any major barriers to new entrants?

4. Who does the company compete with? Can their competitors copy/replace what the company is offering over time?

5. Does the company have pricing power? How elastic is demand? Can we find examples in the past to illustrate demand elasticity or lack thereof? 

Industry:

1. What are the key drivers for the industry?

2. How has the industry evolved over time?

3. Is the total addressable market (TAM) expanding or shrinking?

4. Are there long-term positive or negative secular themes that will change the opportunity set? 

5. What does the competitive landscape look like?

6. What is the businesses market share?

7. Is there extreme fragmentation or concentration?

8. Is the same number of businesses competing in the space today as there was 5 and 10 years ago?

9. Can we identify a business in this industry that has failed in the last 10 years, and why?

10. How do industry participants compete: capital, service, price, etc?

11. Has there been a flood of new capital into the space?

12. Has there been an increase in IPO activity in the sector?

13. Are businesses issuing more equity than in the past?

14. Is leverage for the industry much higher than the 10Y historical average?

15. How cyclical is the industry?

16. Is this a profitable industry?

17. What has been the minimum and maximum ROIC for the industry over the last 20 years? What is the range of ROIC within the industry today?

18. What was peak-to-trough ROIC/margins/sales in previous recessions?

19. How do these characteristics compare to the overall market?

20. Has the rank order of relative profitability (ROIC) changed meaningfully in the last 5 and 10 years?

21. Does the company operate in any geographies with volatile legal, political, or regulatory environments? Do any of these represent more than 10% of sales?

22. Is there a regulatory body that can meaningfully impact industry profitability?

23. Are there any outstanding legal or political risks?

24. Is this a business that can pass on inflation to customers?

25. Are employees unionized or not?

Strategy:

1. How do they deliver on the value proposition?

2. Is the business generating an upfront payment or recurring revenue stream?

3. How do they try to understand their customer needs?

4. How do they think about strengthening their position? Can they build on their competitive advantage?

5. How do they acquire customers?

6. Do they rely on an internal sales team? Partners? Do customers come to the business directly?

7. How do they approach marketing?

8. Do they offer customer incentives? 

9. How do they operate the business?

10. How do they approach manufacturing?

11. How do they approach distribution?

12. Can they reduce input costs by changing suppliers, bringing processes in-house, etc? Is there a road map to do so?

13. Is any single supplier their only option for a given input to the product or service? How do they manage procurement?

14. How do they manage risk? Do they use natural or financial hedges to reduce volatility in cash flows? 

Capital allocation

1. Is the company willing to return cash to shareholders if they can’t find accretive ways to deploy it?

2. Has the company repurchased stock in the past, and if so, has it been opportunistic or mechanical?

3. Is M&A a likely contributor to future growth? If so, what criteria does the management team use to evaluate transactions?

4. What type of M&A are they pursuing (roll-ups, transformational, etc)?

5. What drives synergies: costs or revenue? Can competing acquirers achieve the same synergies, or do they have other advantages?

6. What is their M&A track record?

7. Does the company look to retain key people at the entities that they acquire?

8. How does the business rank order investment opportunities, organic or otherwise? Is it clear that they rank opportunities on the best performance metrics, like life cycle ROIC instead of cash on cash yield in year one?

9. Is their approach to any of the above points consistent? Or have they pivoted in the past?

Performance:

1. Is there a sufficient historical track record to evaluate?

2. Does, or has, the company earned a ROIC or ROE in excess of their cost of capital? 

3. If so, for how long have they generated excess returns?

4. If not, do we see a path to that happening? 

5. How does this return compare to the peer group?

6. What has the cash conversion ratio been for the last five years?

7. Is there a history of asset impairments/write-downs?

8. Is there any capital that is a drag on returns, and should have been utilized differently?

9. Do asset-specific KPI’s meet expectations?

10. Have they historically managed their financial position well? 

Financial Position:

1. How do their debt metrics compare to their peer group and to history?

2. Is leverage higher than peers, or average levels for the business?

3. Are there financial covenants the business must maintain? Will the company breach those covenants in a recessionary environment? 

4. What is the rating agency outlook? Is it likely that the company will need new external equity?

5. Are debt maturities staggered? If not, is there a looming refinancing, and how will the company manage it?

6. Are there any off-balance sheet liabilities?

7. Does the company have any long-term contractual obligations?

8. Is there a dual class share structure?

9. Are there any obligations to other holders, like Incentive Distribution Rights?

10. Does the company have preferred share and/or hybrid capacity?

11. What is the potential impact from dilutive securities? 

12. Is non-cash NWC a big part of the business?

13. Is it large as a percentage of revenue? Is it shrinking or growing as a percentage of revenue? 

14. If it is negative, is there a large potential cash outflow if revenue falls?

15. Do they pay a dividend, and if so, what is the payout ratio?

16. Do they have a DRIP?

17. Have they been funding the dividend through asset sales or increased leverage? Ultimately, is it sustainable with internally generated cash flow?

