Any Investor Can Beat The Market. Will You? [Chills 57 with Eugene Ng]

We talk about the criteria and the frameworks to look for winners in our portfolio and we’ll learn from examples as we talk about companies like Meta, Tesla, iQIYI and many more so that you can come up with your own investment thesis. We talk about capital allocation, upcoming opportunities and how to handle investment mistakes. Do note that this content is for educational and entertainment purposes only and does not serve as any form of advice or recommendation.

Hello, my name is Andrew and welcome to another Chill with TFC episode. In this series, we talk to interesting people with relevant experience and insights to help us learn from their perspectives so that we can create the life we love and manage our finances well. 

It’s not the first time our guest is on this show. You can search or check out Chills 31. The topic was about the Chinese market. We shared some valuable insights and we want to have him back. I mean, how can we not, especially when he’s written a book called Vision Investing: How We Beat Wall Street & You Can, Too! The idea is that any retail investor can also beat the market and we want to learn the strategies behind that. Let’s welcome founder and chief investment officer of Vision Capital, Eugene Ng! 

Startup investing, fund investing, personal investing… what’s the difference? 

Eugene: For me, it’s really all personal investing because I’m investing largely as an individual investor on my own capacity, but if I had to differentiate between public and private… in public, all companies are available to you for your selection. The only difference is the price and Mr. Market makes the price… it could be higher one day, could be lower the other day. 

In private, it’s extremely different. You have to like the company, you have to like the startup, but the startups has to also like you back and accordingly has to be coming out and raising capital at which the time you have to have capital. 

So I think that’s a very vast difference between the private and the startup space. In the startups, your deal flow matters, who you are matters, whether the guy… the founder wants you to be on the cap table to be investing in them for the specific round versus if you were to be investing on the public markets. 

If you are investing in the public markets, all you need to do nowadays… just open up your iPhone, pick a stock ticker, buy and sell, put in the amounts and that’s really it. There’s no emotions. You don’t have to interact with anyone but on the private sector, it’s extremely different. 

Andrew: Just so we understand clearly, public equities refer to stocks that are bought and sold on the public market while there will be a stock exchange. So you see all the Apple or the Teslas and all these public companies, whereas private equities is more of really startup, angel investing and different people come to you to raise their funds for their own startups, right? 

Eugene: Yes, you’re absolutely right. 

Andrew: Yeah. Today, we are more focused on the public equities because while you manage a fund, but most of our listeners are going to be retail investors so let’s see what we can learn from your experience in managing a fund and how our listeners can take that away and apply it to themselves. So tell us a bit more about your fund and your investing strategies. 

Eugene: I think… really got to start off with the mission of the fund. The mission of the fund really is to invest in companies that reflect our best vision for our future that is changing and shaping the world for the better. So I think in public investing, we really got to think about it very differently… is that we’re very long-term focused investors and the reason why we are long-term focused investors is if you’re investing in any company on any given day, you have probably a 51% chance of making money. But if you’re putting that out on a longer term, say out of 10 years, that percentage of making money probably goes up to about 60 – 70%.

Now, if you extend that up to about 20 years, it’s probably about 90 – 100% chance of not losing money, of making money. That’s why we’re very long-term focused investors and in the entire public market space of about 25,000 companies… there was a study that was being done, only about 4% of the companies accounted for 100% of the returns and even a smaller percentage of about 0.5% of the companies accounted for about 50% of the entire market returns. 

Now, we are fishing in a very small set of the pond because these companies really are the ones that are contributing all the returns so we’re really trying to find these winners and we expect these winners to continue to win. So we are very focused in the time… in the way of the style of the investments that we’re really looking at and trying to drive that forward. We take a very diversified approach to that as long (as) we don’t do any hedging, we don’t do any short selling, no leverage or anything. Just simple buy and hold from that aspect. 

Andrew: Okay. So a few things you can talk about, for example, long term means different things to different people, but in your case, you will be referring to…?

Eugene: I say long term means basically we buy and we hope to never sell. 

Andrew: Okay, that’s long term… as long term as it is. 

Eugene: As long term as it is. 

Andrew: You were saying that in 20 – 30 years, the percentage of you making a return, a positive return on the market is 90 – 100%, you were saying? 

Eugene: Yes, that is correct. I think the way to think about it is that in terms of long term, we are thinking about in years and also in decades and the way when you’re buying a company, the best math or the best returns around this is this. The maximum downside then you can lose on any given stock is 100%. You buy something, the thing goes to zero. Now, the best thing is that the upside is literally unlimited. It’s extremely asymmetric. So what we have here is that we’re really trying to find and hunt for multibaggers: companies that really go up 5, 10, 15, 50, 100x in returns.

Andrew: 100x! That’s all we’re excited about! 

Eugene: Yes.

Andrew: Okay. You mentioned that you invest over the long term and therefore, it increases to 90 – 100%. Is that from personal experience or is that statistics? Where did it come from?

Eugene: It’s the statistics. It’s actually done over a study that had… was over 120 years of data. It was done over rolling periods. So for every single monthly rolling period or yearly period or even 20 years of rolling period, that study basically said that if you’re invested in the S & P 500 and you held it for 20 years rolling periods, for example, there will never be a period where you lost money. 

Andrew: Okay, snapshot 20 years…

Eugene: Snapshot…

Andrew: You will definitely make money. 

Eugene: Exactly. I think it’s very important because Warren Buffett and a lot of great investors tell us that you should be investing for the long term, but they never really tell you why you need to be investing for the long term and that’s… I think, that was a very simple statistic when I wanted to formulate my entire investment strategy. That was one particular statistic that really mentioned I need to be investing for the long term. 

