Expert: Yen Liow – Honestly, everyone MUST listen to this

HOSTS Alec Renehan & Bryce Leske|25 November, 2021

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Yen Liow is the Managing Partner at Aravt Global LLC. He is presenting at this year’s Sohn Hearts & Minds Investment Leaders Conference, which is now in its 6th year. The conference has 12 local and international fund managers pitching their highest conviction stocks. Keynote speakers this year include, Charlie Munger Berkshire Hathaway and MIT Institute Professor Robert Langer, Co-Founder Moderna. The associated listed investment company, Hearts & Minds Investments Limited (ASX: HM1), invests in a portfolio of high conviction stocks including those pitched at the conference. In lieu of management fees, HM1 donates 1.5% of its NTA to Australian medical research each year. All conference proceeds are donated to Australian medical research. Tickets are $500 but Equity Mates have 50 tickets at 20% off – so $400 https://www.sohnheartsandminds.com.au/ enter discount code – equitymates

This episode contains sponsored content from Hearts & Minds Investments.

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Bryce: [00:00:14] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going?

Alec: [00:00:29] I'm very good. Bryce very excited for this episode. We love this time of year. Christmas is around the corner, but more importantly, the hearts and mind conference is coming up. Absolutely. We get the opportunity to speak to some of the best investors in Australia and around the world. We had been a couple of weeks ago, which was a cracker of an interview, and I'm pumped for this one as well. 

Bryce: [00:00:50] Same Ren can't wait for this. It is our pleasure to welcome Yen Liow from New York. Yen, welcome. 

Yen Liow: [00:00:58] Thank you so much. Bryce and Ren. This is such an honour. I'm in Midtown Manhattan. You can see the Sun setting behind me. I wish I was back in August to celebrate the hearts and minds with you all, but hopefully this is one of the last zooms we all have to put on. But we'll make sure we make it fun. And you know, it's such an honour to be part of the hearts and minds community. And thank you to you and your listeners for this opportunity to share some thoughts for 

Bryce: [00:01:23] those who haven't come across yet before. He is the managing partner at Arafat Global. He is presenting at this year's Sohn Hearts and Minds Investment Leaders Conference, which is now in its sixth year. And as we've heard from Beeneet and we're about to hear from you and it's an amazing cause. There's the conference has 12 local and international fund managers all pitching their highest conviction stocks. We've got a headliner, Charlie Munger from Berkshire Hathaway. Big headline. Yeah, and you must be pumped to be part of this conference when Charlie's making an appearance. 

Yen Liow: [00:01:57] Oh my. It's the first time that I've ever had the chance to present in a conference where Charlie speaking and I did say, it's pretty safe to say that it's the same thing he could say about me. 

Bryce: [00:02:07] So look for our Equity Mates community. It is. It's usually an in-person event. However, this year it's great that it's online and on demand. You will have access. Tickets are $500, but for the Equity Mates community, for the first 50 people, we have a 20 percent offer, so I had to sign hearts and minds. Secondarily, there'll be a link in the show notes, and Equity Mates is the code that you need to use one word Equity Mates to get that 20 percent off. It's an awesome conference Ren and look 12 of the best pitching their highest conviction stocks.

Alec: [00:02:41] I can't wait. But then in this interview, we want to cover a little bit about your background, a little bit about how you invest, and then a few themes that are on your mind and are of interest to the Equity Mates community. But let's start at the very beginning where we always like to start these interviews the story of your first investment. We generally find there's a good story or a good lesson that comes out of it. So to kick us off today? Can you tell us the story of your first investment? 

