Good Investing Talks - How friendship helps to find the best stocks - Dennis Hong & Fred Liu

Episode Date: January 25, 2021

In this podcast, Fred Liu and Dennis Hong share how friendship helped them to become better investors. They also share investing insights.

Hello, everyone. We are happy to have you back on Good Investing Talks. Today I'm having Fred and Dennis on together. We had a great conversation with each other, but together it's even more fun. Great to have you here, guys. Thank you, Tillman. Thank you, Talman. It's great to be back. Thank you for having me. And also hello to the audience. It's great to have you on. I already collected a lot of questions to both. with you, so I'm happy to ask them during our live stream and also add some questions I thought about in. Let me start with the question that might make you think for a second or two. What is currently your single biggest challenge?

Before you answer that, I give you some time to think about it because I also want to introduce our sponsor for today. It's Mitimko, and I'm very happy to be supported by them because they are a great organization. Mitimco is a short form for MIT Investment Management Company. They are responsible for investing the financial assets of MIT. Mitimko's mission is to produce long-term returns. They support MIT's goal of world. class education, cutting edge, research, and ground planning innovation.

Mitimco is focused on finding and partnering with the best investors across the globe. No firm is too small, to young or too non-institutional. If you or someone you know is currently in the process of starting a fund or has recently launched, Bitimco welcomes you to reach out to partner at mitimco.org. You can discover more about on them, on their website. You also find the link below and the email is also below. So feel free to reach out to them. And as always, I want to show you at this point, the disclaimer. You find it also linked below. The main message is do your own research. This is no advice and no recommendation.

Always do your own research. So guys, I'm happy to get back to my challenging question. What is the answer on that? Sure. I'll go first. Dennis, that's some time. Yeah, so I think the biggest challenge for me and something I've been thinking about a lot, especially this year, is scaling the firm and how we keep the culture, how I find the right, because we talked last time, right? And I said, I'm always looking for these hunters who can help us. I like the picture. like the picture of a of a hunter yeah it's cool yeah so that's always something i'm looking for and that's hard to find right it's hard to build relationships and because of a lot of our processes

around you know having coffee with people finding information getting it out of their heads how do we scale that um you know on top of that if we want to prove certain feces quantitatively what information do we need to buy what information can we source ourselves Can we do it in-house? And then even on top of that, as a firm, our structure, you know, we're currently all public equities, eventually five years, 10 years down the line, do we want to enter kind of the private markets? What right do we have to win in that market or how do we earn the right to win in that market? So these are all things that I'm thinking about. And, yeah, it's still open question at the moment.

Dennis? So our first five years, we're really about. foundation and formulation and really developing scalable, replicable, repeatable mental models over time, over cycles. And that period was probably one of the most exciting times of my life. I've probably learned more in the last five years than any given five-year period of my life. And I think part of it was just this kind of feeling of it being kind of as Amazon Amazon's Jeff Bezos puts it, it being day one. So there is always this sort of urgency and paranoia

and how are we going to make this long-tailed probability of an $11 million launch, how are we going to actually scale this and make this more probable? And I think part of that was that we just had a lot of intellectual tension. So we were constantly learning and growing and everything was new.

And so our first five years, they were really good. A lot of things came together that we're very fortunate. We had great investors who were not only willing to bankroll us with capital, but with time and patience, and we're generous with their input. And it's my job, really, as the CEO, this company, to keep that intellectual tension very, very high.

I think open-mindedness, open-mindedness is probably one of the most underrated traits in this business. When I first started the fun, I would have told you, and you probably would laugh at our day one portfolio. Our day one portfolio would have looked like a pretty run-of-the-mill, blue-chip, large-cap portfolio. We were looking at things like Philip Morris and Visa and MasterCard and booking. They're great businesses, don't get me wrong, but I wanted to generate Hall of Fame returns. So we had to do something different, and we had to take advantage of the fact that we really had a blank canvas to really do anything. we want. So our first five years are really about that formulation and fostering that intellectual

tension. I think our next five years is going to be very much the same, but we figured a lot of stuff out. I got to tell you, things are going pretty well right now, but a certain level of paranoia, the sentiment that you have to earn it every day, that's pretty motivating. So today we have 10 institutions that we have as partners. And I operate at their pleasure. We're in this client service business. And ultimately, I think that we exist to not only take care of them and protect and grow their capital, but the way we're going to do that really, really well is if we keep the intellectual tension at this firm really, really high and continue to be open-minded. So that's my job. I have four responsibilities at the

this firm, as I tell our partners all the time. The first is protect and grow the capital, which is very obvious. The second is to be there for our LPs when we need them to be. The third is to mentor my team. And the fourth, which has become a goal of mine in this current five-year period that we're in, is to try to add value continuously to our management teams. I want to not only be just a passive shareholder. I want to be an active participant and add value and input whenever our management teams seek it out from us. So this next five years is really about executing on this proposition. I hope actually in year 11 to 15 that we're seen as really kind of a partner to our management teams, a real thought partner to our management teams. And we have to

earn that. So intellectual tension, keeping an open mind, and creating that urgency, creating that sentiment of it being day one here at our firm and creating a little bit of paranoia, that's going to be my most important challenge over the next five years. Thank you very much for this open insights. I did get some questions on your relationship. and I want to ask you how you would describe it and maybe is it a kind of role model like these two guys have

or would you describe it differently? I don't know. I mean obviously Dennis and I think similarly and that's why we connected several years ago. Yeah, I think we just I think investing at least in the way that I pursue it and those investors that I really respect you know everyone loves to share ideas everyone loves to talk about their ideas everyone

loves to share like what did I learn this week and you know share that with others right it's a very collaborative nature um so I I really love the relationship that Dennis and I have for that reason because we we talk a lot about these names you know through different chats and whatnot and occasionally I love the relationship that I have with Fred because Fred is incredibly thoughtful person. And I really admire his hustle. And Fred is a masterful networker. Sometimes I'm blown away by the people that he's able to source.

And he shares generously those insights with me and my teammates. So I think that it's probably a little bit different from Charlie Munger and Warren Buffett. I think it's a really terrific friendship. Sometimes investing can be a pretty lonely, a lonely art. And it's pretty fun when you come across various individuals all around the world. And that's an amazing thing, especially in the time that we live in. It's pretty hard to believe that here we are here on October 21, Tillman, you're based in Germany. I'm here in Boston.

Fred, I think you're in New York now, but you might be moving to the West Coast. I think it's amazing this time period that we live in. And I think that having relationships with people like Fred who are incredibly talented, analysts, investors, as well as just really great thought partners when it comes to sharing ideas on how to scale and grow funds, I feel very lucky. I feel very, very lucky. I think Fred, like you and I, we first met through the course of a conference. So at the HBS conference, maybe this is like three years ago. And it was really a matter of serendipity. And we just really struck up a conversation at one of their happy hours.

And it was just a really fun conversation. And afterwards, we just kept in touch. And it's been just fun. It's been fun to watch you scale up Hayden. It's been fun to share a pretty fantastic meal in Jakarta. I think that's the last time we traveled together last year in the fall. We were having, yeah, we were having the. I forget where we had dinner, but it was a pretty cool place, sharing beef Rendong out in Jakarta and then traveling together to Singapore, where we're actually, we spent some time with the management team of C-Limited, which we hold in common.

It's just been really fun. It's fun to work with just this incredible group of individuals like Fred. We're incredibly thoughtful, generous with their insights and also kind. just really nice. Exactly. I mean, I can say that Dennis is basically like a role model for me, right? Like you started your business earlier than me. You've been through the similar steps.

