Thread by @heymaxkoh

15 Investing Lessons from Yen Liow:

Based off his recent presentation at the MicroCap Leadership Summit 2021.

*Hint: You do NOT need to find 100 baggers to create great wealth.

Thanks to @yliownyc for the value bombs.

And to @iancassel for organizing this.

1. True compounders are rare. Hold on tight when you find one

Over last 20 years, of all the US listed companies with market cap over $2B:

Only 14% of them have have compounded at more than 20% for 5 years.

And only a tiny 3% have compounded at more than 20% for 10 years.

2. Strategy - find horses

Horses are monopolies and oligopolies that compound EPS at 2-3x the broader market for long periods of time.

True north: Over time, stock price and intrinsic value will converge.

So find businesses that can show durable growth in FCF or earnings.

3. Understand the business life cycle and which stage you want to play in

3 stages:
a) Proof of concept
b) Replication
c) Maturation

Proof of concept is harder to predict.

Yen focuses more on the replication phase.

4. Price volatility is your friend when you operate in a high prediction environment

Find business with high predictability + high volatility

High prediction envt: shows strong relationship between history and future

Example: subscription businesses with recurring revenue

5. High alpha does not mean it’s repeatable

Example: businesses going through a transition offer greatest alpha explosions.

bankruptcy to survival
poor quality to less bad
cyclical to less cyclical

But they're not repeatable.

So this strategy is hard to scale

6. Difference between 100x and 10x

100x: monopolies still in the making. hard to predict.

10x: scaling an existing monopoly.

The opportunity is still huge if they can execute.

Plus, it's more knowable and predictive.

(Continued...)

6b. Strategy is very different for both 100x and 10x

for companies still in POC phase: average UP, not down.

because business volatility is still very high and unpredictable

for companies in replication phase: average up AND down. price volatility can be taken advantage of

7. Drawdowns in the POC stage vs replication stage are also different

Example: AMZN

drawndowns are much crazier in the POC phase when the monopoly is still in the making.

They're less wild when they are scaling their monopoly in replication phase.

8. Tools to survive volatility

Be aware of the base rate for swings and expect it.

Yen studied 100s of >20% CAGR stocks over rolling 10 year periods:

15% drawdown multiple times a year

20% drawdown most years

50% drawdown once or more a decade

(continued...)

8b. Hold through. You don't always have to add down.

Yen encourages investors learn to ride through the volatility.

You do not always have to act on it.

Be okay with sitting on your butt and do nothing.

Not every market drop is a call to action to add more.

9. You don't have to load everything in the first day.

Average UP as the story unfolds.

Esp when the size of the TAM is huge relative to the size of the company.

You can still make a lot of $$ over a few years as there is still huge upside.

This helps de-risk your investment

10. Too much focus is given to the hunt for the next shiny idea.

But too little is given to the ride.

If you find 10-100 baggers but you only get 2-3x out of them, you are wasting a lot of potential.

To own a multi bagger, you must first hold a multi bagger.

11. Long term is more predictable than short term

There is huge biz variance quarter to quarter.

Thus it's easier to predict 3-5 years out than 3-5 months.

If you grip a stock too hard, you will get scared off by volatility and temporary bad news.

Set your sights further out

12. Good business does not mean good management

Just because you have a good business on your hand...

It does NOT mean the management mean has the skill and ability to scale it.

That's where your skill as an investor comes in.

Find those management teams who can.

13. Indicators of monopolies

a. high competitive win rates. high customer retention

b. pricing power. gross margin is stable over time

c. high returns on incremental invested capital

14. Management team matters

Because Yen's preferred holding period is forever, the people he invests with matters a lot.

Elite management teams offer huge upside optionality.

They tend to consistently deliver positive surprises.

15. Be unreasonable in your standards

Yen holds a concentrated portfolio.

He does NOT introduce new ideas often, so the bar must be kept high.

This means BOTH the business and management must be of elite quality.

You cannot compromise either.

(Continued...)

15b. Yen does NOT buy great business run by average management, even if price is reasonable.

Because over a long period of time (5-10 years), they wont create as much value as they could have.

This does NOT maximize your return on time as an investor.

Only the best will do.

These lessons above are taken from Yen Liow's recent presentation at the MicroCap Leadership Summit 2021:

"The Game Within The Game"

All content and slide materials belong to Yen.

Thanks once again to Ian Cassel too.

Watch the full video here:

I hope you enjoyed this.

If you found this helpful, follow me at @heymaxkoh

I share my journey of how I attained financial freedom before age 30...

By investing in great businesses and holding them long term like an owner.

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https://twitter.com/heymaxkoh/status/1448299477303894018?s=20