When I (am) investing that way, the odds of success are literally in my favour. I’m literally playing a game where I have a very high chance of winning already in the first place than to be playing a game where it’s 50-50. I like to play games effectively where the probablities are really in my favour and now buying stocks, buying stocks is… the good thing is I have asymmetric upsides so then I have the asymmetric upsides as well. I’m basically having bets that basically will make more, far more than others.

Andrew: Okay, 100x. Let’s talk about the 100x. What’s your criteria? Is it different from analysing a supposed 100x company versus… you have 80 companies, right? Not all of them are going to be 100x, right? 

Eugene: Yes. 

Andrew: How do you assess the valuation of the company? How do you pick what to invest in?

Eugene: I think the list of the 100 baggers really is something that you need to start off with in a very… start off right from the beginning. If you have a very big company already, for it to go 100x, it’s going to be extremely unlikely, right? Typically, the 100 baggers, they really tend to start quite small but where you see some of the typical traits is this. 

They’re growing rapidly. They have very strong track record. They are typically disruptors or it could be a top dog in a specific industry disrupting a very big space. Next, the market. The market tends to be very big… means it could be addressing a very big market or they could be expanding to very, very big market. I think that’s extremely important. 

If you’re competing… for example, if you’re a restaurant only competing in a specific neighborhood, you’ll never become a 100x because unless you are expanding into a restaurant chain that goes in a specific region across the country, then across the world, then you can get to a 100x. But if you have a very niche or a specific restaurant, you’d never get there. So I’m talking about businesses that really are addressing a very big market from this standpoint. 

Next, the thing is that the unit economics of the business (is) really going to matter. It matters in a sense that whenever you are generating revenues, you’re making enough profits. At the same time, when you reinvest this profit, you’re making back the same kind of returns. So from a business perspective, it’s growing faster, especially when you know… and growing better, especially when it’s growing. 

Andrew: Unit economics referring to…? 

Eugene: Unit economics means basically if I’m making a dollar in revenues… revenues is selling price x the goods and products that they are selling, the profits that you’re making, there has to be profits. If you’re making losses for every single dollar of revenues that you’re making or every sales that you are making, that’s not going to be an investible business because very soon, you’re going to run out of cash. 

So I think we really want to be finding companies that are businesses that has to be almost…. basically, they’re profitable from day one or basically from their perspective… if they’re reinvesting, it’s a totally different thing but I think they have to be… the unit economics really have to be really fundamentally right in that standpoint. 

And also, I like companies that (are) also founder-led, founder-owned with very high insider ownership, very strong cultures. You find this… because this is… ultimately, businesses are run by people and when businesses are run by people, people matter. The leadership matter, the management matter, the type of culture matters because this tends to be very long-dated, very duration type of business and we want them to this… so 100 baggers, typically they last anywhere from 10… they take anywhere from 10, 20 – 30 years. So you want companies that truly are durable from that standpoint. 

Andrew: Okay. So founder-led, unit economics, top dog or a disruptor. Any other criteria? 

Eugene: Large market is extremely important. 

Andrew: Total addressable market that are large enough. 

Eugene: Exactly. That’s extremely important. 

Andrew: Okay, okay. Is there a framework that a retail investor can take away from all these? 

Eugene: I think the way when you look at any company when you’re investing, always think about how big it can become. First, think about where it is right now. Is it a good business that you want to own? Don’t think about where the media tells you about… you should be buying this company or not but really think about… look at the business. Is this a business that you would want to run or own in real life? 

If that is, now let’s look at it. Is it growing? Is it growing fast? Is it growing fast enough to be where it is? If it can become bigger and far more bigger than what it is, typically that would give you a very, very long runway and I think that’s really always a very good starting point to be thinking about.

So I give you an example. You look at some of the P&Gs or some of your consumer-growing companies. They are typically growing now because they are so big, they’ve been here for so long. Very, very established, right? Blue chip companies. They’re probably growing at almost low single digit kind of growth. Just try to squeeze them out to grow even faster, it’s going to be extremely difficult. 

What happens is that also their profit margins are extremely well established, already very high and you can’t increase them further. So what happens is that if the revenues grow five… low, single digits, your earnings… and if your profit margins stay stagnant, unchanged, your earnings are going to grow low single digits and if the price multiples remain low or still going to remain low, effectively, the stock is going to be returning single digit returns. That’s just one simple way to think about it. 

Andrew: Okay. 

Eugene: So I find those that are not growing so fast, they are most effectively almost out of my considerations. 

Andrew: Okay. Not financial advice, but I’m guessing that P&G is probably not in your portfolio of 80 companies, right? 

Eugene: Yes, it is not. 

Andrew: Okay. How about… because to understand: you want the top dogs, you want the profit margins to be growing, revenue to be growing, customer base to be growing, but are there specific ratios we should be looking at? Let’s drill down into the specifics of it so that we know what to look out for.

Eugene: I think really look at… really starts at the business right at the top. When we look at revenues, revenues is really made up of selling price x the specific quantities.

Andrew: Brace yourself, accounting 101. 

Eugene: Accounting 101, right? How to think about a business… I think the thing about selling prices is firstly, does the company have pricing power? Can they keep increasing pricing over time? Look at Netflix. Every month…

Andrew: It just increase. 

Eugene: … or every other quarter, it keeps increasing prices and prices were like what, about $15 – $20 versus our cable which is about paying about $50. I think Netflix has a long way, a long journey of increasing prices as long it can keep delivering content value for all of us, we’re delighted by what we are watching. I think they can continue to raise prices. Or even Spotify, for example. It’s the same. It’s very similar. 

Next, you got to think about unit. Can they buy more? That’s also another aspect of it. That goes down next to what we think about gross profits. Gross profits is basically revenues after acquiring the costs of making that product and also distributing it. Gross profit margins are extremely important because the way… if you think about it, if a company has very high gross profit margins, it’s typically a signal that they have some sort of competitive advantage or some sort of moat or some sort of pricing power to be able to make that, right?