And so I've actually learned a lot through our conversations together. And at the same time, I think, you know, we're both in this industry because we love to learn something new every day. And we may be looking at different things, but then you can talk about those ideas and what you learn that day or what you learned that week, month, whatever. And yeah, just that sharing of intellectual knowledge. I think that's what formed the basis of this relationship. And yeah, we've met in person many times over the years afterwards.

So the advice here is never miss a happy hour, like when Corona is over because there could be a Dennis or Fed waiting for you. Yeah. I mean, in terms of networking, Dennis said I'm a great networker. I don't know about that. But I will say that one thing that I learned, you know, early on in my career is, you know, when you're trying to get a job on Wall Street, everyone says network. Always say yes to things.

Just go to any event that you're invited to. You never know who you're going to meet, right? The whole idea that you create your own luck by exposing yourself to a lot of opportunities, that's 100% true. Yeah. I already sent you a few questions before and one made up an interesting conversation. It is where are you different and where your strategies are different, where you're approaching things differently.

I mean, I think probably the most obvious different is the way that we structure our firms, but I think that's a personal preference as well. You know, we run all separate accounts. We have full transparency with our partners. I philosophically don't believe in lockups, unlike, you know, not necessarily Dennis, but many other funds out there do have lockups. And I try to get to get to know our partners personally because, again, And I think this business is built on a foundation of trust. So, yeah, I think that's probably maybe the largest point that we differ. You know, we were talking before this about individual ideas or philosophy. I think the reason we connect so much and the reason we share so many ideas with each other

is maybe there is a little bit of an echo chamber. But, you know, we're looking in the same areas. We're interested in the same names. We generally see the world the same way. So, yeah, it creates a more, a better relationship that way. I think another point of difference is I've got a team I've got a big internal team and not a big internal team in comparison to Fred it's pretty big but we have this one team one portfolio one P&L approach and I rely very heavily just on insights from my team and and I enjoy

having this group of individuals who are sort of pulling on the same or and trying to move this boat forward. And it can be hard. There are certainly some competitive advantages to doing it sort of as a one-man show. I mean, Rob Vinyl at RV Capital does it as a one-man show. Fred, you're ultimately the key decision-maker. You're the most important person at Hayden. And for me, I draw a lot of input and insight and really unusual ideas sort of bubble up to the surface because I try to surround myself with very different people on my team. And then I guess there's another thing is that our pool of capital is pretty flexible. So we can really look at anything, really any instrument.

It could be equities, public equities, it could be private equity, venture. Everything competes for capital. It just so happens, though, that we've spent most of our time investing in publics because we've been able to find the returns that we need from the public markets without encumbering ourselves in a complicated private equity deal flow process, we can pick our price with Publix. We don't necessarily have to encumber ourselves in a long lockup with privates where if it doesn't work out, we're sort of stuck and married to the idea. But in Publix, if we do have something that we don't get quite right, it's relatively easy to correct that

mistake. So it is sort of my hope that over time that maybe we find some real extraordinary private equity opportunity that's kind of like one of these, it's going to be 100x and we're full up in our fund and we go to our partners and tell them to co-invest with us. And we're full up, but you should put this in your fund too or on your balance sheet too because this is going to be extraordinary. It is my hope that we find something that is really, really extraordinary. But so far our publics have kept us busy enough and we've found the returns that we'd like from the public markets so we do have a bit more of a flexible pool of capital than than limiting ourselves to just the private markets or excuse me the public markets so to the audience if you

find this great ideas you can text both of them they're happy to receive your message What are like-minded investors you admire or you find interesting that are fishing in the same pond as you do? I'd love to hear from Fred. I have lots, but I'd love to know who Fred likes. Yeah, I mean, I don't necessarily want to name names because I'm sure I'm going to leave out people that may get offended. then just do free and the free they came in mind first to you so it's my fault that you leave out their names sure um Dennis why don't you go first well obviously I'm a huge admirer of Rob Vinyl at RV Capital I think he's incredibly thoughtful investor but he's also been incredibly thoughtful about the

business side of things. And he's incredibly generous to young and hungry and emerging managers with his insights and just sharing his perspectives on the challenges of building a fund and scaling of fun, especially if you don't come from sort of one of these illustrious backgrounds where you can go out and raise a billion dollars in one shot. So I really admire Rob. There's a young guy based in California, who Tillman, I really do hope you are able to get on because I think his approach is very unique and very interesting. He runs a highly concentrated investment partnership called Bonsai Partners. It's a guy called Andrew Rosenblum. And I think he's a really sharp analyst, really thoughtful investor and pretty under the radar. But he's got some pretty stupendous returns.

And he's been very, very thoughtful also about investing and about building his business. And then maybe just, if you would just maybe let me add two more, who I think are really, really terrific. There's this guy called Jason Israel who is at Faroese-Douan's family investment office. And Faroes used to run public investments at Tiger Global. And Faroes has this phenomenal family investment office. And one of his partners over there is this guy called Jason Israel, who's a really extraordinary investor, who's pretty under the radar. are. And I think he definitely deserves some kudos because he's definitely made us a better investors and thoughtful about various different businesses. And then one more. The guys at Kora,

I'm actually quite fond of. Cora is a emerging markets focused investment fund. They're based out of Brooklyn here in the United States, but they have a fairly unique model. They have a lot of on the ground people at these various different research offices around the world. And I've definitely admired Dan Jacobs over there and the thought that has gone into building Quora and the type of investments that they focus on. I may take a cop out on this one, but I'll say number one, I mean, everyone knows Charlie Munger. We talked about this before this. I think it's the Bible. And so like I said, I have a picture of Charlie Munger in our apartment. There's a lot to learn from

from him. I'd say number two, Dennis alluded to this, the Tiger ecosystem, not just Tiger Global in particular, but the entire ecosystem that they built over time, how they share ideas, how they share resources, research. I really love that collaborative nature, and I think there's a lot to learn from that. And then number three, without any names, I'll say just as almost as a asset class in general, venture capital, a lot of the venture capitalists are probably smarter than the public equity guys because there's not a daily market on your book, right? You're really focused on the fundamental business. How do I partner with these entrepreneurs? How do I add value to these entrepreneurs? How do I help them hire? How do I help them scale their business? I think

that's really respectable. In addition to the way that they structure their portfolios, I mean, you can't exactly sell one of these positions, right? And so you start off small and you add to your positions that are working in subsequent rounds. I think that's really something to learn from on the public side as well, because I think a lot of public equity investors don't quite understand that idea of watering the plants that have already sprouted and are going to become bid and not water the seats that never germinate. And then there's a couple venture funds that do a really good job of, say, doing cross-border learnings between businesses. So whether it's, you know, they sit on the boards of companies in Asia and then they will sit on boards in

the U.S., and they will take those learnings and kind of cross-pollinate those business models. So, yeah, I would say those are probably as a general category, what I would recommend. Maybe it's a good time to drop this question now. If you had to start a non-asset management business, in what industry would you start now? Okay, so I'll go first. I think there's a difference between good businesses and what you're capable of and what you're interested in. I think for me, the intersection of all three of those is investing. So I think anything that I choose is going to lie outside of that intersection. But I will say I have

always told my wife, like, if I ever retire from this business one day, I'm going to run a food truck. I think it's a bad business model, but I think I'm a decent chef, and I would love to expose, yeah, New York City to some of my cooking, and I think it'd be a fun business to run. Or I think the other thing is actually maybe consulting or teaching. You know, my dad was a professor. Once you hit tenure, you have a decent lifestyle. You basically have the ability and flexibility to do your own research, right? And we're all in this business because we just love the intellectual pursuit of, you know, learning different things. And I think being a professor or a consultant, being able to dictate your own schedule, being able to dictate your own interest and where do you spend your time, that's amazing.

