Good Investing Talks - How have you built Tsai Capital with & against family, Christopher Tsai?

Episode Date: October 26, 2023

In the second part of our conversation with Christopher Tsai of Tsai Capital, we discuss Christopher's heritage and what lessons he could learn from his family.

Dear viewers of good investing talks, it's great to have you back for the second part of our interview with Chris Sy from the new home studio. If you missed the episode, you find it on the YouTube channel or in your podcast player. In this episode, we want to talk about role models. And Chris, we have two investor role models sitting on your left and you're right. It's Warren and Charlie for sure that had role models for a lot of investors. also want to introduce two other figures from your family that formed you. One is your father and one is your grandmother. Can you introduce both to us? You can pick who's first. We'll start chronologically. My grandmother's name was Ruth, Ruth Tsai. She was an incredible

lady. I wish I had more time with her. But I did did spend a lot of time with her growing up. She was a real pioneer for women in China at her time. She was the first woman to trade on the floor of the Shanghai Stock Exchange, which is pretty cool. So this was from 1939 until 1941. She found an opening. And she, from what I understand, made a killing, trading stocks on that exchange.

on that exchange. In December 1941, Japanese troops invaded what was called the Shanghai International Settlement and trading was abruptly halted at that time. So she had a good two and a half three years on the floor. She was also not only a pioneer for women in China but she was a really really feisty lady. I'll just give you an example Tillman they had my my my my my grandmother and grandfather had as a small country property and one evening she gets a knock on the door from the communist authorities and they say to her that she has you know a short period of time to vacate the land that the land was being

confiscated. The most valuable part of land, incidentally, was the topsoil. So what did Grandma Ruth do? Well, she didn't put up a fight. She said, when do I need to vacate by? And then the night before, she hired a bunch of guys to strip the topsoil off of the land, which was the most valuable part. And she sold it. So she was truly a capitalist, and she left. my father got a lot of that kind of feisty mentality and attitude from her but she was also great with people dealing with people so she had this expression she had a lot of great expression but one of them was why be a square table when you can be around one and what she said what what she meant by that was that you know why why why make people upset about something if that's not necessary she

intuitively understood Dale Carnegie who's been a role model to Warren Buffett who's been a role model to me and who's been I'm sure a role model to so many people in the good investing community she passed on that kind of sensibility that kind to my father. My father was amazing dealing with people. He would not have been able to build up his career without that kind of sensibility. You could be in a room of 100 people and he would make you feel like you're the only one in that room. I think that's one of the main reasons he wound up being so successful in building businesses. It's one of the main reasons he was so successful in deal-making eventually becoming the CEO of a Dow Jones 30 company and

later on in life spending a lot more time dealing with philanthropy and in people again in in different ways so grandma Ruth and my father were certainly role models my father always pushed this idea of like perseverance and being your best he said to me and my sister when we were both young you know you didn't care what we did in life as long as we gave it our very very best so that's how I think about how that's how I think about my life and and again this idea of Kaizen and continuous improvement this idea of trying to always be your best and dealing with people in a kind and respectful manner and the last the last person that I want to

mention is the late Fred Rogers. But let's maybe stick with the family because you told the interesting and the good story about the family right now. And like what I learned that family is also can be or a darker place. I wouldn't call it a dark place and you have struggles and pains with your family. And these are also important to build yourself and your firm because your father is this large footprint with building a huge asset management firm. How have these struggles and this conflict in your family helped you to be who you are and also to build

side capital in the way you've built it? Yeah. So, you know, when I decided to go into money management, I told my father I was launching a business and he said that that's great, but you're on your own. So unlike a lot of other investors who have had, you know, larger than life figures in that field, My father never backed side capital. My mother actually did. My mother gave me a small amount of money to launch the business, I think was about a million dollars at the time.