Yen Liow: [00:03:07] Absolutely. So I've got two for you. One is the actual very first stock I ever bought was Santos when I was 14. So classic Aussie oil and gas company. And to say that I didn't know what I was doing would be an understatement. And that probably persisted for 16 more years, by the way, until I in about 30 and started professional investing. So I'm going to share quickly that story. And as well as I'll give you my first professional investment because I think there's key lessons in all of this. So Santos was part of the, you know, the Australian elite of the oil and gas industry. And when I saved up from all my summer jobs and had the chance to finally buy a stock, I picked it for no particular reason. Except, you know, obviously close to home and and and it created a lot of value over time and felt safer. What I would say is, you know, over time, I really discovered that it had almost none of the characteristics that I look for in a stock. And what I mean by that is like we invest in emergent and established monopolies and oligopolies now where earnings power in the hands of great management teams over time compounds a tremendous amount of wealth. So it took me, you know, bitter part of multiple decades after that to refine to what actually really works. And in this conversation, I'm sure we'll dive into that. But there are some real patterns of outlier performance that are enduring over multiple decades, and it takes a lot of work to decode it. And I clearly, frankly didn't understand any of that for the first 16 years of my private investing life. So from 14 through 30 and then it took another at least another 10 years of professional investing to work some of that out on the professional side. So I started my professional investing career at just before I was 30, and this was coming out of the dot com boom and bust. So I work for a firm called Ziff Brothers Investments in New York. It's one of the largest private family offices in the world, and how it really started was in the summer of 2000. This was literally I was at business school at Harvard Business School and the dot com boom and bust was apex in that summer. And so at the start of the summer, I was actually working on a start-up with Barry Diller's Interactive Corp. And that blew up really fast. And then by the second half of the summer, I spent it at Ziff Brothers and they put me on what ended up being the mother of all short. What's in that decade, which was shorting almost the entire internet infrastructure ecosystem? Wow. And so, you know, this was an incredible time where there was literally hundreds of billion dollars of value that were created in a very short period of time. Lots of listed companies, whether they were operators or equipment providers, there was just the euphoria of the dot com boom, where the exponential growth in internet demand and data growth and all these things were happening and everybody chasing to try to supply the bandwidth and connectivity to create the internet as we know it today. It was a very surreal moment for me as we operated in a market neutral structure, but it was like we asked just one simple, really easy question, which is really difficult to solve, because did any of this maths make sense? You had exponential demand and you had exponential plus supply. And were these really good businesses even though growth looked amazing? Are these good businesses? And so for me, you know, this took literally months and months, hundreds and thousands of hours of work, by the way, really difficult. From an execution perspective. I want to give you a credit for this was the largest win, the first nine digit win of my career. It was at the start of it and it started on the short side and it was because I work for a phenomenal portfolio managers named Ian McKinnon and that whole group around us. But this was a time when everybody was tilting, you know, very, very bullish and didn't ask the simple question. And so one of the most important parts for us that we invest in monopoly, emergent and established monopolies and oligopoly growth stocks is growth without sustainable or durable drivers. And unit economics that can't be sustained when you win aren't really that valuable. And so at the really at the start of my professional career was this euphoric, incredible growth rate, but it was filled by frankly, very low quality businesses that got absolutely crushed when things settle down and reality started showing itself in the numbers. So those are my two instances [00:07:11][243.7]

Alec: [00:07:12] to unbelievable stories. I think the fact that your first professional trade was a nine digit win and you were 30 really puts Bryce and I being on almost 30 and 30, respectively in context. 

Yen Liow: [00:07:27] It was a really, really amazing time. 

Bryce: [00:07:29] So even then, in the 1990s, you were a consultant for Bain in Silicon Valley, the Wild West at the time. What did you learn about businesses during this time? You know, especially from sort of a growth and tech point of view. 

Yen Liow: [00:07:44] So, you know, this was this was prior to business school. So just, you know, the other side of that of that story that I was telling you about. So I was a consultant at Bain, a company, for five years. One of the companies that was very transformative for my experience as an investor and as a businessman was Dell computers. And so this is a company that went up one hundred fold in through through the 90s in the period that I was there and ten fold even in the period that I was with them in Asia. And the first thing I will say to you is is a vast difference between a good business and a good management team. And just because you have a good business doesn't mean it naturally is going to be able to scale. So a great idea that isn't in the hands of a highly capable management team is not going to make it. And it's very, very nuanced. But if you stop and think about, you know, there's a lot of growth, a lot of innovation, I personally think this is the greatest time in history to be alive in the history of mankind. We are seeing things that are truly incredible real time right now, and you're seeing businesses and wealth creation at a level that's frankly quite staggering and not at all normal, but by the standards of history. But if you step back and just stop, think about the maths of something like that is growing at 30 or 50 percent and then you put five or 10 years against that. These are businesses that are literally 10 to 50 times bigger, whether it's headcount, revenues or other in those timeframes, that is a staggering number to try to get your head around when you actually convert it down to the human elements of building a business. And so the first thing I'll tell you is one of the things I learnt about that was the technology was revolutionary, but people are still people. And in order to execute a business plan, it always comes back on to execution. The second thing I'll say that's relevant to today is that was an era where capital markets funded all of that insanity and the survivors created the Amazons of the world and there was a lot of failures. Today, the private world is finding that in the US, but the rest of world, interestingly enough, what we've found is so businesses are staying private a lot later. Rest of world right now from a capital market perspective is still emerging, very especially also back home in Australia. There are great businesses that are emerging in the capital markets where the average Joe like you and I get a shot to actually buy them much younger, much earlier. Well, that's still true in rest of world. And frankly, we've found bountiful opportunities. So that's a couple of quick things for you guys that, you know, it was amazing to see all the revolutionary technology. It was very hard to call who would be the winners out of the gate. You didn't need to. These were all monopolies in the making at the time. Once the monopolies were established, they last for decades and you can make a lot of money once they're established, but always it comes back down to. It's not just the idea. Can the team actually? So cute, the idea, and it's not about the straights, you've got to get the turns right and there some and the greatest management teams can handle the terms 