So I’ll give you an example. You make $100. If your gross profit margin, say for example, it’s $80, which means the cost of goods, of delivering that’s cost you $20 and that $80 is your gross profit, right? I think now when you try to break it down back from gross profit down to what we call operating income, you have to go through a couple of items. 

There’s also a couple of items… the ones I think about generally are SG&A, what we call Sales, General and Admin(istrative) Expenses: typically any sales, admin expenses that we have. R&D (Research and Development) expenses, that’s extremely key. And I think the other one would be… I think that’s probably… that’s another one more. So I’ll try to… 

Andrew: Are you referring to your book? 

Eugene: I try to think about it from those 3 aspects about it and the way to think about it really is in terms of operating income margins, they really have to be rising over time. As the company scales, we want really… I think we want operating leverage so basically the way to think about it… the more revenues grow, the profit margins really go up and if the profit margins go up, it’s a beautiful thing. 

For example, if I have the top line of the revenue growing at 20% and if the profit margins keep rising, which means… let’s say, for example, it grows from… let’s say $100 right now. The operating income is 20% so you make $20 on it. But if a company managed to raise the operating income margin from 20% to 40%, literally what it means is on the same $100, they would have doubled their earnings. 

Now, if the company even grows faster than the top line, it’s a beautiful thing so the way I really think about it is I want companies to be growing really quickly. I want the companies to be improving their profitability. I think that really hits the sweet spot typically in terms of debt, that acceleration in terms of earnings growth and if the company can do that for a long time, I think that’s where you really get that sweet spot of having a very long… generate long term returns.

Andrew: You’ve generally got the expenses right… general (expenses) and admin, like you said. R&D and then sales and marketing expenses. Tell us a bit more about the operating income margin. 

Eugene: I think when you go to operating income margin, I think that’s really the key because you’re further breaking down. Ultimately, as the company makes from generating all their sales, what is truly that amount of profit that really goes in? 

I think operating income as we said, basically you deduct after your cost of goods, you deduct all your G&A, your R&D, all your other depreciation and other expenses and stuff, you get to there.

I think from operating income, it’s also crucial you get to their net income margins, which you… less off all your taxes, interest taxes and so on and so forth to get there. But I think… So, earnings is extremely important because… why am I going through earnings and going through this exercise is that… 

In the very long run, you find me a company whose revenues are rising, whose earnings are rising and whose cash flows are rising and the stock price is not rising? Almost for sure, everything is all going to be rising. 

Andrew: So it’s going to be priced in before that, right? Usually, I mean the market… 

Eugene: It is. In the very short run, I think typically that goes that way but if you’re doing something for say 10, 20 years, you find a company that has rising revenues, cash flows and profits, almost certainly for sure you have a rising stock price. Don’t need (to) question… obviously how much… how much is it rising? By a lot or by not so much? But I think that’s always the parameter because ultimately, businesses are always driven by that.

Andrew: Of course, it’s a case-by-case basis because if it’s already priced in, then the question would be: Am I too late? Am I missing out if I don’t buy now? There’s always all these things to consider. How do you understand that? 

Eugene: I think that boils very interestingly… going into multiples. Some companies can be very expensive right now. Let’s try to give some examples. For example, let’s look at Facebook. Facebook probably trades… Let’s take… 

Andrew: Meta. Meta now… 

Eugene: Meta, right? Exactly. Meta… Meta trades, for example, let’s say at 25 times PE (Price-to-Earnings). If the top line, for example, can grow at 30%, which is fairly reasonable. If you take a rule of 72, which means I know approximately about 72 divided by 30 gets you about two and a half years. Every two and a half years… 

Andrew: To double.. 

Eugene: Facebook doubles, right? In five years, Facebook doubles. At PE right now of 25, in five years’ time, assuming that the price stays the same, in five years’ time, Facebook is going to trade at 12.5 times PE, is it not? It’s probably not going to trade at 12.5 times PE right? Now, the question is will it be trading at a higher PE or lower PE if it managed to accelerate that growth? 

Let’s say, for example, if it trades at 25 times PE, what effectively you have is, in five years’ time, you have a stock of Facebook doubling. That’s how I really think about it from earnings back to valuation multiple. I always try to think about it very forward looking and think about it not in current present multiples, but think about it in really forward multiples. How big can the company grow? Is this 30% assumption that I have a reasonable assumption to get towards there? 

Andrew: Since we’re on Facebook, as of recording, Facebook just changed its name to Meta not too long ago. How do you take into account their direction into VR (virtual reality), into creating this online virtual space, the metaverse? It’s harder to valuate in that sense.

Eugene: I think the metaverse is going to be very, very interesting. What Facebook has is they are trying to establish what Apple had with the App Store and with the iPhone. Facebook has always been as an app on the Android devices, on Apple’s devices and relies on the Apple App Store.

Now, what Facebook is trying to do is to break away from that stranglehold of Apple and to have their own system and I think that the acquisition of Oculus, in the AR (augmented reality) and VR space is extremely strategic in the very first place. When you have Oculus and if everyone uses Oculus and now you have an App Store equivalent of the Oculus, if the metaverse happens in the Oculus, they then have that new stranglehold of the App Store equivalent which Apple has. 

Andrew: Its own walled garden.

Eugene: Its own walled garden, exactly. I think that’s extremely crucial. It’s going to take time to be built. Is the Oculus the final step of where the metaverse is going to be? I’m not sure. Can it be better? I think it can be. But I think it’s a step in the right direction.

It’s almost similar to how Facebook actually pivoted from desktop to mobile. I think that was a very pivotal moment when you started realizing that Apple (is) starting to come out a lot of smartphones and everyone… smartphone usage and adoption really skyrocketed and everyone had… The smartphone was basically a new PC (personal computer) in the pocket.