18. Are sustaining capital requirements in-line with DD&A? Is there a reason they might be different? Can they meet these spending requirements in a recession?

19. Is the business capital intensive? How do they plan to fund incremental capital expenditures? 

Management & Governance:

1. Does the management team have some competitive advantage, as people? Do they bring unique experiences? Can we identify any shortcomings?

2. What is their previous track record running a business or business unit?

3. What is the consensus view of management?

4. Are they more comfortable with succeeding unconventionally than failing conventionally?

5. Can we observe behavior that sacrifices on near-term profitability for the long-term benefit of the business?

6. What metrics are management compensated on? Are these appropriate drivers of shareholder value? If ROIC/ROE/EPS growth aren’t one of those metrics, are we confident that management has an incentive to most efficiently allocate capital?

7. Do insiders own a significant amount of stock?

8. Have insiders sold any stock in the last year? More broadly, how has insider ownership changed over time? Can we find good justifications for insider selling? If not, is this a brown M&M?

9. Does management use non-GAAP metrics in guidance, and if so, is that reasonable? 

10. How does the management team allocate their time?

11. Are they obsessed with stock prices and constantly meeting with investors? Or;

12. Are they intently focused on running their business?

13. Is the founder still running the business or on the board? Is this a good or bad thing?

14. Is the business run in a centralized or decentralized way, both financially and operationally?

15. What are employee incentives?

16. Is there a “key man” risk? 

17. Can we gauge employee turnover? What about management turnover? Board turnover?

18. What do employees have to say about the company through Glassdoor or other channels? Can we gauge company culture through another channel?

19. Are the skills and diversity matrices for the board of directors appropriate?

20. Do board directors have sufficient financial interests in the company?

21. Are board directors distracted by too many other professional endeavors?

22. Is there an unhealthy relationship between any board directors and management?

Valuation:

1. Have we identified the key drivers?

2. Where do our expectations differ from what we think the market price implies?

3. Why do we think we have an edge, and/or can we understand why the market is wrong?

4. Are any of the key drivers impossible to forecast, ie. is uncertainty incredibly high?

5. What is the source of the data that impacts our view of the key drivers? Is that source reliable?  

6. Have we done a bear and bull case scenario analysis? Is risk skewed to the upside?

7. Is the business fully cash taxable? If not, when will they be? 

8. Have we considered the impact of net operating loss balances and other tax pools?

9. Are there any unusual accounting policies? 

10. Does the business expense anything that in principle is actually a capital item? Is this well understood by the market?

11. What percentage of costs are fixed? Is operating leverage high?

12. What is FCF conversion? Is it consistently above or below 100%?

13. Is there a capital expenditure cycle, and if so, where are we in the cycle? How does this compare to their peers?

14. Are there any large unfunded liabilities, like pensions?

This marks the end of my article and thanks for spending your time reading through the blog. I will be taking some time off for myself and so there will be no new articles releasing for the next two weeks. I promise I will come back better.

Disclosure: I am not affiliated to any of the authors or writers and didn’t receive any monetary compensation. I also might own stocks that I mentioned and so please do your own due diligence. It is merely for education purpose and my curiosity to the world. Cheers!!!

The series will be separated into a few parts:

1. Part 1: Nick Sleep investment philosophy and lessons (2001-2005)

2. Part 2: Nick Sleep investment philosophy and lessons (2006-2010)

3. Part 3: Nick Sleep investment philosophy and lessons (2011-2013)

4. Part 4: Nick Sleep mental models

Today's post will be the last part of the Nick Sleep series and I will dive deep into his mental models and how he classified companies into different buckets. I will be quoting his case study and sharing my own version of it. So far, Nick and Zak only disclosed 2 investment models and it is worth learn and relearn overtime.

The mental models

I think most investors are spending too little time thinking about the company’s business model and why certain business works better than the others. It is the obsession's in looking for the best businesses that help them identifies the best investment models. Nick puts it nicely:

“In the office we have a white board on which we have listed the (very few) investment models that work and that we can understand. Costco is the best example we can find of one of them: scale efficiencies shared. Most companies pursue scale efficiencies, but few share them. It’s the sharing that makes the model so powerful. But in the center of the model is a paradox: the company grows through giving more back. We often ask companies what they would do with windfall profits, and most spend it on something or other, or return the cash to shareholders. Almost no one replies give it back to customers – how would that go down with Wall Street? That is why competing with Costco is so hard to do. The firm is not interested in today’s static assessment of performance. It is managing the business as if to raise the probability of long-term success.”

