Investing

Risk (Loss Ratio) Management is Key to Long Term Success in Investing

There are no brave old people in finance. Because if you’re brave, you mostly get destroyed in your 30s and 40s. If you make it to your 50s and 60s and you’re still prospering, you have a very good sense of how to avoid problems and when to be conservative or aggressive with your investments.

This is such a good quote from Steve Schwarzman via Dan Primack.

Having just come through a massive risk-on investing period in Silicon Valley, an era where seemingly nothing but reward has been discussed (irrespective of investment entry point in a company’s life cycle) it is a nice reminder that reward AND risk management matters. Some risky bets might not fall you today, especially in private equity where feedback loops are long, but I can tell you from observing investment firms come, go, and stick around, over time, risk is a killer to a fund manager’s career and investors’ capital. (more…)

Mental Models and Technology Investing

As a lower risk operator in the technology investment markets, I operate well behind the venture capital frontlines, where hype and momentum reign supreme (because that’s just how that game works). Yet, it is still helpful to consider where the Seed-Stage and Early-Stage VC technology investment horizon is heading. What trends are real versus hype? Now that hype has worn off and the opportunists have moved on to the next buzz word, who is left doing real work? Which companies are emerging as winners from overfunded early-stage areas? What is realistically going to occur over the next 5-7 years with a winning company? What market segments are perhaps cheap due to investor biases? (AdTech?) Even though I might not make a move for years, pondering these questions is helpful to form a prepared mind.

HBR Transformative TechnologyConstantly questioning technology’s evolution is why I found the mental model shown at left from this HBR article interesting. This model highlights the differences in proliferation between foundational versus transformative technologies, comparing Blockchain today to TCP/IP (i.e. the Internet) in 1972.

While this model is helpful to compartmentalize things, the reality is that investing in technology is sloppy business. Sometimes it is hard to see where technology is heading, like driving in the fog. Other times, it’s obvious – less a matter of if, but when. Yet, even if a technology trend is obvious and the timing of its proliferation is roughly predictable, determining the winning company for investment is difficult, especially when squared with entry valuation and the number of “horses in the race” on a hyped technology trend. (more…)

Confusing Simplicity with Ease

Yesterday I had a nice conversation with a very thoughtful investor. He noted that while investing is pretty simple — buy low, sell high — people often confuse its simplicity for ease.

I love this notion. Because over the years, I have come to realize that investment success is predicated on some pretty basic principles: Hard work, thoughtful valuation discipline, strong underwriting and careful portfolio construction. As an investor, this enables you to find unique opportunities and buy investments to sell at a higher price, while ensuring that the distribution of profitable and unprofitable investments in a portfolio, on average, deliver a solid return. This sounds pretty easy, right?

After analyzing the strategies and results of countless public and private investment strategies over the past 16 years, I have come to realize that no matter your strategy or “angle”, making profitable investments, especially above-average investments, is not just hard, it’s extremely hard. The good news is that there are strategies which can make this challenge easier, namely specialization. Employing a narrowed focus, whether it be sector, stage or geography, can meaningfully stengthen the building blocks of investing (hard work, valuation, underwriting). Specialization enables you to work a niche, uncovering riches in the niches.

So, while the seductiveness of investing’s simple nature can make something hard seem easy, there are some basic things that can make a hard thing easier. And what is more fun than winning at something that is hard?

Thoughts on the Snap IPO

Professionally I don’t get too excited about consumer technology IPOs, but I sometimes find myself entrapped, following certain consumer names for personal reasons. Snap is my current haunt. Snap has been a fun saga to follow and experience. I went from skeptic, to Snap user, to Facebook Stories user, and now back to being an avid Snap user (for good). I used to live in Venice Beach and skateboard past Snap’s first office before Snap was Snap; my old boss is now Snap’s #3 exec; and I constantly toil with wrapping my head around the sheer size of the opportunity around this company (it’s a big one).