I think when he pivoted (to) that, it’s almost like right now. He needed to realize that “okay, everyone’s smartphone adoption is probably full” and now he needed to pivot. I think with the Oculus, it’s probably the right way to be thinking around it. 

Andrew: Because you gave an example of Facebook being at 25 PE, can I say that it’s just harder to… you got to pluck in assumptions when it comes to new directions or new developments, right? 

Eugene: Correct. 

Andrew: You got to have your best bear case, your bull case and your base case. Am I missing anything? Is this the way to look at it, if I want to look at Facebook or Meta for example, and its new direction in the metaverse?

Eugene: Correct. I think you brought (in) a very good way. The way when we think about investing and I think about things is I try not to think about it in really absolute things. I try to think about in very relative and possibilities and what the range of outcomes can be. I think my base case is probably 30% because Facebook has been growing earnings at around 30%-ish.

Now interestingly, because we have the metaverse, they’re going to be investing about almost $10 billion in the next couple of years. That’s going to take a very long time to build up but I think Facebook itself, they have pricing power over their existing business. I think that’s key and I think where you have right now is that reinvestment and that’s going to take place. But the question is, can that reinvestment happen? 

If they can continue to grow their existing base business at 30% CAGR (Compound annual growth rate) for the next couple of years, which they have clearly demonstrated that they can, I think there’s going to be an interesting angle for it. 

I think the way I think about it is that even if they don’t get 30%, they grow at 20%. If they grow faster at 40%, that’s probably a good range of outcomes to be thinking around it. If they grow at 40%, you’re probably going to make more than double. If they’re growing at 20%, I think you’re probably still going to make under a double and under a double in less than five years? That’s not too bad, right? 

Andrew: Okay, coming back to the framework. So we have revenue, we have gross profit and then operating income margin. Anything else? Just in case I miss out. 

Eugene: I think one thing that I forgot to mention was really about cash flows.

Andrew: Great. 

Eugene: I think cash flow, the way to think about it, I think about in two matrix. The first one is really operating cash flows. So operating cash flows is I would say is cash flow is anything taken out from a business, from really running out of the entire business out from costs, expenses and really cash-based expenses.

Cash flows are extremely important because if a company doesn’t have enough cash flows, for example, if every dollar I need to generate in terms of sales and I need to have $2 out of my own capital out for the business, it’s a very inefficient business because at some stage you need to keep continuously be raising capital, be it equity or debt and that’s not going to be sustainable over the long run. 

The other matrix is, I would say, is free cash flow, which is in my opinion, a more important matrix for me. Free cash flow is basically operating cash flow less capital expenditures or CapEx, which includes your buying of… your property purchase, properties, equipment and your traditional investment per se.

So I like to think about it… free cash flow. Because free cash flows are the one that truly, I would say, the ones that are… Cash flows… I can, as an equity holder, can be really taking because you really need to be reinvesting. For us, reinvesting is so important because if you don’t reinvest, you don’t have future growth. That’s why I will say… (I) feel free cash flow is extremely important. 

Andrew: Can I say that it’s safer to look at free cash flow instead of operating cashflow?

Eugene: It is. 

Andrew: Because you don’t take into account CapEx as well. 

Eugene: It is. 

Andrew: It really minus off all these expenses and this is how much cash flow you have to keep the company going. 

Eugene: Correct. But interestingly, the way to think about it is if a company is near its maturity, operating cash flow and free cash flows are probably going to be very similar because your capital expenditures are probably going to be very low. The company doesn’t have too much reinvestment opportunity. They’re probably going to be acquiring rather than reinvesting them in the business.

Now, when a company is just starting out, the operating cash flows could be far higher than the free cash flow because they’re reinvesting very rapidly. Because every reinvestment, you probably generate more revenue, which makes a lot more sense so I think you’ve got to be thinking about it very differently. 

Its entire spectrum… I’ll think about it and it tends to, I would say, converge as the company basically matures. As an investor itself, I think we’ve really got to just be really focused on the business rather than on price. I think that’s always extremely important. Prices can go up and down at any one stage, but I think as business… I’d rather be business-focused investors rather than be price-focused investors.

Andrew: Okay. You mentioned you have about 80 companies in your portfolio but I’m going to guess that most of us cannot manage 80 companies in our head unless you do it full time. I’m not too sure about you but different people have different investing styles. How do you allocate your capital?

Eugene: To start off with the 80 companies, the way… how I do my research typically is that I’ll do a full deep dive on any company that we own. I’ll write an investment thesis that ranges anywhere from 40 to 100… 150 pages, depending on the complexity… 

Andrew: For each company? 

Eugene: For each company, on the complexity of the company. Now, when you do that kind of deep research, it’s almost like a thesis/journal or encyclopedia. Everything that I need to know about the company, it’s literally available at the click of a button. That helps me because it helps me to form a very strong conviction so with that, I do it one time and every time during quarterly earnings, I take probably half an hour to one hour to update it and that’s really it. Because you have built so much deep conviction right at the beginning, and you do regularly… regular updates… With that, actually it’s not too… I would say, too tiring or too much effort, to be honest. 

I think when you talk about allocation… I think the allocation always follows conviction. The higher the conviction you have, the higher your allocation. Now, but… Typically, what I would do is, I try to do a kind of a rule, a rule of thirds in which my first third or… I call it my starter position, I will basically invest a specific amount for the starter position, and (it will) be at whatever price it will be. So it will be at current market price, I don’t use any orders. I just go in there and just buy at the current market price. 

Andrew: What is the rule of thirds? 

