2. My Revelation / Current Investment Framework

A sad revelation I had arrived at is that all the things we learned about investing in school such as Modern Portfolio Theory or Market Efficiency are not at all applicable in practice. One of the key assertions to these theories, that all investors are rational or logical, is simply never true. On top of that, the entire financial market today, how it is designed and functioned, is essentially a fee-making / rent-seeking industry – you would learn more about sale than real investing work.

Only when I have completely abandoned what I learned in school (including my useless CFA) and distanced myself from the industry, did I start to absorb real investing knowledge and learn to develop a proper system. Below are some of the things I came to realize and have worked for me thus far:

1. Temperament

You’d be surprised. Investment is a pretty forgiving industry – you can fail so many times and only need one or two good investments to be successful. The key is to be patient and disciplined. Don’t strike until you see an apparently compelling opportunity, and when you do, be aggressive (just like playing poker!).

2. Being inactive

Warren Buffet said the stock market has a mechanism to transfer wealth from the active to the inactive. Aside from the tons of fees and taxes you would save over time in your compounding journey by trading less, you would also avoid being emotionally influenced by Mr. Market – selling out your winners or buying in euphoria.

3. Focus on finding “Compounders”

I have completely abandoned the idea of trying to make 30-50% returns of some single trades after I realized that cannot be sustainable – i.e. you can’t replicate trades like that every year for the rest of your life.

I am focusing solely on finding the multi-baggers – wonderful businesses that could compound 20-30% a year consistently for 10-20 years.

4. Once you have found a wonderful business, hold onto it

Wonderful businesses are hard to come by. Once you have found a true “compounder”, hold onto it. Just look at Mobile World Investment Corp. (HOSE:MWG) – the most successful retailer in Vietnam. For the last 10 years, revenue and operating profit have grown ~8x, plus some modest multiple expansion, that has led to a 10x growth in stock price. Nonetheless, there have been times when the stock dropped by 50% while a 20-30% decline happened countless times. Over the long run, stock price shall always reflect the growth in (actual) profit of the business.

5. Risk is NOT what you think it is

We all have been taught in school about the concept of beta – a metric that measures a stock’s price volatility relatively to the market. Well, let me tell you something – it’s BS. If you ask a business owner what is the risk to them, they would say it is the risk of the business deteriorating and eventually being worth nothing – or permanent loss of capital. Having a daily price quotation doesn’t make an asset’s risk profile any different. If you invest to own a proportional share of a business and focus on the fundamentals, the daily fluctuation in price does not matter.

Trust me, it was incredibly hard for me to reset my mind, which was tainted by my extensive education and industry experience. But once I have overcome that, absorbing new knowledge felt extremely satisfactory. The difficult part about investing is having the right mentality, you really don’t need to be a (math) genius.

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In assessing businesses to invest in, I adopt a simple 3-legged tool framework:

1. Attractive economics with high ROIC

There are a lot of things that make a great business but if I have to use just one metric – that’d be Return on Invested Capital (ROIC) defined as Net Operating Profit After Taxes (NOPAT) / Invested Capital (basically NWC + Fixed Assets).

When you look to put money in a bank deposit account, you would pay attention to the interest rate the deposit account is offering, right? ROIC is that rate a business has to offer.

Return on already-deployed invested capital, however, almost does not matter (the Past). What matters is the “incremental” return on “additional” capital deployed (the Future). Yes, this is where you must form a view on the Future.

In assessing companies, pay attention to the ROIC trend over time – if ROIC goes down over time, it means either of the two things: (i) the industry has been getting more competitive / the business is losing its competitive advantage; or (ii) management has displayed a poor track record of capital allocation; or BOTH.

2. Business has a long runway for compounding

Once you understand the importance of ROIC, you will naturally look to put your capital into businesses that not only display high ROIC, but also possess the ability to continue reinvesting its earnings at the (same) ROIC for growth – this growth runway is a critical point.

If you have a bank deposit that offers 20% interest rate annually, you would want to continue putting all your interest income back into the account at the same 20% rate. And continue doing so for …as long as you are alive!

Compounding is powerful. 26% a year for 10 years would be 10x your money, and for 20 years would be 100x your money.

3. Capable management with a passion for the business, high integrity and skin in the game

Yes, management team is meant to be the LAST on my list. Warren Buffet said “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

When you already have a great business, the bar for management is indeed lower. You only need people who have some passion and integrity to continue taking care of it. Or if these are too difficult for you to assess, one way is to think in reverse – just rule out the bad actors.

A more powerful combination, of course, is to have a great business and a talented management team.

Also pay attention to how incentives are designed in the companies you invest in. Having a share component in management’s compensation might not be enough. Most ideally, you would want a substantial amount of their overall wealth to be tied with the success of the company.

As I mentioned previously, I use this framework in both public and private investing. Perhaps the way one may extract information and data points may differ, but really, if you invest just like how you would own a business, there should not be any difference.

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P/S: I have read a ton of analysts’ reports covering stocks globally and in Vietnam. ALL of them would talk more about “short-term” catalysts that could make a stock move – this year or next year “reported” earnings – and never focus on things that actually matter in the long-term. After all, it’s not in their best interest when you truly invest and hold. They make money when you constantly trade. How the industry is designed is really meant to brainwash people and create generations of “investors” that are short-term focused.

In my experience, this is sadly true not only in public market, but also in private market investing.

And this is why I wanted to create this page. The more I write the more I can constantly remind myself of what truly matters and to ignore all the noises. And hopefully, I could encourage more people to do the same. I also look forward to learning from you as we go.

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