For all of these reasons, I wanted to put my brief thoughts down on paper to hold myself accountable and to share some insights with readers. For full disclosure, I am not buying IPO stock, I don’t own any stock, and this is not investment advice (see disclaimer below). This is just my initial set of high-level thoughts to focus in on what I believe are the key issues. If you want vast reams of analysis, metrics, and fun with numbers, I would point you to Snap’s S-1Goodwater Capital’s review, RetailRoadshow, or here, here, and here. Lastly, apologies for the poor grammar below; I am in heavy GSD mode these days due to my two start-ups (family and company). (more…)

Michael Mauboussin on Maximizing the Probability of Investment Success

Sourcing, underwriting and constructing a portfolio of investments that produce attractive investor returns is tough and sloppy work. That is why I liked this quote from Michael Mauboussin on putting process around investing.

“We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process, we maximize our chances of good outcomes.” — Michael J. Mauboussin

Being Different and Finding Your Career Groove

“It’s about the journey, not the destination.”

I love this quote and often use it to keep things in perspective, especially careers.

When reading professional biographies and interviewing job candidates, it often seems as if careers are a linear process. However, as I grow older, while it is true that some people enjoy careers that are truly linear, I am coming to appreciate that careers are more like a journey with a rough destination in mind. Individuals are constantly striving to reach their long term career goal, while having fun (however you define it) and picking up pieces of knowledge at each stop along the way to help them do so. (more…)

Howard Marks & Charlie Munger: It’s [Investing is] Not Easy

As I continue to unwind from investment banking, I have been enjoying reading a lot again. I have already worked my way through more books in the past six months than I did during the the three years of working at Credit Suisse. At the same time, I have been back to writing more, too. My writings have mostly been investment memos at work, but I am beginning to consider posting on my blog again as well. Overall, I am feeling more reinvigorated than ever before.

At the same time, it feels like our little tech sector corner of the universe is reaching a turning point. It seems like the pendulum that has been swinging within the industry from fear to greed since 2005, (more…)

Share-based Compensation: To Add Back or Not?

While analyzing stocks for buy/sell recommendations for the USC Student Investment Fund, I discovered one key factor that often flipped my valuation opinion from buy to sell. This factor is share-based compensation (accounting treatment, here). When it’s added back in a discounted cash flow analysis, cash flow goes up and a stock looks like a buy, yet when it’s subtracted out (like a cash expense), cash flow goes down, making a stock look like a sell.

Share-based compensation is the largest valuation issue that I see discussed the least. (more…)

USC Student Investment Fund: Annual Performance

This past week we held the USC Student Investment Fund (SIF) annual meeting.  The annual meeting is an event that draws approximately 60 SIF alumni, during which each of the five student-run mutual funds presents its annual performance to the crowd.  Based on last year’s interrogation of the students by the audience, which featured some tough questions about Netflix (among others), my classmates and I (pictured left) were a bit nervous leading up to the event.  However, we did a great job – we effectively presented our performance, investment rationale and fiduciary duty.

Over the last twelve months I, along with my classmates Kai Wang and Abhinav Anand, managed the California Small Cap Fund (CSF), an approximately $1mm mutual fund which invests primarily in California-based small cap companies.  Kai, Abhinav and I put a lot of work into managing the fund and the SIF coursework; however, it was work that paid off.  We learned (more…)

Quote: Warren Buffett on Ignoring Stock Market Chatter

“We don’t buy and sell stocks based upon what other people think the stock market is going to do, (I never have an opinion) but rather upon what we think the company is going to do.  The course of the stock market will determine to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. Who would think of buying or selling a private business because of someone’s guess on the stock market?”  -Warren Buffett

My dad recently sent me this quote.  I like it because it helps keep short-term commentary from affecting long-term analysis and opinion, the true focus of investing (in my opinion).  Through the SIF, I have had the chance to hear similar thoughts on investing from people such as Dave Iben at Tradewinds; he doesn’t want to hear anything unless it will be meaningful in five years.  It’s nice to hear that others try to ignore CNBC and the like, too.