(1) “Scale efficiencies shared”

Illustrated perfectly by Jeff Bezos on share scale of economy

Case study 1 : Costco (Nick Sleep pitch)

Costco is one half of the wholesale club warehouse duopoly (with Sam's Club) and had annual revenues of U$35bn in 2001. The retail concept is as follows: customers pay an annual membership fee (standard U$45) which provides entry to the stores for a year, and in exchange Costco operates an every-day-low-pricing strategy (EDLP) by marking up 14% on branded goods and 15% on private label with the result that prices are very, very low. This is a very simple and honest consumer proposition in the sense that the membership fee buys the customer's loyalty (and is almost all profit) and Costco in exchange sells goods whilst just covering operating costs. In addition, by sticking to a standard mark-up savings achieved through purchasing or scale are returned to the customer in the form of lower prices, which in turn encourages growth and extends scale advantages. This is retail’s version of perpetual motion and has been widely employed by Wal-Mart among others.

To understand how important EDLP is to Jim Sinegal, the firm’s founder, consider the following story which was recounted to us by a company director. Costco bought 2m designer jeans from an exporter and shipped them into international waters and re- imported the jeans for an all-in price of U$22 or so per pair. This was U$10 less than the firm had sold the jeans for in the past (offering the potential for a 50% mark-up) and half the cost of most other retailers. One buyer recommended taking a higher gross margin than was usual (i.e., more than the usual 14% mark-up) as no one would know. Apparently Sinegal insisted on the standard mark up, arguing that if "I let you do it this time, you will do it again". The contract with the customer (very low prices) must not be broken.

Many retailers do not operate in such a way, and instead employ high-low price strategies, that is to say they take prices up and down in an attempt to influence store traffic. The consumer goods companies then add to the confusion through running their own promotional campaigns. Although many of us are used to this behaviour, consider for a moment how confusing a proposition to the consumer it is. For example, is a bottle of shampoo worth U$2 if it is periodically available through a couponing campaign for U$1? The high-low strategy may even backfire: do consumers feel taken advantage of when paying U$5 for tissues that were available last week for U$4? They should. At Costco the consumer knows the price is 14 or 15% above wholesale, period.

Costco management describe the strategy as “easy to understand and hard to operate" perhaps because the temptation is to mark up the goods and break the contract with the customer. Costco is profitable enough to self-fund growth of around 14% per annum and not to have to resort to leases for expansion (The Gap's mistake). This means that growth will be more measured (none of the 30% per annum purges that populate the retail industry) and should be more sustainable. As to the potential for growth the firm has 21 stores in Washington State which houses just 2% of the US population. This density coast to coast implies room for around 1,000 US stores (currently 284) and 200 stores in the UK (currently 14) although planning regulations may not allow for this.

Even then Home Depot, the largest DIY store in the US currently has 1,500 stores. At 10% growth per annum, this implies the firm has another 13 years of growth ahead. The share price has declined from a year 2000 high of U$55 to U$30 (Nomad’s purchase price) as margins declined slightly (they are measured in basis points at this firm) with the cost of several new distribution centers which will support the next few year’s growth. For example, in the UK the firm has warehousing and logistics capacity for 40 locations but only has 14 stores. At U$30 the firm is valued as a cash cow, with higher levels of profitability (as capacity utilisation increases) and modest levels of growth justifying a valuation over U$50 per share. Costco is as perfect a growth stock as we have analysed and is available in the stock market at a close to half price.

With their experience in investing successfully in Costco, they invested in Amazon, another company that practice share scale of economies religiously. An interesting fact is that before Jeff Bezos going all in by putting customer first, he actually consulted Jim Senegal, the founder of Costco. It is another exceptional company with superb performance for the fund.

Investment thesis

My version of share scale of economy is this company called Ollie Bargain Outlet. If you are a long time reader of my blog, you will likely to be aware that I constantly talked about it. Please bear with me on this one. Below is a quick summary of my pitch:

Company: Ollie Bargain Outlet, Ticker: Olli, listed in Nasdaq

Olli is a closeout retailer in North America that purchases its goods from bankrupt companies as well as excess goods from manufacturers due to sudden cancel of orders, change in labelling, etc (70%) and the rest from regular suppliers (30%). It offers brand name items for 20-70% off regular prices. (Clorox, P&G, etc) Ollie’s is very possibly the only company whose brick-and-mortar stores are not just surviving but thriving.

The concept of closeout is unique as its sellers are usually desperate and willing to sell their goods at dirt cheap prices for working capital or simply to recover its capital. Traditionally, as the deals can be huge (>$100mil), brokers will be responsible for distributing the goods and closeout retailers hardly thrive as they are usually small and has low bargaining power.

Olli is possibly the only closeout retailer that has grown to the size that they can turn the table around and capture the most value from the industry. I have laid out the reasons below on why I think it has growing moat that will help them to defend their castle as famously worded by Warren Buffett.

1. Olli operates on a cost-plus basis at 40% gross profit margin. (40% is higher than average industry margin but don’t forget that they buy their products at dirt cheap prices) Thus, any savings will be pass back to its customers and thereby create the feedback loops that attract more customers.

2. Suppliers prefer buyers that has buying power as they wanted to get rid of their inventories quickly and thus it plays into Olli strength. Olli has a clean balance sheet (minimal debt, net cash) and capacity to distribute its goods through its 500+ stores (target to grow to 1,000 stores) in North America to its 11mil loyal members (80% of sales derived from them, no membership fees).

