Thread by @heymaxkoh

"All investing is pattern recognition"

Fred Liu @HaydenCapital is one of my favourite investors.

He's extremely underrated.

Here's 18 of my favourite investing frameworks and quotes from Fred:

Before I begin:

Special thanks to Tilman @goodinvestingc

This would not have been possible without him.

Other than Hayden's quarterly letters...

Most of my material of Fred are taken from Tilman's youtube videos.

You have been very generous to share this with us all.

1. It's okay to have a narrow circle of competence. The key is to know your companies well.

The investment philosophy is the same as it was since day one.

It's just that the CoC has narrowed over time.

If you look at our portfolio today, the majority is in e-commerce.

2. Let your circle of competence expand with the companies you follow

As these companies expand out, as they expand into new divisions, our circle of confidence will also expand naturally.

Because we need to stay on top of this

3. Find businesses with optionality that the market doesn't know how to value

We know that there are these options on the horizon, say one, two or three options on the horizon.

But we don't know the timing of that or necessarily the exact magnitude of it.

3b. And so basically, we want to buy these companies without paying for these options at all.

Everyone knows about the option but are negative on it.

But your differentiator is that you think the option will actually become valuable and will work over time.

4. Position sizing like Poker

You just have to wait and see and see if your thesis around that is correct.

So as we start to see these KPIs or data points that can prove out our thesis, we’ll definitely increase our position over time.

4b. That process can take, you know, couple months up to a couple years right...

and as these different KPIs are hit, you're basically flexing your portfolio upwards.

5. Research in the real world. Not behind a screen.

One of my former bosses used to say:

"there’s someone in this world who has the information that you want and it’s your job as an analyst to go find that person."

5b. There’s so much information that’s just in people’s heads.

And you’re not going to be able to get that unless you build a relationship with them and meet them face to face.

6. Find markets with low penetration. It offers more open space for growth.

I think when the total industry market share as a percent of the addressable market is at single digits (low penetration)...

you don’t need to worry about competition as much.

6b. It’s when you start getting to that high single-digit, 9- 10 percent penetration...

that’s when you start putting heads against your competitors.

Because now you need to take a piece from someone else in order to continue growing

7. Past Present Future framework.

You want to put yourself in the management’s shoes.

So when we look at a stock we think past, present, and future.

Each stock is a story right.

Looking on hindsight with the data that you have now, did they make the correct decisions?

7b. And even if they made a mistake...

Given the data that they had at that point in time, say five years ago, do you think make the correct decisions with that set of data?

8. Understand a company's past to know its future

A good rule of thumb I try to abide by is:

To even try to understand the why and how someone thinks, you should probably first understand where they come from.

And thus how these experiences shaped their world view.

9. Be a student of business models. Develop pattern recognition

The only way to make this qualitative judgement, is by truly becoming an expert in the given industry.

And by being a student of business models.

9b. This is why the investor's "circle of competence" and studying business case studies is so important.

This judgement comes from extensive pattern recognition.

10. Don't worry about finding the best stocks. Just focus on upgrading your portfolio

Instead of trying to find the absolute best business, just try to upgrade the quality of your portfolio consistently.

That's really what we're trying to do when we come across a new idea...

10b. We compare it versus the worst name in our current portfolio

I think if you spent all your time searching for the absolute best 10 companies in this world, that'd be a really really tough process.

You'll probably be sitting in cash the entire time.

11. Female centric marketplaces tend to have higher stickiness

One of the high-level things that attracts me is that a female dominated shopper base.

Because females are the majority of retail spending...

Esp in the high margin category such as fashion, beauty, cosmetics

11b. And what happens with a younger business is that you really want a sticky product.

Males tend to buy a larger, higher value commodities product such as electronics.

These purchases are made say once a year.

So you have to continually reacquire that customer.

12. Shopping mall analogy

The more times you visit this app, it's almost like visiting a mall.

If you go to this mall 10 times a day...

You're going to find something that appeals to you.

12b. And that drives purchase frequency.

You may not buy something the first four times, but the fifth time you walk past something and it seems attractive.

So you make that purchase.

13. In consumer marketplaces, look for addiction

The addiction part in a consumer marketplace would be like transaction frequency.

We're looking for people to log on to the app, you know, several times a day.

14. For marketplace businesses, profitability comes with scale and dominance

Where you see the profitability come through is when the marketplace is two or three times larger than the next largest marketplace.

14b. So you can look at Shopee $SE in Taiwan, for instance right.

They have the dominant portion of market share, like 70-80 percent rate.

And that’s where they’re most profitable.

15. Your position becomes less risky with size

The larger they become, the less risky the business becomes.

Because they become more entrenched and pull away from their competitors.

This justifies you making it a larger position because it is such a dominant company by then.

16. Your edge does not come from information. It comes from synthesizing differently.

All of this information is readily available to most investors today, that is no longer your edge.

Your edge is filtering it in a way to have some sort of insight that other people don't.

17. All investing is pattern recognition

You need to look at enough data points.

You need to look enough at enough patterns to formulate your own idea of what works and what doesn't...

And understand how businesses develop and how ecosystems develop.

18. Once the company has shown proof of concept and ability to scale, Fred lets the position compound on its own

Once the company hits that sustainable/ breakeven type of level...

And if we are very confident in that management team...

18b. If we're confident that this company is a leader of the pack...

We will allow our capital to compound alongside this business as they create more value for their ecosystem.

And then we just let it live on within our portfolio and produce returns for our partners

That's it.

If you found this helpful, then do follow me here at @heymaxkoh

I share my journey of how I attained financial freedom before age 30, while still working at my 9-5 job.

I also tweet about my investing principles and criteria.

All the above content comes directly from Fred Liu.

I encourage everyone to read his letters here:
haydencapital.com/investor-lette…

Also check out these videos where Tilman interviews Fred:

a) On investing in Marketplaces

b) Fred Liu and @DennisHong17 share their thoughts on investing in internet businesses

Dennis is another great investor himself, with hall of fame returns.

So this interview is pure gold.

And also this podcast in 2019...

Where Ryan Reeves @investing_city interviews Fred Liu on Sea Limited and how he identified the opportunity for $SE:

open.spotify.com/episode/6IgraU…