And, you know, I love teaching. I try to teach maybe a little bit through our letters, but I would love to maybe after I retire from this business, spend some time in that field. I think you're doing some kind of teaching already at the moment. I'd love to go to Fred's house for dinner. Yeah, come on over. I think this is a really hard question for me because growing up, when I arrived at the Yale Endowment, I pretty much knew from that point that I really wanted to be a professional investor. It is just an amazing business.

It is a field. I mean, we're so fortunate. The three of us here are so fortunate. we're talking about businesses, we're talking about entrepreneurs, we're talking about really like studying. So it's almost like professional school. Like every day is almost about learning and growing and applying that knowledge. So it's pretty hard.

You know, I was trying to like think about what would be helpful to the audience on this question. So I like Keith Rabeau. And I know he's very controversial for a lot of reasons, but I thought he's. he had this really great formula. It's really more applicable to a formula for startup success. His idea was that if you want to be really successful in building a startup business, find a large, highly fragmented industry with the incumbents having low NPS scores and vertically integrate a solution to simplify the value proposition. So I sort of think about what Ernie Garcia, Jr., the founder of Carvana did,

was that he saw this incredibly bad business, the used car industry, bad in the sense that nobody likes the used car business. I mean, the statistic is pretty shameful that seven out of ten customers who go to a used car business feel like they're going to have some sort of shady sales process, some sort of lemon or bait and switch, some kind of a dishonest customer experience. And that's really sad. But I think what really distinguishes Carvana from the traditional use car business is that, and I love the way that Cliff Sosen puts it, what Ernie Garcia and his team at Carvana are doing are that they're building economies of trust. And I think that's part

of the reason why Carvana has been able to scale so quickly in a relatively short period of time. I mean, the business de facto is only about eight years old, less than a decade old. And for that business to have scaled over $4 billion in revenues and still growing very fast, it seems to be that there is a customer proposition that's really resonating. And so I think that if I were to think about leaving this business altogether, the investment business altogether, I try to think about a industry that is just plagued with very unhappy customers. And hopefully it's very fragmented. So there's no obvious incumbent to begin with their and the industry concentration is not really large. And I try to find a way to create ecosystem

control by vertically integrating a solution to just make a better mousetrap, as Fred would say. I like the most I do. Dennis, anything come to mind in terms of industry-wise? I got to think about that. So work in progress.

Let me think about that. Sounds good. What books would you recommend? I want to pick this question up from the chat. There are many great questions coming in, but I'm sorry at the moment that I can't pick them up all because I already did get a lot of questions beforehand, so I want to pick this one up

because it might be also interesting for all. What book would you recommend one should read? I'll say most recently. You know, I've been reading Alchemy by Rory Sutherland. It's just basically about the idea how some of the best decisions or the things that work for businesses aren't necessarily rational.

It may be an emotional reason why something works, right? He gives the example, for instance, Uber, right? Uber doesn't necessarily shorten the wait time that you're waiting for a cab or a black car. But by having the map feature and being able to trap that car and being able to rely upon it and say, have another cocktail while you're at the bar, we're just having that reliability,

that really was a game changer for that business. So kind of think outside of the box and basically go after businesses that are at the extremes. Don't try to tailor towards the average also. So anyways, that's a book that I recently read that I thought was pretty interesting. I love biographies of all kinds. You know, I love Bradstone's books because they really highlight not only just the business attributes and business characteristics that make franchises. like Amazon or Airbnb and Uber so great, but they really dive deep into the psyche of the entrepreneurs building them. So I really love this book, The Upstarts. And it's really neat because

it's a juxtaposition of Uber and Airbnb and the two entrepreneurs that founded Uber and Airbnbee, so Travis Kalanick and Brian Chesky. And they're diverging and converging stories about their own challenges and their story is to build these like really terrific franchises that everybody knows today. I mean, they're effectively cognitive reference of their own, their own various different segments. I just love the human side of things. So any time that a really great biography is written on people that I really look up to

and admire, and I love books that really dive deeper beyond just the surface level and really dig into sort of the heart of the matter of like what's going on. inside their heads and why is it that they made certain life decisions and professional decisions that they did. Those types of books really get me really excited. I'll actually add two more to that as well. I think we may have talked about this before, but the sleuth investor, I've recommended that book numerous times just about doing primary research and doing channel checks and how to build your network in the investment space. I think, again, that's probably one of the best books or only books written on the subject. Number two is actually very different,

or I guess there's the third book. It's a book called Pachinko. This was actually recommended by my wife. It's a fiction book, but it basically follows the story of a Korean family through four generations. It really starts before World War II and how that family basically had to flee Korea to go to Japan, how they struggled in Japan and kind of built their businesses. And then eventually, you know, some of the kids eventually think about start being educated in the U.S. It just follows the four generations. And you can really see the evolution of maybe not Asia as a whole, but definitely Korea in Japan and kind of cultural differences and everything there.

So I think it's a really good book for anyone interested in the region and the development of those two countries over the last 100 years. Tim did ask, if you're always fully invested or how you're managing can. Well, for us, cash is a residual value of any ideas that we put into the portfolio. And so we started, when I started Hayden, we were over 50% cash on day one. And over time, as ideas, say, different theses, different didn't work, different ideas matured, the IORs went down. Those positions became our first source of cash. until we didn't, we left the cash balance untouched.

And because we only invest in a, you know, one, two names a year, it took a long time for that cash balance to basically reach, you know, single digits. Right now we're below 5%. And so hopefully our bar for getting a new position has gotten higher in the portfolio, obviously, because with cash, you know, your opportunity cost is cash, right? It's whatever interest you enter into cash, it's basically zero. So nowadays, it's our lower-st or worst idea, which is still hopefully a positive IRA for us. So, yeah, right now we're running fully invested and most likely going into the future, that's how it's going to be.

We've had a bit of an evolution in our relationship to cash. So I've always had this thought process that cash is a call option on existing and new ideas. Every year, just pragmatically, the market sells off. I mean, if you look at the last 50 years of history of the S&P 500, there has not been sort of a single year where there's some major systematic drawdown. So actually, a peak to trough, the average drawdown in any calendar year is about 13.5%. About two out of three years ends up being very positive and often quite a bit positive, even with very significant drawdowns. So in that context, when we first started the fund, I thought that we'd always have a little bit of cash. just in case we had this real back-up-the-trump opportunity in any given year.

But the thing is that over time, as a partnership, I began to realize that maybe in the beginning, I was a little bit afraid of the potential for quite episodic levels of volatility and that scaring our investors. But over time, we've had sort of a real experience of having these big drawdowns every year. I can't remember a year where Shostpring has had a drawdown of at least 15% peak to trough in any given year. But in each of those instances, we've had we've had partners who have remained calm, who've remained very constructive about what it is that we own, have been very excited even to add to our portfolio when we are down. So for us, like we realized over time

that cash can be a big drag to the portfolio. And then there's sort of certainly investors that I respect who always have very significant levels of cash at all times. But for us, I realize that the cash is probably best kept on our partner's balance sheets. Because more often than not, we have found that our partners have had a willingness to add to us when we are down. And so it has been more efficient for us over time for us to run essentially fully invested at all times. I think mathematically, I also sort of think about this. So actually, like Cliff Sosen also had some really, really nice narratives about this. So if you think about this, let's say the three of us here, we have an opportunity to buy a business for a million dollars. And that business is throwing off 300,000 in cash earnings this year. That's a pretty nice 30% cash yield. Now, we can buy that business today for a million dollars, or we can wait for a recession and get 30% off. So you can buy that business. for $700,000. Let's say like a recession, statistically, probably only happens once every 10 years.