Alec: [00:10:20] love that the tech was revolutionary, but people are still people. That's a good, good quote to use for this episode. After your time at Bain in Silicon Valley, you went and worked at a family office. One of the biggest family offices in America, a family offices are fascinate us because, you know, they think generationally as investors. They can be truly patient and they can really, you know, I guess, think long term and let ideas play out. What did you learn as an investor and in particular as a long term investor in your time in a family office? 

Yen Liow: [00:10:56] So I mean, the essence of investing is effectively, you know, combining a strong amount of capital compounding and unleashing time. You put the two together, it's how you get, you know, generational multiples of capital. But I think the single most important takeaway I took away from the Ziff family was their mantra that the quality of the person matters more than their experience always. So if you think about it, the longest dated, highest optionality, highest leverage investment you will ever make is your people. It's not a stock, it's not even a company. It's your people. If you find the right people. Everything changes, and this is a family that we ran one of the absolutely largest portfolios in the long short world, not family offices in the world. And that group, not one single member of it, had public market experience the day before we started it. They invested in I and a team of people that they believed if they invested in the training had the qualities that they look for in humans that they want to back for long periods of time. And with that comes an unbelievable amount of optionality. But people always over experience. And so the thing I would just say in studying many of the most successful investors business people in history and having seen some of them up close and actually having the opportunity to meet some of them, they'll all tell you that the world belongs to the risk takers. But people are always your best investment. And I believe that Ziff family really understood that in how they curated their community and how they invested in the capability of their people and aligned with them. 

Bryce: [00:12:35] So you knew eventually then started your own hedge fund, a raft global with the name homage to Genghis Khan. So what's the why is that reference important to you? 

Yen Liow: [00:12:47] King is probably one of the most misunderstood people in history, and Genghis, with his army of about 200000 cavalry, conquered 10 million square miles of this Earth in 30 years. That's the equivalent of Canada, down to Brazil, continuously 30 years. This is an army with almost with on land. Never lost a single battle. They lost to one sea in 30 years. There's no comparable in history. And so what was most important to me and it was transformative in my life was this one key notion of unfair fights didn't pick a lot of them. But my goodness, never pick them that way where the odds were even vaguely. Even so, if you want to do something really epic with your life. And if you want to compound capital had a really extraordinary rate. You've got to be very, very careful in the games you choose and how to play them and only do it when the odds are stacked in your favour. And I think Genghis Khan was frankly one of the greatest applied learners in history. This is an illiterate slave who learnt how to conquer the army after army after army across the entire globe. And he did it because of one key insight. And he had the humility to find the right people. But the key insight was never, ever fight a fair fight. Always fight where the odds are in your favour, even against armies that are 10 times bigger than you. This was something that he did in all sorts of terrains, and that's the reason for it now that Arafat actually means the number 10. He had a decentralised army. This is the smallest, most humble unit. It's not an elite unit. And so it was homage to the greatest applied learner in the history of of the world, in our view that created the Silk Road and a bunch of technology. But that was the reason for it. My my heritage comes from from northern China, so there was a little bit of geography and a bit of wordplay in there, but that's the reason for it. 

Alec: [00:14:25] We've touched on your investment philosophy a few times and it would be great to really get you to expand on it now because it is a fascinating one. You know, you've mentioned the idea of unfair fights. You've mentioned the idea of monopolies with great managers. So it would be great if you could really expand on your investment philosophy and how you invest. 