As a result, since they have a strong funnel to turn their inventories faster than its peers, they will get to choose the deals (priority) that can generate the highest return with their experienced merchant sourcing experts.

3. Economically, it is a high ROIC business as the capex per store is low at $1mil with sales of $4mil at a net margin of 10% or $400k on the first year of opening. It is equivalent to 40% ROIC on a per store basis or almost 2.5 years payback period. As the stores aged, its same store sales are expected to grow by 1-2% annually making its store more profitable and higher ROIC. Its current ROIC remain steady at around 15% due to capex spent for expansion in distribution centers.

4. Lastly, it is run by experience board members with the current CEO working for more than 20 years with its founder (Mark Butler, owned 10% but unfortunately pass away) and he is committed to extend the company legacy. Culturally, it is a highly prudence with their mantra to save every penny possible. A good example is how they reuse the Kmart trolley when they took over the lease.

Conclusion

Olli is targeting to grow 50 stores annually and it is expected to grow its sales at low double digits. If the multiple remains (trading at higher than industry peers due to higher profitability, about 10%), I am confident that with the company share scale of economy, the intrinsic value of the company will grow at low double digits and possibly worth multiple of current valuation in the long run.

(2) “Deep discount to replacement cost with latent pricing power”

This is actually how Nick Sleep started. That is to buy companies that is really deep value and waiting patiently for regression to mean. I mean most value investors started this way but eventually realized that a better way to invest is to buy higher quality business, pay for a fair price and hold for long terms. It is simply easier and lesser hassle.

Case study 2: Zimcem (Nick Sleep pitch)

“We have begun making some investments in Zimbabwe and wrote about the background to these in a recent Global Investment Review (also contained in the appendix). The investment case relies upon extreme undervaluation compared to normalised values, so much so that a wait of ten years for normalisation would still yield wonderful results. It makes little sense to discuss stocks we may or are buying (Costco is likely to be a rare exception in this regard) but I can illustrate the investment case by describing Zimcem. This is the country’s largest cement producer (after the local division of Pretoria Portland Cement), with around 700,000 tons of cement capacity and a replacement cost of around U$70 to U$100m. The firm has no debt and business conditions are awful (general inflation exceeds cement price inflation and product demand is low) but the company is priced on the Harare stock exchange at one seventieth (1/70th!) of its replacement cost.

Why is this relevant? So far, we have only discussed one model we use to pick good investments which we call “scale efficiencies shared” as evidenced by Costco (and to a lesser extent Amazon.com). We have little more than a handful of distinct investment models, which overlap to some extent, and Zimcem is a good example of a second model namely, “deep discount to replacement cost with latent pricing power”. Indeed, these two models combined can be used to describe around 45% of total Partnership assets. It was this model that led to many investments during the Asian crisis (such as Siam Cement which has risen twenty-fold from the trough in eight years) and to neighbouring South Africa where Pretoria Portland Cement could be bought at a price of U$20 per ton of capacity in 1998 and is now valued at U$180 per ton. The model is premised upon the observation that the business needs to replace its assets and will require prices which 1. fund the capex, and 2. economically justify the spending. Either that or Zimbabwe will have to go without cement or import from abroad (tricky for this land locked country). In any event, provided discretionary capital is not invested to exacerbate the situation, the supply side remains muted (industry capex is zero) and the business is not nationalised, then the shares ought to do well, in time.

This last point, along with other confiscation events, does not have a zero probability, and is the main reason our investments in the country will be modest in size. Even if we were able to secure all the shares we desire (which we seem incapable of doing) it is unlikely that the total investment would be much more than a few percent of the Partnership at cost. There is no a priori reason why Zimbabwean businesses should not trade at a premium to replacement cost. Just over the northern border Zambia’s dominant cement company is now valued at a premium to replacement cost following recovery in the economy after years of mismanagement. In Zimbabwe this may require “regime change”, or even regime changes. Perhaps the investment case rests in your manager being fifty years younger than Bob Mugabe.”

My final thoughts

The above investment models discussion are truly a masterpiece by Nick and Zak. To repeat him in the letter, a lot of businesses have the scale to operate efficiently but non share the scale efficiency to their customers. The way the team think is just so different from what we learned from the usual academic financial classes.

We are taught to think like a stock analysts (earnings, growth, multiples, beta, etc) but instead, we should think like a business analyst. Imagine when you look at Costco or Amazon financial statements in their early years, I am pretty sure most stock analysts will shun the companies. For example, it has high capex with low/negative margin, high multiples, etc.

However, most of them are missing the points. This is because number only tells us about the past but investing is the future. Only when you spent enough time into understanding the business model, its management philosophy, its future growth potential, etc, then we might be as successful as them. (At least this is what works for me)

If you have made it this far, thanks for your loyalty and hope that you could spread the message so that more people is aware of this. This will be the final part of Nick Sleep series and hopefully I can share more under radar investors to my readers in the future.