So let's say we get to year nine and we haven't had a recession until year nine. We basically have shortchanged ourselves $2.7 million in cash earnings all for the opportunity to buy this thing and save ourselves $300,000. So just the arithmetic of holding very large cash balances at all times, that has not necessarily made a lot of sense to us, just from an arithmetic point of view. I will tell you, though, we have been very, very lucky to have partners who consider themselves asset owners. They are genuinely interested in the underlying holdings of what we've acquired on their behalf. They know what they own. We're very transparent about what we own. We share all of our

underwriting materials about what we own, and I think that makes our investors more engaged. and more willing to put money with us or double down with us when we do have these systematic dislocations that happen, quite frankly, every year. I would actually say that's a great example of why building trust with their partners and having that transparency is so crucial, right? Because if you have partners who support you act like asset owners, as Dennis says, and really understand your portfolio and have that emotional stability. to withstand that volatility. It benefits you as an investor because you are able to run fully invested and focus on what you do well,

which is finding great companies. And it also benefits the partners themselves because they're able to realize higher returns, right, without that cash track. I think for a lot of funds out there, they may not have that trust level with their partners, which is why they may have a portion of cash in their portfolio. So it could, for some funds,

it could be a business decision. as well as a portfolio management decision. This year was kind of the year of the e-commerce software as a service and internet companies. It's a question from Michael. He's asking, why did it take so long for the market to recognize the value

and the greatness of this businesses? Dennis? So I think E-Chi e-commerce is pretty tough to paint with a broad brush. I think that the recent resilience, as well as incredibly enthusiastic price behavior of e-commerce businesses, in general, has been really due to the acceleration in the growth that we've seen. So we posted this neat chart back in kind of April that showed that we've seen probably within the scheme of two months, almost like 10 years of penetration.

And so it's not been surprising actually to see that the stocks also reacted appropriately with that acceleration in growth. And especially also, like what also really helped is a bit more of a benign CAQ environment. So the cost of customer acquisition has been a little bit more benign than in recent years, quite simply for the fact that aside from e-commerce businesses or those, businesses are competitively advantaged through COVID, there wasn't a lot of people spending money on TV or on other sort of online advertising channels until recently. It's to be determined what that cost-to-customer-acquisition environment looks like going forward. I certainly, it's

become a lot more competitive in the recent environment, especially as everyone is now moving online and everyone is now chasing after customers. But I'll tell you that the resilient growth that we saw back in kind of the April and May timeframe, in many instances across our portfolio, we actually assume that there would be sort of a linear decay in the growth rates in this back half of this year, quite simply for the fact that as people sort of go back to work, to the places that they love to eat, to the places that they love to shop, in in the physical world, and as these economies have opened up, we naturally assumed that there would be this linear decay in the back half and that there would be sort of the growth that we

saw was relatively transient. We may have achieved a new sort of penetration level on e-commerce as a percentage of all retail, but we also made the assumption what we thought was realistic that as economies open up again, you should start to see a bit of a deceleration. What has been interesting, though, is that the contemporaneous data would suggest otherwise. In fact, the growth rates that we saw in the early part of this year, in many cases, have not tailed off, but have actually persisted. And in some cases, actually have been reinforced. Even in places like China, you saw a very, very strong adoption rate of e-commerce that was extremely resilient across categories, whether it be online health, whether it be online grocery, whether it be

continuation of the trend within e-commerce writ large. But actually in China, what we're seeing is, again, like a second wind and a second acceleration across platforms. And that's been an interesting one to watch. So the assumption that we would have made back in March and April of all these businesses that we bought, that there would be sort of a linear decay in the growth rates in this back half of the year, that has so far not been the correct forecast. And in fact, actually what we thought was going to happen has proven to be more conservative than reality. Yeah, I would also say that I think that there will be a bifurcation when, you know, there's a vaccine and things do return to normal, kind of what Dennis alluded to, is, you know, if you're a mature business that, you know, has basically won your market, and if you're, everyone is basically buying online today in your market and people, return to buying and brick and mortar, your business is going to decline along with that,

right? But if you do own a mousetrap type of business that is earlier stage and it's S curve, right, where the biggest friction is around consumer behavior and changing consumer behavior. This is one of the best periods for that. It's been, what, eight months already, close to eight months. You know, habits supposedly take about two months, three months to form. We're well into that, right and if you have 3% 5% penetration those habits that people form right now are going to be permanent and so that's going to exhibit a step change function but if you are just a beneficiary of the industry tailwind and you already have dominant market share inside your market I think those are the businesses that you want to be wary of that may suffer the decline when things

normalize a bit that's interesting both of you were writing rockets this year if you take a look in the portfolio and see how your positions developed you had a cavana that's 8x sea limited how you're dealing with this riding on rockets and how you decide to sell or to stick to that year sure well uh you know talking about mousetraps and consumer behavior change and everything i think sees the best example of that right um i think that again this is a business that had, you know, nowadays, they're about mid-single digit penetration. Two years ago, they were lower than that. This is a company that I don't think will suffer that decline and that if you look at

their earnings power, it's justified. I still think a business like that, even though we've made ridiculous returns on it, it's still our largest position because I think even from here, it's a network effect type of business, right? the more entrenched you become, the stronger the business becomes, which means that investing in it today is actually less risky than it was when we originally invested two years ago, which means you're able and you should have a larger position size all else equal, right? And so yeah, I think it's still very early days for a business like that. And that's why we continue to hold it and I haven't sold it

in fully. So we're pretty algorithmic about our portfolio construction, and we're at any given point in time, we're trying to maximize our portfolio for the best three to five-year IRA. So we have made a few changes to our portfolio. We're still quite enthusiastic about everything that we own for the very reasons that Fred highlighted. There's still, I think, quite a runway for businesses like C, which have Shoppy as probably the largest value creation opportunity within that group of companies in that franchise.

And the management team has just absolutely taken advantage of the competitive dynamic with two major competitors who are externally finance. And so you have like at sea, Shoppy being a depressed's advantages because it's two largest competitors are really kind of doing different things. So in the case of Toko, you have an external financier in SoftBank that is requiring profitability. And that's a very, very, very hard choice to make when you have a competitor that doesn't have to do either and actually can press both advantages. And then you have the case of Lazada where you have quite a bit of management turnover, which has been very, very challenging. But also just quite frankly, the fact that they run that franchise from Hangzhou.

and the insights that we get from that company are that the Lazada team has to really figure at the unit economics in order for the guys in Hong Jo to give them more resources. So that's a very, very challenging spot to be in. What I like about C is that there's still some embedded call optionality. It's still very early days with the digital wallet business within C money. It could be something quite valuable, it's probably worth more than zero, which I think that there's probably not a lot of value being attributed to that. And then I think that one of the questions that has recently come up, both internally, but also just as a debate I see online quite frequently, is what are they going to do in South America? And it's pretty interesting. I know that, I think

that Fred is more bullish than us on this, but it is a pretty interesting dynamic that we'll have to monitor to see what they do in Brazil ultimately. It's still pretty early days. The current model is mostly cross-border to allow shoppy merchants to sell into Brazil. We're talking basically taking cheap stuff from China, mostly apparel demanded by consumers in Latam, which takes like a month or two to arrive. So it's not exactly a wonderful consumer experience, but the very, very fact that Sharpie's been able to carve out what is pretty significant share with minimal effort. That has been very, very surprising. So that would be kind of an interesting thing to watch.

I think that the C-limited team is ambitious. They're thoughtful. They are savvy. They're hustlers. And I suspect that if they see something really interesting in Ladam, that they'll go for it, I sometimes wonder about this very question, is it going to be easier for C to compete against Mercado Libre in that M? Or is it easier to compete against Alibaba Group and SoftBank in Indonesia? I think time will tell, but it's exciting to see where that franchise potentially could grow.