Yen Liow: [00:14:48] Absolutely. So first of all, there's a lot of things to get right in philosophy. But I think there's there's there's a lot of ways to make money and frankly, a lot of ways to make money, more ways to make money in the short term than there are in the long term. And you have to decide where you want to play in the spectrum. But first of all, I want to just say there is no right way in philosophy. There is no way. There's lots of ways. In fact, I think that's one of the most fascinating things about investing is there are just so many ways, right? And I think what makes them interesting is you have to work out empirically why a strategy is going to be enduring and then work out how to actually exploited monetise it. And so for us, it's we just as a reminder this this is a multi-trillion dollar industry we're competing against, right? And if it was easy, trust me, it's not valuable because everybody is trying to do it right. So you have to work out what it is about the enduring patterns decoded in real depth so you can hold up under extreme volatility and be selective in deploying your time and then rinse and repeat it. So here's a couple of things for us. I spent almost 15 years decoding the right and the left tail of capital markets. What that means is studying the base rate, breaking apart company, after company, after company, through case study methodology. What had really worked on five and 10 year rolling basis? What kind of what was the defining factors in these stocks? What drove the maths like this is the one over my way. I picked Santos, right? Is like, you've got to be able to look at this universe of 3000 plus global stocks. And why is it that these are the 20 that you want to invest in and what you want to spend your time on the 30 or 40, you know around it? Once you have conviction that you understand it, your use of time increases through the roof. So what is our our philosophy? And here are the basic elements to it. So the core tenet of what we. Do we invest in emergent and established monopolies and oligopolies that grow earnings power 20 to 30 per cent plus and trade at reasonable prices, it's a cop type strategy. So let's break down each part of that. First of all, we think game selection is the most important thing you ever do as a leader, as an investor, what does that mean? Pick a game that you can win. That's valuable if you don't do that out of the gate, you're already playing from behind. So that's the whole notion of unfair fights. Unfair fights is twofold. One is we backed companies that have extraordinarily high win rates. Why? Because then all you're focussing on is pricing inefficiency. That's a lot easier when the two things are flexing. If you pick the first game really well, you just wait for the right entry point. The second part is then you as an investor have to find the right why it's an unfair fight if you're. Why is it me to be able to monetise those investments and you have to have good answers to both? The next part of this is the industrial design, and two parts of this is first of all, we firmly believe in preparation. We believe markets are efficient most of the time, but not all the time. And it doesn't take a lot if you run a concentrated portfolio and you're prepared to be able to exploit that. So one of the core elements of our philosophy and our true north is, we believe, earnings power or free cash flow per share over time is the number one driver of total return. In the short term, which we would define as less than two years multiple is what drives the majority of return from year three three, five or hopefully 10 plus it's almost exclusively earnings power. So what you want to be able to find are businesses that have enduring powerful earnings power, get them at a reasonable price and let them loose. And that's the reason why we centred on emergent and established monopolies and oligopolies. When you have great businesses that can grow fast and they're really protected and immunised from strong competition, you get to capture strong rents. But the last part of this is it needs to be matched with an industrial design. And so our industrial design does not require a single new stock in any given year to generate in your performance. In fact, in 2017, we bought one stock spanning 17 months. It was a big year we had that year, right? And then in a crisis we might buy is hyperactive for us is three stocks, but we're prepared. Our guys and gals are always preparing for us to be lucky. We have to be prepared. And so the thing that we can control is, how prepared are we? We can't control when our stocks actually perform. We can't even we can't even prepare or determine when they'll go into the portfolio that we have to cede to the market. But we must be prepared. So those are the key elements of our of our philosophy. 

Bryce: [00:19:15] So you have monopolies, you know, can often get complacent and become sort of slow growing, then not those companies you think about, you know, some of the big ones here in Australia or even the oligopolies, they're not the sexy stocks that are growing incredibly quickly. So, so how do you think about that and sort of balance that trade off? 

Yen Liow: [00:19:34] So the most important element here of and again, it's a is an established monopolies and oligopolies, and it's combined with high growth. So if you have a monopoly, an oligopoly, that's low growth and our true north there again, Bryce is like over time, if all your earnings power is growing at five percent and that includes cash flow, that's all. You should expect it to return over a 10 year period. Right? You got to trade for the multiple to generate anything more than that. We're buying stocks that even when they're established, monopolies are growing north of 20 percent and we get a good entry point. You can let it ride for ages. Our cost of capital 20 percent. Our mission is 20 percent net for 20 years. We're trying to 38 or 40 our capital over two decades. We think we think that's a generational goal, right? And that's something worthy of our of our focus. And so the monopolies and oligopolies that we are focussed on, the emergent ones are growing the fastest. Those are the ones that are becoming a monopoly or an oligopoly. They're highly dominant in their elements of business, usually either some parts of markets, they're disrupting either an existing monopoly or they're disrupting a fragmented market structure. Or you're talking about companies that once they're really clearly proven they've won, they're just very large markets relative to the size of their business and can continuously grow at a very fast clip. So it's not the staid old monopolies that you're thinking about. Mm-Hmm. The reason monopolies and oligopolies matter so much is they preserve your unit economics. They preserve returns on capital. They have very high win rate and most importantly, in liquid markets. They're incredibly predictable and that allows you to exploit volatility or at least at worst, withstand it. 

Alec: [00:21:13] So forget the slow growing duopoly of Coles and Woolworths back in Australia. That's that's not what we're doing. 