Eugene: So the rule of thirds, it works like this. If I want to get a full size position, I don’t put in my full size position right away. I try to put in one third of my position upfront. As the next couple of quarters, when I see the company is doing very well, not the price… it’s doing very well, I put in my second third. (If) the companies are doing especially well, I can put in some more and I continue adding. 

So I try to do it that way and continue to build up that position. You don’t need to actually rush in or get a fear of missing out and put all your position right away. You can actually build it over time because if you think about this way, if you’ve invested in Apple 20 years ago, on the 20th year versus the 19th year versus the 18th year, it wouldn’t make a difference. Or in Amazon, even up to right now. 

So it really does not… The most important is, I want you to be finding great companies and let these companies actually show them… Let them show you that they can perform. They can do well at this. 

One particular phrase… that (is) my favourite… One of my favourite phrases, to it think about it this way is: to find excellence, to buy excellence, to hold excellence, to add into excellence and to sell mediocrity. I think when you try to… always try to follow this pathway and keep adding to them and letting them rise, I think that’s always how it goes. 

So in my portfolio, for example, I always give that standard allocation… almost and let them run. A lot of them, when they show me that they have run… Accordingly, the stock price almost typically follows that run rate, it almost always compounds naturally on its own because I let my winners run and it run really high. 

For example, when some of the stocks, basically they go up 10, 15 times, they become some of my largest positions and they become some of my largest positions in my portfolio by their own right. I think that’s extremely important so I let them compound into some of the biggest positions. 

Andrew: Let’s talk about rule of thirds for a while. Let’s just say I have $90K, so that means $30K, $30K, $30K, right? Three tranches… so the first $30K goes in and you’re saying that the second tranche goes in if the company is doing well and not necessarily the stock price is doing well. But what’s the time period between the first and the second tranche? Does it matter? 

Eugene: I think it depends. It’s not a clear cut answer. The way to think about it is between… So, companies report every quarter, right? The way to think about is look at the next quarter earnings. Are they performing as per what your investment thesis is saying? Are they accelerating that growth even faster? I think that’s one way to think about it. 

If you find that they’re accelerating at their position and sometimes if market drawdowns may be in between the quarters and you’ve still a very high conviction in the company, you can add sometimes especially… so I tend to use quarterly earnings as checkpoints, but sometimes Mr. Market gives you an opportunity, right? Then suddenly, for no reason, nothing happens and market falls 20%, or 30%. That gives you a great reason to add and I would take the opportunity to add to that position. 

Andrew: Okay. 

Eugene: Because I am getting to buy it at even cheaper prices than I bought previously. 

Andrew: So your second tranche might come earlier?

Eugene: Yeah, so it really depends on market level. It’s a combination of when the earnings comes and really your conviction. 

Andrew: (That is) something to consider, apart from dollar cost averaging as a strategy. This is closer to lump sum investing, except that you’re just dividing this lump sum into three different tranches…

Eugene: Yep, correct. 

Andrew: …(to) put it that way. Okay… And you mentioned, allocate according to your conviction so it’s not about industry or other ways you demarcate it or you carve it out, right? It’s according to our conviction. Can you tell us a bit more about that? 

Eugene: So, (I) try to give an example. If I try to invest in some of the gene editing companies, which I do invest in some of them, some of them are still getting FDA (U.S. Food and Drug Administration) approvals. Only when they get FDA approvals, then they make… then they get to start making a lot of money. 

Now, at this stage is when they get FDA approvals and they start making more money.,It’s going to be… they’re probably going to return like almost 20, 30, 50x but if they don’t and somehow they struggle, they (are) probably going to go to zero. 

Andrew: We just don’t know how long that is going to take. 

Eugene: We just don’t know how long. I like the way they’re doing. They’ve shown a lot of progress and a lot of development but does it mean it’s going to get there? It’s not exactly a hundred percent for sure.

So I can have conviction, but I don’t have a high conviction that it can get a 50x, correct? But yet, I want to own. Now, do I think about… but yet it has a higher risk of going down to zero so do I want to have a high allocation in this kind of very… I would say, moonshot bets? I would tend to part on my allocation. 

I think it’s also about the risk-reward in terms of thinking around the specific company and in terms of allocation from that perspective. If I have a company that I know, for example, like Visa or MasterCard, they grow revenues about 15 to 20% per year. They tend to grow earnings even faster because they have a lot of skill and operating leverage in the business. They tend to be growing say around, between 20 to 25% CAGR for a long time. These are very… 

Andrew: Compound annual growth rate, right? 

Eugene: Exactly. These are businesses that keep growing. Day in, day out, you’re spending on… any money on your credit card or your debit cards. These two guys basically get the majority of all the entire market share. Be it good or bad, you still have to spend money. It goes to them. 

These are the kind of companies where I have far more confidence that they’re probably going to return a very narrow set of returns and I have far more higher conviction for me to form… for this to form a very solid based on the companies. I’ll probably allocate a lot more. 

I think these two kind of very vast extremes helped me to think about conviction. And of course, there’re some of the ones who’re really growing a lot faster and you probably want them to swing a little bit more in terms of your portfolio as well, then you can allocate a higher percentage. But again, that’s how I try to think about it. 

Andrew: Okay. You mentioned that you let your winners run so are there opportunities you’re looking at right now? We’re recording this in November 2021… or are you just letting your winners run and just waiting for the right opportunities to show up? 

Eugene: I think in investing, a lot of the money is not made in buying and selling or what we call trading because in trading, if you miss the best days… Studies have shown, if you miss the best days… for example, this is the couple of best days, you will strictly reduce on average… For example, in S&P, it tends to be around 6 to 8%. You greatly reduce that to almost 2, 3, 4%. 

So trading… just because you’re missing the best days and you can never almost perfectly time the lows and the highs… I have not seen anyone at least do that very consistently over a very long term. Because of that, you don’t want to be buying and selling. You just want to be buying and holding and letting them run.