Right. I mean, as Dennis said, that's optionality, right? And I think what's interesting is, I'll just add to this, is, you know, currently they're doing cross borders, but they're starting to be evidence that the people who buy cross border wait for a month for those goods to arrive from China, they are then reselling it on the same platform, right? Which is exactly the model that they followed in Southeast Asia. A lot of the goods were shipped from Shenzhen or, you know, it could be from Korea or elsewhere. A lot of these goods were a cross border. And so that's exactly the model they followed. And what's also interesting is like, you know, I remember talking to some investors in Brazil last year when they started launching this stuff. And, you know, investors in Sao Paulo and Rio, they had no idea that Shoppy was even in their backyard.

And the reason for that is if you look at the surveys from two years ago in Indonesia, the biggest use case for Shopify was outside of like tier two cities, right? Tier three and below cities inside of Indonesia. That was where they were penetrated. So they were really going after a more rural market, lower income type of market where generally investors don't sit, right? Investors sit in these major cities and they don't operate there. They don't see the advertisements.

And so I think a lot of Brazilian investors or even some Brazilian competitors were caught a little off guard. And so, yeah, it's an interesting development to watch over the next couple of years and see if they can be successful there as well. But according to, you know, different metrics, it seems like they're doing well. I want to wave in here a question from the chat. How do you make sure that the companies you're invested in has a great management and how do you evaluate management in the companies you invested in?

Maybe you could also name it on an example of C. I would say part of it is just watch. what they have done in the past, right? I think you need to know, in order to make a judgment about a person or a management team, which at the end of day is a judgment about a person, it's you have to put yourself in their shoes and understand the business well enough to have a independent opinion of what would I do if I were them, given the facts that are available in this world today. And then you make an opinion, hopefully, obviously you think your opinion is correct, right? And then you see if management,

management agrees with you or they chose a, sorry, our light turned off, if they chose a different route and if they did choose a different route and made a decision different than yourself, why did they do that? What data supports that? What was their rationale for doing that? And given that new information, do you agree with them or not? I think at the end of the day, it just comes down to judging people and how do you build trust with someone, you know, that you meet in regular life, right? It's the same process. The great thing is that as public investors, we have a lot of access to information. So the financial statements, the quarterly reports, the annual reports, how management crafts a narrative around their business and just looking at the numbers, how fast is the business grown its revenue, its earnings, and industry cash flow, how have they been deploying capital? That's just the mechanical aspects. But I think the more interesting aspects are doing the due diligence process of talking to competitors, talking to former employees, talking to other investors who may have invested with

them through their prior lives. We're looking at this business in Japan. It's this software business that is growing really fast, focused on bookkeeping, accounting, and payroll. It's a really, really interesting company. And the entrepreneur there, he's a former Googler. And the way we found it actually was just doing a survey of some of the analog companies in the U.S. and Europe, and as well as a really big one called Zero, which is listed in Australia, New Zealand. But we always ask the question, who in your space do you really admire? Which company in your sector is really good? And who do you keep an eye on? And it was very interesting. So there's this bookkeeping, accounting, and payroll software business in Sweden

called Fort Knox, and we have bill.com here in the United States, and they both zeroed in on this Japanese software company. And they fawned over the CEO and how he was building something really special, and that they would be lucky to replicate even half of the capabilities that he's building for this business. So I think that that's probably the fun part about what we do. looking at the mechanical numbers and the track record is one thing, and also just understanding if they win, do we win as well? And so we tend to have a bias towards managers that have very significant percentages of their own wealth in their own company's shares. That just seems to be sort of a bias. When you look across our portfolio today, we have very, very few companies

that are run by professional managers, so to speak. And most of them, most if not all of them, are owner operators. And in fact, actually, the owner operator themselves are often the largest, if not among the largest shareholders in the businesses that we're excited about. So there's a lot of like really, really fun things that you can do to do due diligence around management teams and assess the quality. But that's part of the fun. I mean, ultimately these are businesses run by people. I think that Fred and I, I think we probably would agree that Forrest Lee at C is pretty exceptional. I think he's really come into his own as an owner-operator. I think what I really admire is just his ability to think really big and find optionality and build optionality into his business

and leverage the resources that he has at C-Limited to get into all these adjacencies, taking it from gaming to e-commerce to digital payments to Latam, maybe other markets around the world. The best management teams create optionality, and they're very, very thoughtful about using the resources at their disposal to chase after that optionality. Right. I would add on just, I think one angle that has been really fruitful for us, because what do management teams control? They control the strategic decisions, and they also instill the culture inside of the firm, right? Those are your two primary levers that they pull. I would say on the cultural aspect, talking to middle-level employees has been one of our best sources for gauging a culture inside of a firm. Yeah, I mean, on the topic

of forest, every single employee that we've always talked to really respects the management team there, not only Forrest, but they're direct superiors and whatnot. They get probably some of the highest levels of autonomy out of any company based in the region or even globally. Yeah, and then also just talking to competitors, right? Like, who are you afraid of? And often those are the companies that you should be investing in. Oh, and I want to make one other point, Fred, just to segue into your point on the mid-level employees.

So one of my teammates is this guy called Nihar, and he's a former Google engineer. And he said that one thing that is a pretty interesting phenomenon to follow is, where are all the top engineers going? Because the top engineers go to places where they're attracted by visionary entrepreneurs or really thoughtful entrepreneurs. And it has been something that we have started to pay attention to, particularly in a place like Japan. So we own this Japanese mobile classifieds business with the business.

this manager who just has a real cult of personality around him. And there's been an incredibly compelling sort of due diligence that this business has been able to attract some really extraordinary tech talent. Tech talent in such a way that it's like a choice between this company and then something like a Facebook or Google in Japan. So following tech talent, particularly the kinds of businesses that we look at, it can be quite illuminating. I'm just thinking we should aggregate all of the top engineering schools as a career pamphlets that they put out each year and figure out where all the engineers are going.

That would be interesting. I hope with this talk, we also make the light go on for some of the viewers. So if you like the content, drop us a like. It helps me very much with my work. I have a question from Kermit Capital. Does Square have the potential for a global super app? And do you expect to see them follow the C playbook? And might they see and Square compete in emerging markets?

I thought that was a really neat question. And I'm a big fan of Kermit Capital on Twitter. So please give me a problem. So Square's ambitions are global. But I think their efforts are probably likely focused in the U.S. and Europe where there are not scaled up super app or digital wallets today. So we think the highest potential is scaling a digital wallet likely in these markets, leveraging their peer-to-peer, their P-to-P transfer service as a core initial use case, as in the U.S. with the cash app. The U.K. is increasingly becoming a focus. And actually, Square recently purchased a business in Spain called Berset.

So I think that there's probably going to be a similar playbook to the U.S. in these markets, but it's probably pretty unlikely for Square and C to sort of face each other in competition in the emerging markets anytime soon. It is hard to forget that global players often find it very, very challenging to enter into foreign markets because the rules and regulations and governing various different businesses, they're often very hard. So Square actually had quite a bit of challenge entering into Canada because Canada has a very unique payment system called Interact. I'm Canadian, so I grew up with this, but it's really kind of this consortium of banks. And Square had to navigate all the kind of rules and regulations to enter

into that market. I think that Square is going to probably find very similar challenges globally, where they just have to have to face up to quite significant incumbents that I've already been really, really good at what it is that Square is promising to do. Now, Square certainly can do it. They're in Canada, and it seems like they're scaling a nice business there, but it is not, it's not just as if you enter the market in your square and business automatically comes to you. I think Shopify has also had very similar challenges in Japan. So there's this really extraordinary business in Japan called Base. Again, a great Japanese tech business growing like triple digits and has basically created the same proposition that Shopify has offered in the

developed markets, but even Shopify has had some difficulty really getting traction in those markets, just because, again, the nuances of local culture, local customs, local regulations, they're often very, very difficult for a global player to get everything right. I think that it's probably very similar to the reasons why Lazada has been finding it so difficult getting a significant traction in Southeast Asia. Of course, they're really, really big business, and they're doing fine compared to everybody else, but I think it's still very, very challenging to run a business like Lazada from Hongzhou and have Chinese managers come from Hongzhou and try to implant a Hangzhou, Alibaba style management culture inside of what really requires a localized mindset.