Yen Liow: [00:21:19] By definition, we don't even look at those. In fact, again, there's like three thousand plus stocks in the world. In fact, if you include all this, all the the really smaller ones is probably closer to ten thousand addressable companies you could run from. But for us. There's probably two to three hundred ever if that we don't even need that, that fit the quality of what we do, and we were only looking for 20, so a concentrated long duration portfolio. Literally, we don't need a single stock in the next 12 months to hit our return goals. And that takes the pressure off forcing positions. I'll say one last thing for the young analysts on this that are listening to this podcast. This is the one key thing that drove it for us from a game selection perspective. You could spend thousands of hours on a lower quality cyclical business or a highly competitive business, and there is no link between the work you've done to predict the future because that one element of competition it breaks the link between the past and the future. They could wake up the next day and your competitor goes price war and everything here is gone. Or it could be Covid. You know, your assumptions are just gone. In Covid, our businesses didn't become more competitive. The flow through rate changed, but none of our businesses, but all of a sudden became worse because of Covid. Yes, there was more uncertainty, but the quality of the businesses were the same. And so it reduced the number of variables. And so this was the most important decision in my career actually is once we focussed in on, this is the one. Now all the work that we do when we spend, you know, two, three or four thousand hours on a position we know eventually will monetise that we don't have to worry about, Oh my god, it's only one time it's an event stock, and I've got to get it in now. Or that work is a waste of time. This stuff is more when, not if. And it's most importantly, it's the link between your effort and what you're predicting. Yeah. 

Bryce: [00:23:00] Four thousand hours on the position, I take about four minutes. 

Yen Liow: [00:23:03] Sometimes we, you know, we have a couple of positions that we're now, you know, life of fund. About a third of our capital is being invested for the entire life of our fund. And we have a couple of stocks that usually it's between 500 and 1000 hours would be, you know, before we even get it in the portfolio. But there's a couple that are probably bordering on between three and four thousand at this point. While it's more not that we're trying to study the business, we really understand the essence of it. I just think when you're studying quality, they teach you so much about yourself as a person and business in general and, you know, thousands probably a little high. My guess is probably closer to 2000 or 3000, but it's like the biggest point. It's like when you study really, really high quality businesses and high quality leaders, you're always learning. And that's the benefit of it. You don't need to monitor these, you know, channel checks you need for stuff like this. It's it's just learning deeply about how how do you avoid the business of this level of quality? 

Alec: [00:23:57] So yeah, and I think our audience will be calling out for us to ask this question at this point. Your philosophy, it's incredibly compelling the idea of going for 20 percent returns for 20 years. If people do the maths on that, they'll they'll realise just how transformative that could be. So let's get specific. Let's talk about a couple of companies that you think fit this investment philosophy, whether or not you hold them in the fund. Obviously, this isn't, you know, by hold or sell advice, but more just companies that fit the bill of these, you know, fast growing monopolies or oligopolies. 