And the other two million I raised from local business people that I knew growing up in Greenwich, Connecticut. So we launched with three million dollars. And from that moment, it's been a constant, it's been a constant struggle in terms of building the business, but it's also been extremely rewarding over time I've come to realize at least for me that happiness comes through the overcoming of struggle I think that if you're given something too easily that there's less happiness associated with that success

at least that's how it feels with me and so we are now as you mentioned over 20 years in business and now clients come to us and I realize that that is not something that just happened automatically most of our clients come to us through referrals that's not something that happened automatically that's something that has happened over years and years and years of building not only a performance track record but building a certain reputation in terms of how we manage money how we treat clients so that to me is a huge huge sense of joy and I'm sure it's to a lot of your fellow and a lot of the

fellow investors in this community and being able to have clients recognize you and come to you is is a truly rewarding experience so to make it clear what you've just said your father didn't fund you he rather turned you away and you had to build all this you have with the firm I think you have 100 million assets at the moment yourself yeah and my father like I said didn't didn't back me at all my mother put in a million dollars at the other two million dollars I raised actually when I was 16 years old I started managing money informally so what I did was I knew I wanted to manage money from a very early age and when I was 16 I felt like

it was the right time there was a Chinese restaurant in Greenwich, Connecticut, called Lotus East, and it was run by this really wonderful man called, his name was Johnny Chang. And I would go to Lotus East as much as I could to have his orange beef, which was my very, very favorite dish. And Johnny, like many Chinese, love to gamble and they love to play, you know, in the stock market. So we had many, many conversations about the market and stocks and I eventually convinced him that's not the way to make money it's not you're not going to make money buying and selling all the time you need to think long term eventually after many many

conversations it's effectively marketing right I convinced him to give me 400,000 it was his entire life savings and fortunately did very well for him so he really became one of my first clients I convinced another local businessmen to give me capital. So in total, I raised, when I launched that capital, I pulled together two million from these relationships that I developed, a million from my mother. So we launched with three million and my father did not contribute any capital. So it's been a, it's been a struggle building that. And as we know, how compounding works, compounding not in terms, just in terms of building goodwill, but compounding in terms of building capital, it takes time.

And it's about laying a foundation, building a network, building a reputation, and now it's, you know, 20 plus years. And as I said, clients come to us now. But that was not the case until let's say maybe five to eight years ago clients started coming to us. So we're talking about more than 15 years of laying that foundation building a network before we kind of got organic growth. How much time took it to build the firm to a level that you could also invite friends for the beef? You just mentioned the beef you like because you also have to get an income from the firm. Well, the nice thing about the asset management business is that it's scalable.

And it didn't actually take long for me to be able to invite friends to dinner. It's called five years. And I have always run Cy Capital with an extremely lean infrastructure. I started the business out of my apartment. I have moved into an office building only maybe three years later. And we've been in an office building, different office buildings. One on Park Avenue. We were in the Chrysler building.

We're now in 590 Madison Avenue. We've been in different office buildings ever since. But in all cases, I've had a very, very basic office. And that's all I need. And I feel like having a small office. is all we need in terms of running the company. And because so much of the functions of side capital, so much of the back end, the administration,

the accounting, the compliance, the legal, that's all done by other people. I've outsourced all of it. So there's over a dozen people working on the side capital business constantly. So there are a lot of people involved that are not seen from the from as I said from from from our legal and compliance who I'm in touch with

probably every week they're all working on side capital but they're not in the office and we don't need to be and interestingly like post-COVID the world has actually moved that way just coincidentally we've operated with a very remote kind of structure from the very beginning and that was done as as a result of necessity really running the business in a lean manner so it could be profitable with 3 million in AUM, or 5 million in AUM, whatever the number was at the time, to hit profitability. So we've operated with that kind of remote structure pre-COVID.

We don't want to bore the audience with too much talks about building the investment business in this way. So if you're interested in this special topic, please apply to my community Good Investing Plus. via the link below we are also covering this topic in details and the good thing is it's interactive so if you're building an investment business you could ask questions let me maybe ask a follow-up question on your father he not only turned you away when you ask for funding you started your business but he also turned you away because you made public that you're gay and this was a broad point where you just stopped talking to each other for seven years how did this how did you manage with this well it's it's definitely

character building because when your parent one of your parents refuses to speak with you it's not it's not the best feeling in the world right but it also helps you to form your own identity and it happened to coincide with the same moment that i launched or roughly very close to the the same moment I had launched the business. So it really helped me to focus and forced me to focus on just making sure that it was a success. Because probably thinking about it now and thinking about it live with you and your viewers,