Do you have something to add, Fred? No, nothing to add. I agree with everything that Dennis just said. That's great. There's a question on what Dennis thinks about JP Morgan taking on Square and PayPal with their smartphone card leader. I almost knew that someone was going to ask this question. So I'm going to start with the caveat

that this was just announced today. So we're still thinking about this impact to square. Our current initial thoughts are as follows. So there's a significant amount of square sellers who don't use Chase at all. So I'm not sure

that Chase's announcement or J.P. Morgan's announcement is necessarily going to have an impact on those. But for those who use both, for those merchants that use both, there could be compression on the instant transfer fees, which J.P. Morgan has basically said that we're offering that for free. So there could be compression on that income stream over time, but I think there's probably two things to consider for people who are sort of bearish against Square based on the news today. So Square has a more robust ecosystem than what Chase is offering today. So Square is not just a POS payments network. They offer things like payroll appointments. They have an app store.

And Chase simply just doesn't have that. And many, many merchants use Square to power their businesses effectively as like the heart of their operations and not just to process payments. The second thing is that Square really excels at hardware, which it sounds like it's very, very easy that it's basically just a dongle that you plug into your phone or it's just a car reader, but it's very hard to make this work seamlessly. When it comes to processing payments, if it doesn't work, then that's a dissatisfied customer and lost sales. So we're not saying that Chase's solution won't work well, but it's pretty difficult to really make an assessment of that until we really see it in action. And then I think I want to make just one last point.

What is square known for it? Well, we think most of new seller acquisition, will still continue to accrue to square, just because they're kind of the cognitive referent in sort of small business empowerment. Chase might be successful in cross-selling its existing customers, but again, this is still to be determined. So high-level takeaways, I think that it's really important to really understand what's going on with Chase

and you do not ignore a competitor that, like Chase or J.P. Morgan, but I will say it's still very, very early days to really understand what the true impact to Square will be. I will also say is that Square is not likely to sort of sit down and be happy to just let this happen. Square is an incredibly thoughtful, aggressive, constantly iterating on product. They're a very innovative company. And so it would be very interesting to see how these two businesses, J.P. Morgan and Square sort of compete with each other. But in my mind, I've never known JPMorgan to be necessarily a very innovative company. So we'll see.

There's another question on C and especially the gaming arm of C. Are they a one-trick pony with the successes they have? Or are they able to repeat the successes and the high margins they have and fight against the competition in the gaming space? Yeah, well, I mean, I think one thing to understand about the gaming universe is just the shelf life of these games have become much longer over the past call five years, 10 years, right? You think about League of Legends, it's well over 10 years now. World Warcraft people are still playing it. You know, I still play. I'm still playing age of empires. Love age of empires. I saw Starcraft installed on my computer. Yeah. I mean, a lot of these,

games now exhibit, you know, aspects of network effects, right? So network effects are much more stable. It takes longer to unwind and unravel that because it literally is a web, right? So I think, you know, Free Fire has only been around for a couple of years. I know Forrest thinks that it's going to be at least a 10-year type of game. But you can never call with these things. You can never call where the top is because that's based upon gamers. behavior and if there's a cool new game out there that everyone migrates to. But you can, because the unraveling is usually slow in these, you can watch for when, if there is an unraveling starting to happen. And with the latest numbers that they've put out and the data you can look at, there is

no sign of that currently. So think about it almost like riding a wave. You don't know how large that wave is going to get, but you can start to feel when it starts to peter out. And That's what you should be looking for. You should be looking for signs of that. In the meantime, for C, you know, yes, Free Fire is a large part of Guerrina's business, but the gaming business is really about having as many shots on gold as possible. If you study like a business like Unity, for instance, and understand like the developers that they serve, it's almost like a lot of ticket, right?

You need a lot of shots on gold to hopefully get that one game that makes it big. And there's no way you know what's going to make it big beforehand. So for them, it's really about just, you know, partnering with as many studios as possible, developing games themselves. You know, they just bought Phoenix Labs, Stuntless. It seems to have early traction. They're going to port that over to mobile, you know, sometime within the next year or so. So there's a lot of shots on goal here.

And so we'll see if there's another lake. But even if there isn't, really our thesis, when we originally invest in, you can look back at our 2018 presentation. I have no idea what's going to happen to this gaming business, but what I do know is that unraveling happens slowly, and there was no sign of that. And in the meantime, it's a funding mechanism for Shop B, which means that they don't need to dilute their capital

or take on external funding. And Shop B will become self-sustainable by the time that way before Free Fire starts to peter out. That's all you really have to underwrite. And hopefully they have another cash flow stream, whether it's through payments or gaming, to help fund these investments afterwards. Do you have something to add?

We have, I mean, I think we share very, very similar thesis on that. In fact, I actually have a little bit more of a stark assumption on this. I actually thought that Greena's peak year would be this year. So actually, if you go back to our original underwriting work, we made an assumption that there would be a decay in free fires. in Free Fire's momentum. And so this would be, here in 2020, would be the peak year for Garena's valuation. And then we round-trip back to the valuation that originally we had for Garena, the year that

we owned it. Now, the assumption then was that actually that the street would be less focused on Garena because you have a very large shop-e business that's growing very, very rapidly, already profitable, quite highly profitable in Shoppy, Taiwan, and actually with very significant market share in Taiwan, which was a nice roadmap that management sort of highlighted, I think, for maybe as a pathway towards profitability in Indonesia, which is their largest and probably arguably most important market. So there was going to be a handoff in the valuation that the street would be less focused on Garina. We'd have a round trip, but then it wouldn't have mattered

because you had a shoppy business that was quite ascendant. And so actually, Garina's momentum this year, and it seemingly hasn't been dented, we might be able to have another strong earnings here from Gorina. So the decay that we assumed in Garina might have been pushed a little bit out into the out years. Now, what's been interesting is that India is, I think, the number two region for free fire, which is pretty interesting. I think that maybe part of it is just the relationship that India has with China right now and the various banning of Chinese apps in the country

may have been created a competitively advantageous position for the Free Fire franchise in India. But to our understanding that seems like Free Fire is also seemingly gotten some adoption in the United States and in Europe, which are markets that I would never have considered this franchise would have entered. So I think it's still very early for those markets, clearly, but the management team at Guerrina has definitively executed ahead of our expectations. I've got two questions left, and then I want to give you the room. If you have something to add, we haven't discussed, and you want to share with the audience and the community.

The first is coming from the chat, and I really liked it. How do you think about a fair multiple for a company? especially with the high multiple expansion we've experienced. Sure. You know, the last interview we did, I kind of drew that S-curved chart, right? The way that I think about it is really we're trying to buy companies below a mature market multiple. So, for instance, with a lot of these network-effect businesses, if they do dominate their market, if they do become mature in this business, what type of multiple valuation will they trade at?

because you were referring to high multiples of this year. And the question is that usually because these businesses are earlier stage, there's a bit more uncertainty around these businesses. Historically, investors would not place as high of a multiple or the type of valuation that you would get when the pathway is certain. And so we were able to buy these businesses for cheaper multiples than a mature market multiple. in addition to being able to benefit from the value creation that this business creates over time, right? The earnings power Kaker.