Yen Liow: [00:24:30] Yeah, I'm going to share a couple with you. Two different companies to different industries. And there's also one other enabling condition for the 10x versus the one hundred and a 10x. And these are all roughly 10x stocks. One hundred x is more like venture investing in public markets. 10X is usually more growth equity, so I'm going to pitch you to growth equity stocks. One is similar scientific. It's about $800 million medtech company in the United States, and the second one is Keyword Studios, about a $2 billion pound company based out of Ireland. So similar scientific creates a product called quantum flow. So the disease in the United States is called peripheral arterial disease for the elderly above sixty five, as you age your blood circulation to your extremities goes down. And this tool is a sensor on your finger and a sensor on your toe and it can end. The diagnostics are done in the cloud. You plug it into a laptop and it goes into the cloud. After three minutes, I can tell you, where is the person in the spectrum? This is a highly disruptive technology, so this is a business just for you, for the finance analyst behind us. This is a business that's growing mid-thirties with 91 percent gross margins, 50 percent EBITDA margins, chase trading at low 30s cash flow next year and this is five percent penetrated of the first addressable market. So they are only five percent penetrated on the on the above 65 age demographic in the United States. It's disrupting the standard of care. It's becoming the standard of care. Their clients, by the way, greatest businesses always create tremendous value for their clients. The return on investment for their clients, which are insurance companies and home risk assessment these are nursing companies that go to your home is 50 to 100 times return on the investment, so they pay similar a fee. They benefit in that year about 150 to 100 times return on investment. And so this is a company that we think is incredibly disruptive. We believe there's four different shots on goal and this is this is shot number one, that's less than five percent penetrated. It's a business that's growing mid-thirties with extraordinary. These are SAS type software type unit economics in medtech. It's got a very high reoccurring. Base to it, and we believe a second product is now just started hitting market with its first client, so you have a second TAM or total addressable market that's in it at an incredibly reasonable price. And so when we got went back to high win rate, you want unfair fights for the company and you want unfair fights for us. If this business literally was a $3 billion company, it's a Nasdaq listed company. It would trade at a far, far larger valuation. And these mid-cap stocks, which I know the Aussies love this mid-cap stocks, you know, you can find these pockets of inefficiency trading for crazy like reasonable prices, and we believe Semler is one of them. The second one is keyword studio set of video gamers in. This is a company that you all use, but you don't even know it. So Keywords Studios is the largest provider of outsourced video game services in the videogame world, so 19 of the top 20 video game publishers in the world are their clients. This is a two billion company out of Ireland. Organic growth is mid mid-twenties, and they do a bunch of roll ups as well because it's a very fragmented industry, adds another 25 percent. So this top line has been growing at 50 for the past five years. The whole play here is the motion picture and TV industry is about ninety percent outsourced. The video game industry is 35 percent outsourced and it's going exactly in the same way. So video games used to be the $100 million plus developments where you generated a console cycle and then you published another one. Now is they're all on the internet. They're actually going through a constant cycle of upgrading their games. Keywords is by a mile, the largest provider of those services. So this ranges from everything from testing and debugging new releases to hyper localisation. So games now are published in over 100 languages, almost 200 countries. You have artwork, you have language, you have music, you have player support, you have testing, you have marketing. All of that is what keywords does. But that's the organic story. So, you know, I've been a videogame investor for almost 20 years. That is that industry grows low teens. You've got an outsourcing trend. These guys take market share. That's what creates that top line, almost 20 plus per cent natural tailwind. And then on top of that, they are an unbelievable capital allocator when you buy moms and pops. Generally speaking, these are smaller studios of between 10 to 30 people, and one large publisher will be 40 50 percent of their revenues. So that will get you a very nice discount on the price because it's risky on a standalone basis. Well, when you put that as part of the family, that's no longer a risk. And there's lots of synergies when you bring it into the family that you can enhance the total return, the profitability and the growth rate of these businesses. And so the acquisition premiums, which is half of what it trades for anyway, gets cut in half again as they as they grow these businesses over the following three years. So key words we believe as a growth rate of between 25 and 50 percent over the next five years, trades at about, you know, low 40s is not the cheapest optical stock in the short term. But we believe there's enormous secular tailwinds here and what we call an advantaged acquirer in allocating that capital. But these are businesses, which I would put it in the category of emergent monopolies and oligopolies. They're very stable unit economics. They're displacing assemblers, displacing existing standard of care. It's not even close. The other the other existing technology can't compete with seamless technology. It's literally better, faster, cheaper and in key situation, they're literally creating the industry. They are at least 10 times bigger the next player, and so they enjoy monopolistic type rents. 

Bryce: [00:30:03] Wow, got two awesome companies, and I'm sure a lot of the community are frantically googling both of those. Yeah. So before we jump to having a quick chat about leadership and then also the payments sector, we'll just take a quick break to hear from our sponsors. So again, I want to just quickly touch on leadership, you've obviously studied it a lot and you've made the case at the start that there is nothing more important than people. We spoke to one of your your friends, Benita, as you know on the show a couple of weeks ago, and he said that Zuckerberg was perhaps one of the greatest business leaders of all time, which I'm sure would have ruffled a few feathers. But good call. What do you look for in a leader or what is the research showing some of the key characteristics that they share? You know, these really good leaders that you're looking for in investing in?