That’s why really, the concept of letting your winners run high really matters a lot. I think in terms of trends, I’m looking at tailwinds and I’m looking at tailwinds that last years and not decades. 

To give an example, we have, right now… We’re in the start of a tailwind. Which is the shift from internal combustion engine or what we have in our cars based on your standard engines and we have what you call, battery… battery-electric vehicles, or what we call BEVs. 

Andrew: There we go, Tesla fans! I see it coming. We’re going to talk about Tesla. Alright, tell us more. 

Eugene: I think it’s important from that aspect because right now, you think Tesla has been around for almost a decade or more than that, right? We are just at this sweet spot right now where we’re seeing the adoption and the way to think about it is like this. 

Globally, a lot of the countries, because we’ve signed the climate pact, we need to basically improve and help prevent global warming. In terms of vehicles, they actually contribute a lot of CO2 emissions. That’s one huge aspect that we need to get out to… to make our entire transportation fleet, to electrify them or we call the theme of electrification. 

How it looks like this is that it’s going to be… it’s probably going to look like an S-curve. An S-curve is going to look like this. We are right now from internal… From electric… here is basically where we have electric vehicles and here is internal combustion engines. They’re probably going into there and going to hit a sweet spot. 

Now, the way to think about it… our current stock of all our cars is probably about a hundred million globally. On average, depending on the economy, good or bad, (It) takes you about 6 to 8 million cars per year to replace. If you think about that, on average, the replacement car cycle right now and EV penetration is still around 1, 2-ish, 3%. The entire replacement of the fleet itself is going to be 20 to 40 years. 

Andrew: Before we go further, let’s talk about the S-curve adoption. 

Eugene: Yup. 

Andrew: Yup, so that we know what it means. 

Eugene: I think S-curve adoption is crucial because in any technological adoption, it will take time. The initial stages, it will take time because people are trying to get used to it, trying to understand it. Okay, why is it (we are) trying? 

I think the best time is right now when you see infrastructure… for example, right now, in electric vehicles, more infrastructure being… more charging stations, more ease, more people getting used to it, more marketing, more knowledge. That starts to accelerate. You start seeing the network effect. If everybody starts using electric vehicles and there’s no more petrol kiosk stations, for example, that further accelerates that shift.

I think S-curve is extremely important. Typically, you always reach a maturity or a massive adoption point where you hit that point and it starts to stagnate. I like to think about… in any technology trends, that S-curve. And of course, with technology, we have seen the S-curve adoption swung much more quickly. 

It used to be when we move from horses to cars in the past. That whole thing used to take so long, so many years, decades even and now we are seeing the internet… 

Andrew: We’ve all the roads and the systems for roads. 

Eugene: Exactly. The roads were… the roads (were built from) decades before they started implementing. You look at the internet. It took us less than 10, 20 years and it massively changed our lives so I think that’s the weird thing about S-curve. 

Andrew: So the S-curve is slow at the start, that’s why it’s curving and then it picks up. It accelerates and then it reach mass adoption and therefore, it curves back down again. That’s why it is shaped like an S. 

Eugene: Yes, correct. 

Andrew: You’re looking at the S-curve adoption for EVs.

Eugene: Correct, exactly. I think when you look at that, it’s because it’s such a long way… Don’t think about Tesla or investing in any electric vehicles player as a very short one-year player or (you) do it for months. It’s that [indiscernible] and I suspect 10 years down, 20 years down in Singapore, the majority of our cars is really going to be electric and it is already set in place. Governments are all set in it, infrastructure is going to be… I think that’s one way to really be thinking around it. 

Now, you brought (up) a very interesting thing about Telsa. Tesla is interesting because it was one of the first mover and now obviously, it’s the top dog. You look at US. Majority of all electric vehicles, there’s a majority share. I think, close to about 70, 80% of that. 

In China, it is quickly moved because when you have built one factory in the US and you have taken all that knowledge, you know what exactly to build it. You build it much more faster and they managed to roll out an entire factory in China in less than under two years and get into production. That’s extremely unheard of. 

I think with Tesla, the main important thing is really the fleet itself. An EV play, just building the car and getting it on electric is not sufficient. You really need to make it full self-driving and Tesla is trying to get towards there. Now, the Tesla cars itself, they’re already recording… firstly, Tesla has more cars on the road than any other electric car manufacturer. Elon Musk basically shared in his interview with Cathie Wood in one of the ARK interviews: Tesla, in terms of recorded miles is more than a hundred times combined… all of his competitors combined. 

Andrew: It’s a lot of data there. 

Eugene: It’s a lot of data, right? And you put through the neural network that goes through it. It has this immense moat… that it has. I think that’s extremely crucial that it has (this moat) and that’s why they’re being able to go out. You can see, with autopilot for example in the US, literally it can be on the expressway and the cars are moving and it’s able to change lanes on its own.

Andrew: I think Tesla is interesting because this is where investing guidelines are not cast in stone because I’m sure you didn’t invest in Tesla recently. You might have looked at it a long time ago and there was a period of time where the Tesla is not hitting its target, it’s not making a profit. If you were to look at your previous criteria, increasing profit margins and all that, it’s not meeting all these criteria.

In fact, if you use Facebook/Meta’s PE ratio of 25, there was a period of time Tesla’s PE is more than 1000. Right now, as of this moment, it is still more than 300, which is really high. Some people might be thinking “okay, is it too late? Am I too late?” and therefore, would you agree that it doesn’t fit your criteria that you lay out earlier?

Eugene: Actually, I think conversely, it does fit a lot of the criteria. You have to think about it right now. How many cars does Tesla actually make? I think… I cannot remember off the head of my numbers. Let’s say, for example, it’s a million. We sell a hundred million cars a year globally. If I think Tesla can get 15% market share over 20 years, that’s 15 million cars. If you think about it, that’s 15x current revenues, right? 