So you would get the twin engines, right? You would get earnings compounding at whatever rate, 30%, 40%, 50%, in addition to as that uncertainty dissipates, that valuation will also expand as well. And that's how you kind of create your really great investments. you know, in cases like this year, sometimes occasionally the multiple will expand on top or above what you would normally pay for a mature business. And so you will have some multiple compression in these businesses over time, right? So the question is over the next three years, over five years, even with that multiple compression,

can that Irving's power Kager quick enough to overcome that headwind? It really differs case by case, and it really differs in terms of what you think that slope is for the intrinsic earnings power keager. But, yeah, for us, our names tend to be a bit earlier stage. Historically, they've had a bit more uncertainty around them, which has allowed us to buy it at a cheaper valuation. Dennis, do you have something to add? I'm curious here what you say on this point.

So we're probably pretty similar, actually, in terms of valuation discipline and how we contextualize the world. I will say that it's definitely a area that we're going to continue to learn and evolve. So when we first started the fund, we had a very DCF type approach to valuation, but there are certain limitations and practical limitations to employing a DCF for the kind of thing, for the kind of investing that we do. Because quite frankly, the discounting period is often quite long and most of the values captured in this terminal year, which is very, very challenging sometimes. Like I, we talked a little bit about, in one of our letters about, for example, investing

in Tencent in 1998 when an IPO, I peoed at a billion dollars. But if you're running a DCF in 1998, and you sort of prospectively looked at what is this business worth, in 1998, this one billion dollar business, it would have implied that this this business is worth 62 billion. Now, clearly, in that year, you're not going to have that business trade up to $62 billion. Like, there's just, there's just no way. It just makes no sense. So, you know, we've evolved from sort of a DCF-based approach to one that takes into account normalize multiples, normalized earnings and multiples approach. So we start with the premise. the long-term rate of returns of equities, let's say the S&B 500, has been about 10% annualized.

So if we think about that as kind of our cost of equity, and start with the premise, what would you pay for a zero-growth business discounted by 10% cost of equity? It's a 10 times multiple. So in the rare, really rare instances, when you have like these massive market meltdowns, like we had in March of 2020 or the fall of 2018, where all these stocks just go down. Nothing's up. All the stocks go down. And you get this real rare opportunity by a growing business, a high-quality growing business

for 10 times either explicit earnings or 10 times normalized earnings. That tends to be a pretty good risk return. But what we found over time, and this has been sort of six years of this, Paying more than 40 times normalized earnings, things start to get really, really tough when you pay higher multiples than that, because you have to make sure that these businesses are truly robust, have truly, truly indisputable ecosystem control, because otherwise there's just not enough of more margin of safety. And you can really, really have some damage to your portfolio if you, if you're starting to pay inexorably higher. and higher multiples. So for us, like, we are pretty algorithmic about when we construct the portfolio and we think about sort of what is this business going to be commanding in the one, two, three, four, five year discounting period that we look at. We try to be very,

very thoughtful. Now, we also make the assumption in our, in our underwriting that over time, just base effects alone, the business is just going to show some linear deceleration. It's just going to decelerate. Take a look at, like, for example, Netflix today, right? Consistently for the last several years, Netflix has generated an incremental $5 billion in revenue roughly. But $5 billion in revenue on a $30 billion base, even if they were to repeat that year after year after year, you know, you're going from like 30% growth to like 17% growth to like 12, et cetera, et cetera. And so you make the assumption if you want to be an owner in that, that the market is not going to be willing to pay sustain high multiples. And in fact, you have to make the assumption

that actually the multiple comes down. The market is simply not going to be willing to pay that high of a price for a business that has a deceleration like that. So in our underwriting, we make the assumption that over time, over our ownership period, that there is going to be a natural deceleration in or decay in the multiple. But what's going to carry that is hopefully that we've bought a business that is growing its intrinsic value rapidly up front. So, you know, for us, like when we're looking at a new idea, You know, it used to be that we opened up our minds to a lot of different ideas.

You know, even businesses that sustainably were growing 10 to 15% a year. That was kind of our early years. We're looking at businesses like Expedia and booking.com and Visa, which were very good businesses and sustainably growing regardless of the economic environment. But what I realize is that base effects catch up to those very, very quickly. So at a starting point, we often have to find businesses that growing their, and we look at gross profit growth, by the way. Because I can grow revenues to the moon very easily, right? I could just say, hey, Fred, would you like a dollar? Just pay me 50 cents for that dollar. I could do that

all day long and generate lots of revenue growth. But the unit economics clearly don't work. So we actually look at gross profit growth. And so for us, like if a business is generally not growing gross profit north of 30 percent as a starting point, it becomes less interesting to us because that business will clearly at some point have to overcome base effects. And then there's going to be a deceleration in the growth, and therefore the multiple will start to decay. So we have to be very, very thoughtful about what is a good starting point for us to take a look at these businesses. It's a weird period in time. I mean, we're not macro investors, but it's really, really hard to ignore the fact that the macro and the general condition in the

markets is very odd. And coupled with the fact that just market structure, there's not that many companies that are growing, let alone seeing accelerating growth. So in some sense, it's not surprising to see leading dominant software businesses, growth businesses, and so on and so forth. A couple of these low rates, you're starting to see like really, really escalating multiples in many of these businesses. Fortunately for us, we have a global approach. So, you know, for us, like we generally are looking at things all over the world, but we're finding that increasingly our best ideas are probably overseas. And I've told some of our LPs that Shaw Springs future is likely Asia. And it wouldn't be surprising to us, probably in the coming two to three years, that we

probably would be doubling down our investments in Asia explicitly even as a firm and probably start an office, a research office in Asia. Quite simply for the fact that I think that some of the most exciting, most interesting, most talented entrepreneurs are in Asia today. And it's less competitive. So I'm 38. And the international students I went to school with, they're not staying in the U.S. They're going back to places like Shanghai, Shenzhen, Hong Kong, Singapore, Jakarta, Bombay, and they're taking over businesses, they're starting businesses, they're scaling businesses. And that's really exciting because they have U.S. education, they have a capitalist mindset, they have sophistication around capital markets discipline, capital allocation, and competitive

strategy, I think that's really exciting because I think that it puts these individuals at a very, very significant competitive advantage. And the fact that they're taking over these businesses and creating real disruptive businesses against quite slow-moving traditional incumbents, I think that's where we're going to find some of our best ideas. Yeah. And when those seeds are planted and their employees become wealthy and they spend off and create their own businesses. It creates a whole ecosystem around it. That's the beautiful part of it.

And so to then, as this point, move east. I would also say that, you know, I think in terms of your original question, I just want to add that sometimes with these businesses that are growing so rapidly, call it like growing 100%, 80%, what have you, they don't normally decelerate to 0% or flat the next year, right? Generally, there is some sort of fundamental momentum within it.

There's a reason why customers are continuing to buy their products. And so it may go 80%, 70%, 60%, what have you. And so if you are able to underwrite the next two years of growth, maybe you do have some leeway to pay up for the multiple a bit because you're highly confident that it won't decelerate to zero immediately, right? It won't fall off a cliff. But I would caution that there are some investors. I mean, I've seen models that go out to like 20, 35 or whatever.

That's just nuts to me, right? I understand how you can have confidence around the next two years, but who knows what new products are going to come out in the next 15, right? So I would say, you know, to Dennis's point about the DCF approach, a lot of these businesses, there are certain years where they have like step function changes. They launch a new product, they launch a new feature, they reaccelerate. And you're never going to capture that in the D. You know, I went to undergrad B school.