Yen Liow: [00:30:55] Phenomenal question, Bryce. And look, there's a huge genre of this. And before we even get to leadership, I think, look, that's the essence of the question because there's leadership. But ultimately, you know, people talk about culture. And I think this is overused without enough nuance into it. The real thing that we're looking for is we want to partner with ownership mindset at people. You want firms that think like owners act like owners, but there's four criteria that we look for in aggregate. Let's come back to leadership in a second. The first is you want ethical people. You always want to deal with ethical people. And by the way, this is the number one mistake. All young investors myself absolutely included make, which is you think price, you compensate you with a dodgy person. You can't let me just save you the money now. Like no contract, no amount. No price will ever save you from a dodgy person, period. Everybody makes the mistake. I'm sorry, there's only one way to learn it. I hope it's just a cheaper mistake from this lesson. The second thing is you want world class capability best in class dwarfs. It just crushes average. And you have to study what that means in execution. So growth investing is very different from turnaround investing. Capital allocation is different from those. Again, you have to study what is the skill and then how what the metrics of the skill to define. How good are they? Third is you want them hungry. You don't want to inject any energy into your leaders if they aren't waking up in the morning and just are so pumped about going to to fight for the business and the people and their clients, that's not your guy or gal. And that last one is alignment. You want to be aligned with people. You don't want to manage people. If you're aligned with highly capable people, good things happen. And then the last thing I'll say Bryce is like, I think the best leaders of this generation, Steve Jobs, obviously, he's passed away now, but you know, Reed Hastings, Bezos and Elon Musk. The difference is not just the straits, it's the turns. So it's one thing to be able to floor it and go hard in a straight. What defines great managers is they can pivot. They can make the hard decisions. So what Bennett was talking about with Zuckerberg, which is unbelievable at this scale. Trillion dollar business where he's pivoting and going, You know what? The Metaverse is the next big one, and I need to invest $10 billion a year to do it. Wow, that is such a gutsy thing to do. And it takes an extraordinary leader. Like, you know what, Reed Hastings had to do with Netflix literally to burn his original business and say, That's not the future. I have to. I have to sync it to get to the future. Extraordinary. The bit on Amazon Prime for free. Jeff Bezos, right? These are visionaries who have the guts where they go. Wow, the current path, while good, is not great. And I have to make the call. It's painful, but I am the leader and I, and for me to lead, I have to make the hot or cold. That is incredible, absolutely incredible. And when you see them, you have to call them. I have to tell you, you don't have that many people on the planet who can do what you know, some of the people that we just described have done. But we look for the turns. The turns tells you more about the person and their capability than straights. The straights is still hot. Don't get me wrong, it's it's scale. Something ten times bigger in the straights is hard, but the turns is where the tails are. 

Alec: [00:34:01] Yeah, and you've had some great quotes in this in this interview, and it's about the turns, not the straights is another one. We wanted to turn to payments because you're speaking to a primary, primarily Australian audience. And if you've been an Australian investor in the last five years, buy now, pay later has been front of mind. So we know all about payments down here. But your fund's biggest holding is PayPal, so I assume you're all across the payments space as well. The question we want to ask is why PayPal specifically? But then I guess just more generally, what are your thoughts on the future of the payments industry?

Yen Liow: [00:34:39] Mr PayPal now is more of a mid-sized position for us. We've owned the sensors since it was spun out in PayPal and frankly, I've followed PayPal even before, well before through eBay, before it got spun out. So we've owned it in good size since 2015. You know the quick thesis on on PayPal and let's get into the broader payment spectrum and and by the way, Afterpay this is again where I think it's so awesome that the Aussies around innovating the world. I mean, this is like, you know, and I'll put my hand up and absolutely tell you how horrified I am that I missed that rides and this was something that we tried our hardest and I didn't get there. And that's like, you know, hindsight's 20 20, but it would have been nice to even get a little bit of that. But we did not. So PayPal, the faces wasn't literally I'd follow the. His company for almost 10 years before it listed was it's just had a dominant position in online e commerce, but even more so in mobile. So its footprint was more valuable in mobile than it was even a desktop. And obviously it was a play on e-commerce. But we believe that just one of the strongest secular trends here was was the move to mobile. And so that provided the right to all of this other optionality that we thought was was always going to come, but we couldn't really see all of it when we started that investment almost six plus years ago now. So the buy now, pay later, this was another area that we thought PayPal is absolutely prime time to be able to replicate really quickly. And in fact, that's that thesis has proven to be true. So Afterpay is still done great, and we don't have the data now because it's part of Stripe, but it's like we believe that this in one year that PayPal already replicated almost 75 80 percent of the scale of our trade in a single year, it's just again the size. This is what beachhead strong monopolistic positions or oligopolies stick positions can do. When your base is this large, you can implement new strategies and push them out really wide now payments in general. Well, look, this is an area that is is this is this is why I think it's the most exciting time in the history of mankind to be alive. The innovation across the board is just astonishing, and you can't talk about payments without talking about crypto. And, you know, even before you get to crypto, there are just really, really cool innovations that in the absence of, you know, digitising the economy, you could never do this on a hyper democratised basis before the analogue world had lots of frictions. You know, all of the solutions that we're just making up for. Tough analogue friction. The digital world just has a lot less friction, and that allows a ton more innovation. And so what we're seeing across the board. First of all, when Buffett said this, I think when the creation of the of the Warren Buffett said this, when the creation of automobiles, it's easy to know that horses are out. But it's hard to pick the winner, right? Like, it's easier to know that some are going to be losers than it is to be able to pick the winner. And by the way, once the winner, you don't need to pick the winner before. Once it emerges, it becomes pretty obvious and then you can ride it for a really long time. But you also want to get out of the way of what's being hammered. And so in payments, you know, it comes back to Bryce this question earlier. I mean, we also own Visa. We've owned that for a very, very long time. And there are profit pools in every single business model that you have to understand if the new technologies are going to disrupt it and deflate it very aggressively. And so actually, number one for us in payments is understanding how our current positions get affected in the next number two is like, OK, where are the emergent monopolies and oligopolies in the making crypto? I take very seriously, so I'm not the expert. I just want to start with that. I'm not the expert on crypto. However, I have deep respect for what's going on in blockchain in general. We don't really focus too much on the currencies. I think the currencies are an expression of something far larger and frankly far faster in its adoption rate. Blockchain is a revolutionary technology, so it's manifested through payments in some shape or form at the moment. But there's plenty of other applications, and this is why I think it's the most one of the most important technologies that you have to stop and pay attention to. All of commerce is based on trust. Without trust, you have no form of exchange. You need rule of law and a means of exchange and distributed trust digitally is the essence of blockchain. That is an incredibly transformative notion mathematical blind trust and that will allow the economy to unleash the speed of trust. And so that's what we're focussed on is how does this blockchain technology get implemented in all of its various forms, whether it's smart contracts or exchanges, whether it's there's just so many different manifestations of it at the moment, we're still studying it to try to fully understand it. But in payments, the main mechanism right now is there are plenty of use cases which are frankly being over monetised, which are really profound opportunities in both insurance and payments that I think are obvious and we've seen the first generation of them already. But there's a lot more to come. 