I probably wanted to prove to my father that I could build something successful. So I was very focused on making sure that that happened. The good outcome is of your relationships is that after seven years you started talking again to each other and came up, it was like he became a kind of like more helpful to you and advise you on building. Yes, so roughly seven years. It might have been six, it might have been eight. I'd have to look through letters and diaries to figure out exactly when, but it was roughly seven years. in 2005 which actually took place here in in Berlin so I invited my father to the wedding and his god-daughter convinced him to go and so our relationship rekindled around that 2000 around the summer of 2005 and we became extremely

close to till his passing in 2008 so I had three really solid years with him. During those three years, he was an amazing mentor of mine. I actually started out working with him as a teenager, so I did effectively an internship with him. I helped with a lot of the business that was going on that he was handling for his philanthropic organization, and I learned a lot about looking at companies and thinking about businesses and hearing from him really like how not to think about companies. That's the, that's the, it's important to think about inversion, right? We've got, we've got Charlie over here. Charlie always talks about Carl Jacobi and inversion. So my father taught me a lot about what not to do, which was

super helpful in terms of building the portfolio that we have to do. your father became a mentor but he also you decided to not do things he did where did you make it differently outside of building your whole own thing as a film well I decided that one marriage is better than four so I focused a lot on on on marriage I mean I have I think that you know having the stability within family having very strong relationships with children I have two daughters who are now 13 and they're amazing children so smart and so so curious so kind and you're having a strong relationship with your children having a strong relationship with

your partner that's super important to building a business and having a good track record because think of all of the distractions right you would have if you're involved in separation or divorce or conflict with your children I mean that can't be good. So Peter Kaufman has also been in many ways a mentor to me. In many ways, I'm sure mentor to a lot of people within your good investing community. He has this, he put together this piece called One Ladder and he talks about seven steps of the ladder. The problem is that most people think about getting to the first step and then to the second and to the third. In other words, let me focus on building a career first and then I'll spend

more time or will be able to spend more time here. Then once I get here, let me think about getting here because I'll be able to be in a position to get to the next ladder, the next step of the ladder. The problem with that, and Peter Kaufman lays this out in his one ladder presentation, is that a lot of this is multiplicative. So he talks about health. He talks about family friends career spirituality hobbies right he talks about seven elements of the latter and how everything works together so I've tried to live my life focusing on these areas and health being really number one because health is multiplicative if health goes to zero everything kind of goes to zero

but just like right next to your own health you have to take care of yourself first has to be your family to me so So I focused a lot on family and making sure I had those, that I have strong relationships with family. It's time for a quick Advert Tillman. Here we go. Are you looking for a beautiful and efficient way to analyze stocks? Then please check out what my friends at Stratosphere are building. They have built a great tool to visualize data, to get ideas about ownership of stocks, and

many more information that's helpful in the analysis process. You can find that tool where the link below and feel free to sign up. It's free. Thank you for your attention. And now, Edward Tillman and for the investor role models. It's obvious that Warren and Charlie are role models for you, which other investors have influenced you in the interesting or positive or sometimes even negative way. Yeah.

So I want to mention two role models. one not in investing, and one directly in investing, because they come together to help build a business, at least for me. So on the non-investing side, there was a person named Fred Rogers who many of you will know and many of you will not know. Fred Rogers was an author, a Presbyterian minister, but most well known as a TV host for an American show called Mr. Rogers Neighborhood, which first aired in 1968. And Fred Rogers was an amazing person.

He was such a kind person and he said that there are three ways to ultimate success. The first is to be kind, the second is to be kind, and the third is to be kind. That is such a simple way to go about life. And it is so fulfilling to go about life with kindness, like in your heart. And you will always come across people who are not kind, and that's fine. But the point is that you kind of become, there's this expression like you are what you eat. I think that you are also how you behave. time if you behave kind it reflects on yourself and you internalize it so that's how

i think about life and that's how i think about interaction with clients in building a business and the whole side capital ecosystem the service providers the the clients everybody who is involved one way or another you want to deal with them talk with them be with them with respect and kindness. The other person who has been really influential to me on the investing side is Ron Barron, who has taught me about culture and people. We spoke about people in culture earlier and how important that is to get an understanding of how companies are run and managed. He actually has a similar investing philosophy that my father had both both Ron and my father were