Tesla is serving in a market that’s worth of $1 trillion annually because the car market is huge. No one thinks about it, right? Their [indiscernible] is massive. It’s not just cars, it’s trucks, it’s SUVs (Sports Utility Vehicles), it’s different, different car segments. I think that’s a very different way to be thinking around it. They’re going to trucks and pickups and stuff. 

Andrew: So it’s this total addressable market, right?

Eugene: It’s the total addressable market, I think, if you really go into it. Tesla is very… You cannot think about Tesla from the aspect of a traditional car manufacturer because you’re not just making a body part, making… letting it run, having the marketing about it, making it look good. It’s really not that. 

They have been investing in their full self-driving for a long time and when that full self-driving, they have spent so much money investing in it, finally rolls out. Hopefully, it’s not… in the very distant near future and hopefully in the next couple of years. Everybody’s paying. When everybody’s paying that subscription fee, that amount of money they’re going to pay, it’s going to flow right through to the balance sheet as cash flows and as massive amount of profits. That’s where Tesla will basically experience the margins that is unlike any auto manufacturer that you have. And you add on robo taxis… 

If I own a Tesla… this is how the dream looks like: I get a Tesla, assuming you (are) still going back to work. The Tesla basically fetches me to work on full self-driving mode. I can clear my emails in between. (I) come back home, picks up the wife, kids, sends them back to school… acts as a robo taxi throughout the day. 

Tesla gets a one-third cut of that revenue, pure revenue. You’re just renting all your Teslas as a robo taxi. If it needs to charge, goes and charge. End of the day, picks you back up, picks the wife back up, charges back in your home and if your home, for example, has solar, it’s free. 

Andrew: During the trip, you can play games on the app store. 

Eugene: Exactly. 

Andrew: At $1.99 or something. We’re just imagining a future. 

Eugene: I think that future… and you have robo taxis added in, again, it’s something that they’re already trying to build it… Once it’s software-based, that amount of profitability…

So, the way to think about it, Tesla is… They don’t need to make… It doesn’t have to be a winner wins all when it wins most, kind of market. It can be like an Apple where Apple makes, for example, 15, 20, 25% of all smartphones and probably takes close to about 80, 90% of the industry profits of smartphone. 

That’s how I really think about like how Tesla has to be or can be in that aspect, like the Apple of cars from that aspect. I think that’s one way to think about it and I think you’ve got to think about it really long term from that aspect. 

Like last year, when it’s pre-Covid, I was in LA (Los Angeles), probably like almost three or four cars on the road were Tesla in San Francisco. So, this is… I mean, the future is really here. It’s just that it’s really not evenly distributed yet or it’s just unevenly distributed. 

Andrew: I’m sure that’s one of your multibaggers right now. Not financial or investing advice, but something to think about when you consider the criteria for investing in companies and when you look at it from a qualitative point of view because you are also trying to price in the future which is a bit harder to price. We went through it just now. It is so much harder when I talk about future developments but you’ve got to have your bear case, your bull case and your base case. 

Eugene: Yes. 

Andrew: Okay, let’s talk a bit about investment “mistakes”. Any mistakes you have done? What did you do? How did you reallocate? 

Eugene: I think in investing, there’re probably a couple of mistakes. One is mistakes that you can control and one is, mistakes that you can’t control. Now when mistakes that you can control, but you let… Then you let it happen. This is one example. I invested in Wirecard. Wirecard, as you know, is one of the companies… One of the German-based FinTech companies that recently, I would say, is undergoing a very bad stage right now… probably going through or leading towards bankruptcy.

When I invested in Wirecard, Wirecard ticked all the boxes: growing rapidly, growing fast and I could see Wirecard payments all over Singapore which they allow for all the credit card payments because they acquired Citibank’s acquiring network. 

But what I didn’t… what I choose to not realize was when the first FT (Financial Times) report came out and… (Wirecard was) having a lot of internal transactions. When I was reviewing their annual reports, I saw that but I had minimized it and I didn’t bring it up too much. What happens was that when thefirst Financial Times report came out, I did a whole deep dive and re-looked back at my whole investment thesis and I realized I had actually part it down and not put it out. 

I wasn’t neutral enough. I had focused on what the numbers were. I think that was my single biggest mistake in terms of that and straightaway after I see that, I reviewed it. I sold my entire position the very next day. I probably was at a loss of maybe 50 to 60% but that’s perfectly fine. 

It’s probably one of my largest losses, but I think the most importantly is, the way to expect… I think the way to think about it from that was actually to not minimize the mistakes. If something is not good nowadays in my thesis I’ll put a red cross or a red flag to just be very neutral about it. 

This is what it is, I shouldn’t be minimizing it. I think that’s extremely important. I think that has helped me in terms of evaluating new investments and really just to be putting it on a fair point. If it’s good, put a green tick. If it’s not good, put a red cross. Eventually, at the end of the day, I’ve an entire investment thesis review: are there more green ticks than the red ticks, and if there are some red ticks, are these red ticks something that you are okay with or not okay with? And then make that final investment thesis. I think that actually vastly improved my entire investment process.

Now, the other one that you cannot control. I invested in a company called iQIYI. iQIYI is in a way, if you can think about it, the Netflix of China but not really the Netflix of China with subscription but it was actually selling more ad base in terms of getting ad revenues. 

Now, when I first invested, it was growing rapidly but what happens was that after a couple of quarters, the growth suddenly started to taper off massively. From… at 50, 60%, it started going down to almost low single digits: 10, 5%. For some quarters, they were actually negative. I was like “oh, what’s going on?”, because that’s clearly a very bad sign.