While the wording may seem lengthy, reading it is never dull. I'm quoting him directly to preserve his intended meaning. No summary is good enough to replace his original letters. You may read the complete letters from the archive here in his IGY foundation website. He is kind enough to share his wisdom and I think more investors need to know about it.

Share TQI capital (Typical quality investor)

Disclosure: I am not affiliated to any of the authors or writers and didn’t receive any monetary compensation. It is merely for education purpose and my passion for investing. I might own stocks pitched by them and please do your own due diligence. Cheers!!!

The series will be separated into a few parts:

1. Part 1: Nick Sleep investment philosophy and lessons (2001-2005)

2. Part 2: Nick Sleep investment philosophy and lessons (2006-2010)

3. Part 3: Nick Sleep investment philosophy and lessons (2011-2013)

4. Part 4: Nick Sleep mental models

Today post is the last part of its investment letters and it marks an end for the exceptional performance of the fund. Every dollar invested in the beginning of the funds becomes ten dollars (10x) with a compounding rate at 20% before fees. It is exactly how he envisioned the fund will perform. Every great things come to an end but for Nick and Zak, it is their new beginning to pursue their respective goals.

I particularly like the X-amount concept by him. In his words “X was the amount of money that we felt would be required to put food on the table, pay for the kids education, have a nice life-style, own our own homes and so on” After that, he is the custodian to the money for people in needs. This is why he created the IGY Foundation to help people.

On collecting information and thinking

“In today’s information-soaked world there may be stock market professionals who would argue that constant data collection is the job. Indeed, it could be tempting to conclude that today there is so much data to collect and so much change to observe that we hardly have time to think at all. Some market practitioners may even concur with John Kearon, CEO of Brainjuicer (a market research firm), who makes the serious point, “we think far less than we think we think” - so don’t fool yourself!

Whilst Zak and I applaud John Kearnon, we try to take Charles Darwin’s approach: de-emphasise the data collection and think. When we study truly great businesses, we find that very often it has been simple human attributes that have led to their success: you feel differently drinking a Coke than a no brand cola or, you may feel differently towards a business that consistently undercuts the competition in price or, a delivery service that literally goes the extra mile and picks up returned items – and the reason you have these feelings, and the stimuli that produce them, have hardly changed in millennia. When we try to understand the factors that made great businesses great, in our opinion, there is lots of time to think.” Interim letter 2012

On Choice

“It is almost ten years since Barry Schwartz published his popular psychology book “The Paradox of Choice”. To précis part of the book: Schwartz observed that western society tends to view choice as a good thing, and more choice as better still. In his local supermarket Schwartz counted one hundred and thirty or so different salad dressings, excluding the dozen olive oils and balsamic vinegars should the pre-made salad dressings not offer enough choice! In his local electronics store he found over six million possible combinations of hi-fi components. Even though consumers were being offered what seemed to Schwartz to be an ever-increasing plethora of choice to meet their needs, he could find no correlation with increased happiness. Instead, he hypothesised, that with all the choice came the (subconscious) expectation that the outcome ought to be perfect, and this expectation rendered the actual choice made as disappointing in comparison. It was as if too much choice was making us unhappy.

Schwartz does not make mention of it directly, but the problem is not confined to consumer decision-making. The public stock markets have many tens of thousands of potential investments, and the price of each of those changes almost constantly. The number of possible profit or loss combinations would make Schwartz’s hi-fi store look like a multiple-choice test. It is very easy, therefore, to feel unhappy about one’s investments. Indeed, on any one day, month, year it is highly likely, indeed statistically almost certain, that one’s chosen combination of investments will lag alternatives – there will always be someone who did better.” Annual letter 2013

Stocks invested/discussed:

1)Black Arrow Group Plc

2)Carpetright

The last few letters have been very short but it is still worth going through as he wanted to emphasize the same things that made his fund successful. That is the commitment into long term investing and investing in high quality business.

Of course, long term investing might not suit everyone as implementing it is “sort of like sticking to a regimen of regular exercise and healthy diet” (wisely advice by Mr. Pulak, the author of “What I Learned about Investing from Darwin” to me via email), but I would strongly recommend to everyone who is interested in long term investing to read Nick Sleep letters.

In conclusion

After going through his investment letter, one thing that resonate with me is that investing is more about thinking and less about collecting information. He reminds me of my boss who told me that I was “paid” to think. Ie: To reason why certain companies perform better, which models work best, how is the industry is going to evolve, etc. It is the continuous search for the best companies and sticking to them that will make them the best return.

If any of you didn’t get enough of Nick sleep, there is a book called Richer, wiser, Happier by William Green where he interviews some of the best investors such as Sir John Templeton to Charlie Munger, Jack Bogle to Ed Thorp, Will Danoff to Mohnish Pabrai, Bill Miller to Laura Geritz, Joel Greenblatt to Howard Marks and Nick Sleep. Enjoy!