We were always taught to just model out the out years in a linear decelerating fashion, right? Like times .95 for every year going forward. I think that's pretty ridiculous because the value creation comes from those inflection points that you're never going to capture. And so for us, it's really around if this business stopped going, what would we pay for it if they won their market? And then we can get all that future growth for free. And if we're highly confident in next two years, maybe we can pay a little bit more.

and then get years two to infinity for free. But really, that's the core of it. I think it's really tough to project very accurately a business 15 years into the future. Amputed. This question is also too hard for you, but I found it interesting and want to put it as my end question. Have you already thought you're early in the S-curve with your personal value creation? Have you already thought about an idea what you want to do with the capital you accumulated and what you want to do, charity, start a new business, do a food truck empire, or maybe.

Could be a big business. I don't know. Yeah, I mean, I'll just say that. I don't know who said this quote, but I just remember hearing it years and years ago. It's like, spend the first third of your life learning as much as you can and being a student. Spend the next third of your life, really perfecting your craft and honing it. Spend the last third giving back, right? I'm probably in the second third right now. And so, you know, in the last third, I think that education is a big focus for me. I mean, I think on our third day, my wife and I, a girlfriend at the time, we went to tutor at Kip charter schools. That was our third day, right?

I think when I do retire from this business, I would love to spend more time in that aspect because I think financial literacy and just education general is probably one of the great equalizers in society and a way to close that wealth gap within the U.S. or even globally. So that's an area that I would love to focus on a bit more later in my career. I personally feel I'm still getting started. So I'm quite a long ways off before even thinking about sort of the sunset of my career. So, you know, the thing is that I love entrepreneurship. And one of our investors is this phenomenal entrepreneur.

And he's been incredibly successful financially. And I think the best way that he's given back is actually by investing in innovation in places like India. So some of the poorest countries in the world and empowering entrepreneurs to build businesses solve problems. And I think that that is such an amazing, amazing concept to, and it doesn't take a lot of capital to make a huge impact. Actually, in fact, even just like the seed, seed capital for entrepreneurs who get overlooked by traditional sources of capital. And if they have the opportunity really, like, change the worlds with their franchise, make, make life easier for everyone. I think that that would be, it would be so interesting. But as of right now, I'm really focused on building this sperm.

I'm really, really focused on doing my four responsibilities even better than before, right? So protecting growing our capital, like that's going to be a lifelong, lifelong learning, a lifelong of experience that I, have yet to experience, taking care of our LPs, right? So our LPs, and this firm doesn't scale beyond sort of for us, like I've identified that it's not an AUM constraint for us. It's, for me, it's bandwidth. I don't have an IR person. I don't have a marketing person. I am the IR. I'm the marketing person. I'm also the portfolio manager and I'm also the CEO. And our partners, you know, for me, it's very, very important that my partners have access to me. And I want to not only be a great partner, I want to be the best partner.

And that only scales so far. I think that we have bandwidth for probably 15 to 20 full stop. And that's it. And doing a very, very good job, a superlative job for that constrained group of partners. That's really important to me. And then mentoring my team. So, you know, like I tell my teammates all the time, I want to build the kind of firm where if you so choose, you could easily see yourself.

building your career at my firm. And the only reason why you should leave is because you want to start your own thing. And that's pretty cool. The idea that somebody left my firm to go start their own franchise, and I may have had a small part in inspiring them to do that

and trained the next generation of great investors, I think that that's such an interesting concept. But I hope that my teammates, they stay here and grow with me. and are with me for the duration of their careers. And then finally, it's adding value to our management team. So I was telling an LP the other day that, you know, our first five years, we're really about foundation.

So building this foundation to build scalability, replicability, repeatability. Our second five years, which we're living through right now, is about executing. Our third five years, so year 11 to 15, I want to be the first. the kind of investor that are managers, if they see us show up on their shareholder base or shareholder registry, that they feel that, wow, like, I'm really, really thrilled to have them because they're helpful, they're thoughtful, their value added. And it's a really, really good thing that Shaw Springs there. And that reputation takes a lot of time, and we're a long ways away from doing that. But I look at firms like Tiger Global. I look at firms like Hill House. I look

at, I look at individuals like Lee Fixel, who just raised an extraordinary firm called Addition, and he is a shareholder that is desired by everybody to have Lee Fixel on their cap table is a pretty big endorsement. And I think that that's, that's really, really cool. So we have some ways to kind of get there and show management so that we can add value and be thoughtful and be the kind of shareholder that they want. Thank you very much. And at this point, I want to say sorry to all the questionnaires, which questions I couldn't ask because there's a long list of great questions I wasn't able to ask. Sorry.

But for the end of our conversation, you have the chance to add something we haven't discussed and you want to share with our audience. It's also fine to say we already have discussed so many things. So I have nothing here. I just want to say, and we alluded to this, you know, even before we started this conversation, is, you know, the resources like this that you provide Tillman for younger investors, it's amazing. Because I mean, I named my firm Hayden after my freshman year dorm where it was a bunch of friends and myself, just literally we were living through the financial crisis and trying to devour everything that we could. terms of investor letters and whatnot. You know, YouTube wasn't as popular as it is now. There definitely weren't resources like this. I think I would have accelerated my learning so much more. If, yeah, if other investors were even open to interviews like this maybe 15 years ago,

I think the industry has changed because of the internet, information has become a bit more democratized. And people are more willing to share and, you know, share ideas and not be a black box in terms of how they run their funds and what they're investing in. I really love that change in the industry. So I have to thank you, Tillman, for doing things like this. And I also got to thank the internet for existing like this, because I don't think we can run Hayden the way we do without the internet. I want to say thanks to the internet as well at this point. It's a great thing. Yes. Yeah, Tellman, I did want to just express my humblest thank you for having me on. sharing your network with us because I think you've put together one of the most

interesting group of under the radar boutique managers. And I learned so much just watching your videos. I do want to leave maybe two things for the younger people that are listening. So I'll tell you, the last time I did this video, some of my most favorite emails and pieces of correspondence were from really, really young people who wrote and said, you know, I'm Korean American and it's amazing to see a Korean American who's a leader at a firm and and I've been looking for that type of role model for a long, long time. It was really, really touching to receive those types of those types of correspondence because it's, you give visibility to quite a diverse group of people.

The two pieces of advice I wanted to give young people, which we talked about a little bit, but Byron Wien of Blackstone Group, this business requires a little bit of luck, and there's no better way to maximize your luck than to know as many people as possible. So network intensely. That's one piece of advice that I want to give.

And the second piece of advice I want to give is, find ways to make yourself intellectually and personally uncomfortable. And what I mean by that is that don't necessarily just work on things that you're already really good at. You're already good at those. Work on the things that scare you to death. Work on the things that just make you so fundamentally uncomfortable to your core. I'll tell you, Tillman, I hesitated to do that previous live stream with you.

one, because it's live and number two, growing up, public speaking, public speaking is one of my biggest phobias growing up. And it took me a lot of courage. I think I told you this, that the two weeks ahead of that live stream, I couldn't sleep because I thought that, man, like, this is very intimidating. It's live and I just don't know how people will perceive me. But I've sort of also made it a point in my life that I want to work on the things that I'm not good at, work on the things that make me really, really uncomfortable. And being able to spend some time with you in the course of that 90-minute interview, that was really valuable to me. So I just wanted to thank you for that and to encourage your listeners and viewers out there that work on

the things that you're not good at. Don't work on the things necessarily that you're already good at because you don't grow. So I wanted to leave those two pieces of advice. Thank you very much to both of you. And thank you very much to the audience. I hope to have you back one day again. It would be great. But for now, for now, it's time to say goodbye to everyone. Thank you very much for joining our live stream.

You two please stay on. But to the others, we say goodbye at this point. Bye, bye, bye. Bye, everyone.