not we're not shy about looking at growth companies just because the valuation appeared on the surface expensive and I think that a lot of value investors and I consider myself a value investor a lot of value investors will see let's we'll see a company that has a 50 earnings ratio and they won't not even do the work they will just put it in the you know they'll throw it in the garbage pile but the problem is everybody is screening for low PE ratios so all of the great companies are already uncovered often companies sell for high high or seemingly high multiples

because they are reinvesting in their business today in order to build a higher intrinsic value later they don't screen well When we bought Tesla in February of 2020, Tesla's price earnings ratio was roughly 200. But it was 200 because the company was reinvesting so much. And since that time, the multiple has come down significantly because the business is now grown. So it's important in the journey, in the discovery of uncovering the next Tesla, the next Amazon, that one does deep work and doesn't dismiss a company just because on the surface it has a seemingly high valuation.

And my father understood that and Ron Barron understands that. And so both of them have been hugely influential to me for different reasons, but on this topic for the same reason. What kind of companies your father do invest with this kind of friend? framework do you have examples on this yeah I mean his investments are well publicized and I mean he invested in companies like Polaroid businesses that were very early in some cases for me way too early in their in their trajectory but the the wonderful thing about investing in growth companies is that there's so

much asymmetry so when you have when you have uncovered something and you got the story right, you got the thesis right. We're talking about being able to make multiples of your money on that investment. And so it's super important that one does actually hold onto that investment for the long term in order to accrue all of the benefits of being right in the beginning. My father was much more short-term oriented than I am and I learned that that was not and that was not an approach that resonated with me. But we did think about businesses in a very similar way. We thought about companies that were building scalable technologies,

businesses that were innovative, and businesses that were run by incredible leaders and skilled capital allocators. You like these companies that reinvest and therefore shine expensive. And maybe as a last question, how do you think about reinvesting in your business? What is your framework to this? As an investor, with an investing business, how do you decide about capital allocation?

What are you trying out? Do you have an experimental budget for doing things you don't know where the outcome comes? Tell me. Yeah. So reinvestment in terms of this, in terms of one's own business, to me, manifests itself in in two forms one is in capital and one is in time and sometimes those two go together the first one capital um for for us it's about investing in the infrastructure of the business making sure we have the right um we have the top compliance in place we have the top portfolio

accounting in place these things all cost money we use uh one of leading portfolio management software is called Black Diamond. It's all cloud-based now. It's an extremely great system to help us manage the portfolios. So the infrastructure that you don't see that clients don't see is something that we're continuously investing in thousands of dollars every year in terms of the technology that's behind that. Of course, we're investing in brand and in the brand and in getting story out to people that might benefit from our services and people where there is that alignment that we spoke about earlier that that is that is costly networking is about building you know building a business is also about networking so for people

who are in in the very early stages of building business I highly recommend you know, taking part in some of these conferences where, where there are high quality investors, but there's so many wonderful conferences and just going to Berkshire, right? Your incredible events that you host in Omaha every year through good investing is certainly like, that's where you're making these relationships, but it costs money, right? Be it hotel, be it flights, be it, whatever it is. membership fees, whatever it is. It costs money. And so that's the capital part and that connects with time. So as a money manager, it's super important not to get distracted to the

point where it's infringing upon your ability to do research and do what you're supposed to be doing, which is investing money for clients. So I'm very careful in terms of what I do to make sure that somehow there's a benefit to the underlying investors. So these conferences for me have been so wonderful in the sense that they are ways for us to bounce ideas off of other smart investors to hear the opposite side of our thesis, right, to hear the short argument against a company that we might be invested in or might want to invest in. So being able to have that exposure is an investment that is to me like a necessity. Thanks for mentioning our OMA activities. We are planning them next year again and we're

happy to have emerging managers with us. So please apply to the community where things are run through. And thank you very much for your time, Chris. Thanks for coming and thanks for being the first guest in my studio. Thank you. Thanks for having me, Tom. And bye-bye to the audience. Bye-bye, good investing.