While the wording may seem lengthy, reading it is never dull. I'm quoting him directly to preserve his intended meaning. No summary is good enough to replace his original letters. You may read the complete letters from the archive here in his IGY foundation website. He is kind enough to share his wisdom and I think more investors need to know about it.

Share TQI capital (Typical quality investor)

Disclosure: I am not affiliated to any of the authors or writers and didn’t receive any monetary compensation. It is merely for education purpose and my passion for investing. I might own stocks pitched by them and please do your own due diligence. Cheers!!!

The series will be separated into a few parts:

1. Part 1: Nick Sleep investment philosophy and lessons (2001-2005)

2. Part 2: Nick Sleep investment philosophy and lessons (2006-2010)

3. Part 3: Nick Sleep investment philosophy and lessons (2011-2013)

4. Part 4: Nick Sleep mental models

Today's post will continue to delves into Nick Sleep's investment philosophy, lessons and stock pitches, offering insights into what we can learn from this legend to become better investors.

2006 is the year Nick Sleep and Zak leave their original firm - Marathon and run their own fund. It is also the first time the fund faces challenges from the 2008 financial crisis. However, they manage to pull through and not only survive but thrive as a result of their unmatchable insights on long term investing. (If you miss the Part 1, you may click on the link here)

Delving into the second four-year performance of his fund, notably in 2008—a year notorious for testing Nomad Capital. Amidst a 45% downturn, the fund's resilience significantly outshone the broader index on an annualized scale. The letters from this period stand out as profound guides, illuminating invaluable lessons on navigating stock market crises.

On Portfolio construction:

“It is commonplace for overall portfolio construction to be as a result of stock weightings built up from one to two to three percent of a portfolio and so on up to a target holding. This means that weightings are anchored at a small number with only outliers reaching double digits. There is another way to construct a portfolio, which is to invert and start at a hundred percent weighting and work down! If fund managers did this, I am sure they would end up with completely different portfolios.” Annual letter 2006

On dealing with mistakes

“We (strapping on the protective armour of the first-person plural) have made lots of mistakes. (I will be less cowardly) I have made lots of mistakes. Sometimes we made the mistakes ourselves. Sometimes we learnt from others. Sometimes they were direct investment mistakes. Sometimes they were part of growing up (look out for those private mistakes, they are full of investment lessons). But there they are. Warts and all. This is how life is. We do not justify them, but we do not condemn them either. Indeed, they are best not judged. Our model is to learn from our mistakes and what we learn we hope to give to you, in better performance results (in exchange for a performance fee!).”Annual letter 2007

On how to avoid making mistakes

“One trick to help see the world more clearly is to invert situations. A newspaper headline claiming that one third of the population wants something, also tells you that two-thirds don’t! In our opinion, the best book to hone the skills of inverting was written by Terry Arthur in 1975 and is entitled “95% is Crap – A plain man’s guide to British politics”. Terry is one of the most modest and thoughtful people Zak and I have had the pleasure of meeting, and he was one of the first investors in Nomad.” Annual letter 2007

On chasing yield

“Output maximisation looks efficient at least in the short term, but that is not the same as being long term optimal. The flaw to putting money to work immediately, for instance, is to presume that all relevant opportunity sets are available immediately. By accepting, say, a promoter’s promise of eight percent returns (six hundred basis points better than money on deposit), the investor denies himself the right to future opportunity sets which may be far better, like public equity circa 2008 and 2009, we would argue.

This is an easy concept to grasp when applied in hindsight, but much harder to see prospectively. A plan sponsor who argued that contrary to the income statement, his cash was not earning two percent but ten percent (a blend of two percent on deposit now and twelve percent from an as yet undefined opportunity set sometime in the future) risks being perceived by his peers as away with the fairies – the lawyers and auditors would not endorse his view - but he was right.

That is why, in the hands of Warren Buffett for example, one could rationally argue that cash is worth more than cash. That is not an argument for hoarding cash, as many do today. For the cash to be worth more than cash it must be invested intelligently. It is, however, an argument for a cash buffer, just in case, a little slack in the system.” Annual letter 2008

On selling too early

“1. Misanalysis, or using the wrong mental model: Investors are used to firms which have one good idea, such as a new product, but then struggle to replicate success and end up diluting returns (Zak and I call this the Barbie problem, as Mattel has struggled to replicate the economics of its famous doll). Taking this model and applying it to Wal-Mart would miss the company’s source of success entirely as the strategy of price givebacks did not change from year to year; culture plays a part in the continuity of a successful price giveback strategy and factors such as culture, because they are hard to quantify, often go undervalued by investors; investors presume regression to the mean starts at the time of their analysis or, as CFA students may recognize, in year three or five of a DCF analysis! Investors use valuation heuristics rather than assess the real value of the business.