Typically, when I’m doing this, I’m typically looking at multi-quarters and if it’s happening consistently over a couple of quarters, it’s something that is really beyond my control so I’m trying to figure out what happened. 

I think the straw really came when… In any streaming or entertainment company, the content that you own is king. I think when they were trying to then also sell the content to other platforms which means to tell me they were unable to monetize that content that they had, and I think that was an extremely red flag. 

I saw the deterioration of the business. Unfortunately, they couldn’t grow as fast as they could. I think when you are selling off the content, I saw the whole deteriorating of their content library coming off, not being able to expand. I think that was the final straw and I sold the entire position again, the following day, when I made that call.

I think I always try to focus about that… I think, try to think about it in two different aspects. Again, this… I think in the space of investing, you will always have losers. You cannot not have losers. If you don’t have losers, you’re playing the game too safe. You have to have losers. The way to think about it is this, the games… When you’re playing the game that I play or the style that I do is that the gains from your winners will far exceed the losses from all your losers. 

I give you an example. The gains from my biggest, single biggest winner,is probably more than a hundred times of all my losses from all my losers combined, from just my top winner. So if I compare all of that, I think the losers become really insignificant and become mediocre and it becomes just a smaller part of your portfolio and the winners just take the majority. 

I think most importantly, I think for us as investors, you want to be taking advantage of it but let your winners win and swing them and swing your performance in your favour.

Andrew: Your winners should more than compensate for the losses that you have. 

Eugene: Correct. 

Andrew: Okay. We’ve gone through many concepts with examples. Thank you so much. Is there any last piece of advice that you have for our retail investors? 

Eugene: I think in investing, always be thinking… always be going back down to the business itself. I think you’re always going to have a lot of noise. Someone’s going to say something about a particular business. You have inflation, you have economic growth, you have all kinds of things and you have market drops. 

Always go back to them and stay as business-focused investors and ask yourself… To give an example, during Covid last year, when Covid was hit… It’s every… I asked myself when Netflix was down 20, 30%, I asked myself the question: is anyone going to unsubscribe Netflix? 

Andrew: No, we’re going to stay at home. 

Eugene: Yes, the answer was probably no and if anything, Netflix is going to go up so actually, I bought more Netflix. You ask yourself that very fundamental, basic questions every time when you have a market sell off. Is the business really not doing well or is it just Mr. Market decided to throw a tantrum and have that? 

When you think about it, always be that… from that aspect, I think it really helps you to be so much better as an investor and just be trying to be owning businesses rather than trying to be trading [indiscernible] or trying to have price charts to try to determine whether to buy or sell anything.

I think that’s really fundamental. I think that changes… That was a fundamental change in my perspective and I think that should be in terms of any retail investor and of course, by investor… by definition, (it) should be for the long term. 

Andrew: Thank you, Eugene. 

Eugene: Thank you. Thanks. Thank you so much.

Andrew: Thank you for watching this video. If you found it useful, like, share, subscribe and feel free to leave your comments. You can also join our Telegram group, follow us on social media and sign up for our weekly newsletter. Everything is in the description. For more content, check out thefinancialcoconut.com.

We have three questions that we ask every guest. The first question is what is one of your core life principles? 

Eugene: I think one of my core life principles is to be the best version of yourself and then continuously keep improving on it. That’s extremely crucial. For me, the second one that I have is: in anything, you need to have grit and determination and the tenacity to just grind it through because a lot of stuff, typically when you do it, at the beginning, you’ll not see the returns. But most of the time, you (will) see exponential… You probably see a S-curve and hopefully you see an exponential rather than… a more… longer exponential curve rather than a S-curve. I think that is something that you’d really need to train, in terms of patience. 

The final one, I think is as everything in life, enjoy it. Life is a marathon, not a sprint. Enjoy the journey, savour it. I spend a lot of time investing, look(ing) at companies, but also spend it outside with your loved ones. I think that’s extremely important. I think in life, that’s what really truly matters. 

Andrew: That’s the balance. 

Eugene: Exactly, the balance. 

Andrew: We’re a finance podcast so what is one piece of financial advice that you think should be shared more often? Anything that comes to your mind?

Eugene: I think the way to think about it is… I’ll end off with that favourite phrase that I shared earlier in the beginning. In investing, really it’s about finding excellence, buying excellence, holding excellence, adding to excellence and selling mediocrity. I think, do that in investing, do that in your life. I think that truly is one of the biggest takeaway that can help you, help the world.

And through… Hopefully we, as a collective, can be doing that: investing more meaningfully in companies and driving the world forward. 

Andrew: Okay. What is one area of a life that you are giving additional focus right now? 

Eugene: For me, I’m really… two different aspects. One is teaching. So I have not taught investing before. Obviously, I wrote a book but what I’m trying to do right now is to create a course, to teach people how to invest. I’m doing (it) actually with Maven. It’s just one of the start-ups. It’s going to be cohort-based, community-based learning. We will do it over a specific course. I’m targeting that for January next year.

The other one is… I also just started my investing journey on the start-ups, in private (companies). I think that’s something that I actually have to sign up with On Deck, for their On Deck Angels, ODA 5 batch to really try to expand my deal flow, to meet more founders, to meet more investors and try to expand that aspect. 

So (it’s) something that I’m hoping to build over the next couple of years and hopefully to get to show some track record and some returns in the next three to five years. That could perhaps be even content for my second book on how to invest in start-ups.

Andrew: Okay, would you like to share your Twitter handle or any other social media profiles? Because I know you do post quite a bit on the companies that you are looking at. 

Eugene: Yeah, you can follow me on Twitter. My Twitter handle is @EugeneNg_VCap or short form for Vision Capital.

Andrew: Alright. Thank you, Eugene.