2. Structural or behavioral: Active fund managers have to look active. One way to do this is to sell Wal-Mart, which appeared expensive (but actually wasn’t), to buy something that appeared cheaper (but err, also wasn’t); investors are not long-term and did not look further than the next few years or, more recently, few quarters. Evidence for this can be gleaned from the average holding periods for shares which stands at just a few months; fund managers wish to keep their jobs and espousing a ten-year view on a firm risks being a hostage to fortune; marketing folks require new stories to tell and new stocks in the portfolio provide new stories; fund managers sell their winners in order to appear diversified in the eyes of their clients.

3. Odds or incorrectly weighing the bet: In the words of my first boss, investors tend not to believe in “longevity of compound”. Conventional thinking has it that good things do not last, and indeed, on average that’s right! Empirical Research Partners, an investment research boutique, discovered that the chance of a growth stock keeping its status as a growth stock for five years is one in five, and for ten years just one in ten. On average, companies fail.” Annual letter 2009

On reducing reinvestment risks

“There are, broadly, two ways to behave as an investor. First, buy something cheap in anticipation of a rise in price, sell at a profit, and repeat. Almost everybody does this to some extent. And for some fund managers it requires, depending upon the number of shares in a portfolio and the time they are held, perhaps many hundred decisions a year.

Alternatively, the second way to invest is to buy shares in a great business at a reasonable price and let the business grow. This appears to require just one decision (to buy the shares) but, in reality, it requires daily decisions not to sell the shares as well! Almost no one does this, in part because it requires patience - and the locker room set does not do patience - but also because inactivity is the enemy of high fees.” Annual letter 2009

On doing the little thing right

“It is tempting when analysing such situations to look for the big thing the firm does right. In effect, one is looking for the smoking gun that explains the firm’s success. A smoking gun may be a vivid image, but the world does not always work like that. I should have known better when I asked what big idea had led to the firm’s success: “No, no, Nick, there is no secret sauce here”, one senior executive explained, “we don’t do one thing brilliantly, we do many, many things slightly better than others”.

I have heard this line frequently over the last twenty or so years, and I have always dismissed it as a fig leaf covering the lack of any real corporate advantage. And I think that all this time I may have been wrong.” Interim letter 2010

Stocks invested/discussed:

1)Air Asia

2)Games Workshop

3)MBIA (mistakes due to dilution risk)

4)Michael Page

5)Welsh insurance company

6)Asos

7)Amazon

Conclusion

It might be the best period for his fund to buy some of the highest quality companies like Amazon and Games Workshop at a super attractive price. Investing is a tough game (imagine dropping by 45%), so discipline (sticking to the high quality companies, pay a fair price and be patience) is going to be the key to long term compounding.

While the wording may seem lengthy, reading it is never dull. I'm quoting him directly to preserve his intended meaning. No summary is good enough to replace his original letters. You may read the complete letters from the archive here in his IGY foundation website. He is kind enough to share his wisdom and I think more investors need to know about it.

Share TQI capital (Typical quality investor)

Disclosure: I am not affiliated to any of the authors or writers and didn’t receive any monetary compensation. It is merely for education purpose and my passion for investing. I might own stocks pitched by them and please do your own due diligence. Cheers!!!

These are the visionaries who have shaped the landscape of finance, leaving an indelible mark on the industry. Together, we will explore the timeless principles, strategies, and mindset that have defined their success.

Source: Powered by GoArt

In the realm of revered investors, Nick Sleep stands out as an exemplar of humility and low-profile professionalism. The founder of Nomad Capital, he commenced his journey on September 10, 2001. Sleep's remarkable track record, a 20% (before fees) compounded annual return over 13 years until the fund's closure for personal reasons, solidifies his place as a legendary figure in the world of investing.

The series will be separated into a few parts:

1. Part 1: Nick Sleep investment philosophy and lessons (2001-2005)

2. Part 2: Nick Sleep investment philosophy and lessons (2006-2010)

3. Part 3: Nick Sleep investment philosophy and lessons (2011-2013)

4. Part 4: Nick Sleep mental models

Today's post delves into Nick Sleep's investment philosophy, lessons and early stock pitches, offering insights into what we can learn from this legend to become better investors. Let’s take a look at his fund first 4 years performance:

Below are some of his early days investment style and thoughts about investing:

On his investment philosophy:

“When we evaluate potential investments, we are looking for businesses trading at around half of their real business value, companies run by owner-oriented management and employing capital allocation strategies consistent with long term shareholder wealth creation.“

On short term investing:

“Many investors are professionally required to “pay attention” to the latest trend for fear of missing out (pay attention and be invested!). The dysfunctionality of the short-term investor was neatly described to us recently by a fellow long term value investor. Imagine, he said, that you knew with 100% certainty of outcome, that on January 1st next year a company would come by some good fortune, perhaps a government contract or license award, which would result in the price of the share quickly rising tenfold. You and I would buy the shares today and wait.

However, to the short-term investor the utility of this piece of information would be naught until after this year is ended. This is because he feels he is required to perform this quarter, next and by year end through fear that sub-par performance might cost him his job. A share which may be flat for the balance of the year is therefore of no use to him. This tale illustrates the dominant dynamic in the markets today: investment time frames are very compressed, and few investors it seems bother to assess the real value of a business but instead respond to the latest data point to determine share price direction.

This is momentum investing and is the mechanism by which expensive shares become very expensive, just as cheap shares may become very cheap. In the above example both sets of investors may even have privately agreed that the share in question was an outstanding investment, but only one would have bought.” Interim letter 2002

On management incentive:

“There are only two reasons companies behave well. Because they want to, and because they have to. Our preference is to invest in those that want to. If we can find enough of these heavenly opportunities, they will in effect put us out of a job, and you should be pleased with this happy outcome (even we will be pleased, if a little bored).

The problem of course is price. In paying up for excellent businesses today, investors are already paying for many years growth to come, in the hope that, as the saying goes, “time is the friend of a good business” Interim letter 2004

On diversification:

A simplified version of the Kelly criterion is that investors should bet a proportion of the portfolio equal to 2.1 x p - 1.1, where p is the probability of being right. The common-sense outcome of this equation is that if one is certain of being right, one should invest the entire portfolio in that idea. Even if one is say, 75% certain of being right the correct weighting remains high at 47.5% ((2.1 x 0.75) – 1.1).

But does anyone do that? As far as we are aware, only the early Buffett Partnership portfolios had anywhere near this level of concentration, and then mainly in companies in which Buffett was a controlling shareholder. But is this not the right way to think? If you know you are right, why would you not bet a high proportion of the portfolio in that idea? The logical extension of this line of thought is that Nomad’s portfolio concentration has at times been too low.

And if it has been too low at Nomad, what has been going on at the large mutual fund complexes with many hundred stocks in a single country portfolio? Apply the Kelly criterion, and the average fund manager would appear to have almost no clue as to the likely success of any one idea. In our opinion, the massive over-diversification that is commonplace in the industry has more to do with marketing, making the clients feel comfortable, and the smoothing of results than it does with investment excellence. Interim letter 2004

On Value vs Growth:

“When investors describe themselves as growth or value it might be helpful to have two questions in mind. To the value investor ask, “what is it about your approach that would have stopped you owning K-Mart for much of the last twenty years?” (K-Mart was a “cheap” stock, as measured by say price to book value – but a dreadful investment, recent performance notwithstanding), and to the growth investor ask, “what is it about your approach that would have stopped you selling Wal-Mart?”. So how does one avoid these mistakes?

The answer lies in analyzing not the effects and outputs of a business, but, digging down to the underlying reality of the company, the engine of its success. That is, one must see an investment not as a static balance sheet but as an evolving, compounding machine.” Annual letter 2004

On investor competitive advantage:

“Broadly Bill Miller argued that there are three competitive advantages in investing: informational (I know a meaningful fact nobody else does); analytical (I have cut up the public information to arrive at a superior conclusion) and psychological (that is to say, behavioural).

Sustainable competitive advantages are usually a product of analytical and or psychological factors, and the overwhelming advantage with regard to Nomad is the patience of the investor base and the alignment of that disposition with the analytical and psychological traits of your manager. It simply would not work otherwise.” Interim letter 2005

On beating the market:

“Think of how the future will be different from the past. Most people default to the directions and trends that they are currently observing…The important thing is that most things change. In longer term projections, Peter Bernstein tells us, that cone of uncertainty gets wider as time goes out. What are the chances that IBM will be bankrupt tomorrow morning? Probably none. A year from now? Five years from now? What about one hundred years from now? The point being that the possibilities increase as time goes out.

So, what you are trying to do as an investor is exploit the fact that fewer things will happen than can happen. So, you are trying to figure out how that probability distribution works and stay in the middle of what will happen. The market has to worry about all the things that can happen.” Interim letter 2005

On rethinking bias:

“This year we shall have to discard another strongly held bias which is that high inside ownership is a good thing. This too is not always helpful, as shareholders in Northwest Airlines are finding out. In this instance the unions appear to reason that management (who are the largest group of shareholders) will not risk placing the company in bankruptcy and are holding out for the last dollar in negotiations.

Oddly here, high inside ownership is hindering the process that would lead to a more viable airline. Who would have thought that a low share price and high inside ownership could be bearish? But they can. I wonder what other “best loved ideas” we will need to rethink in the coming years.” Interim letter 2005

Stocks discussed/invested:

1. International Speedway

2. Matichon

3. Xerox

4. Monsanto (mistake)

5. Stagecoach

6. Costco

7. Weetabix Limited

8. Union Cement

9. Georgica Plc

No summary is good enough to read replace his original letters. You may read the complete letters from the archive here in his IGY foundation website. He is kind enough to share his wisdom and I think more investors need to know about it.

Share TQI capital (Typical quality investor)

Disclosure: I am not affiliated to any of the authors or writers and didn’t receive any monetary compensation. It is merely for education purpose and my passion for investing. I might own stocks pitched by them and please do your own due diligence. Cheers!!!