Bryce: [00:39:26] It's fascinating. It's one of those sectors that is the more experts that we speak to, you know, the more obvious it becomes that we're at this awesome time of getting into something that's going to be truly transformational and early. But still, it's just like, where do you even start? Yeah. 

Alec: [00:39:40] I also think we could probably chart the experts we've spoken to since from when we started in 2017 to now and chart the differing views on crypto, you know, 2017, it was just overwhelming bubble get out of no value. And now I think in the last two years, people have really started to be like, There's something here. 

Yen Liow: [00:40:01] Yeah, I'm in that camp. So to be fully clear, you know, I lived through, obviously the internet version 1.0 and 2.0, right? And the start of them, the difference between fads and what emerges is a very fine line. Hmm. Right. And before it goes fully mainstream, I think the technology was always clear, but it's really, really hard. I don't have a view on if bitcoin what's the value of bitcoin? I don't have a view. I believe there is something there, but I don't know what it's really worth. But that doesn't mean I shouldn't respect the technology that underpins it. And and I do believe that's transformative. 

Bryce: [00:40:34] We end before we move to our final three, we'll have a quick chat about hearts and minds. As as you mentioned off air, it's something that is important to you. So, so why is participating in the Hearts and Minds Conference important? 

Yen Liow: [00:40:46] Well, first of all, it's a it's a real honour to be part of the Southern Hearts and Minds conference. You know, for me, it's a chance to reconnect back home. It's been a while since I left Melbourne, and it's just such an honour, frankly, to be involved and actually to see the leadership that this community has created in aligning the investment community and, you know, the medical research community. So like a core thematic for me. I literally think this is one of the greatest times in history to be alive, and medical research is a really important part of the next couple of decades. And Australia has always had a strong history of research that has impacted the world. And I love it that you know, this community of hearts and minds over the past five or six years now has raised over $30 million and handed it to many of our industry leading researchers to impact the world. I actually don't do many public pitches ever, and the reason I'm doing this is, first of all, I just think it's such an honour to be able to come home and share some of our thoughts. But I love the alignment that our best ideas are going to create value for the research community out of Australia that I truly do believe is going to impact the world. And so when they made the call, we went in without hesitation. It's just such an honour. We know the Sony organisation in New York, and I have to say I'm so impressed with what I've learnt both, both from a hearts and minds structural perspective. I think it's brilliant what they've done with H.M. one and looking through to, you know, the group of researchers that that they're sponsored. I'm just excited and frankly honoured again to be part of this. This is something I firmly believe in. I think medical technology is is is on the precipice of the next two decades that are going to frankly change our whole, you know, many of the assumptions that we hold about the world. 

Alec: [00:42:27] It is just such a great cause and the people that contribute to it. You know, the quality of the managers and the quality of the people, it's something to really behold. So we're really excited to play our own small part here at Equity Mates. But when we were rating in the IFR that you've promised a quote whopper of a stop here. So he's putting the pressure on a pretty pumped and especially after this conversation today, some of the companies you've spoken about, I am expecting big things. But but you know, for us, we have sort of grown up as long term investors, everyone we speak to is is very long term. You've just spoken about how you're looking to compound capital at 20 percent for 20 years. And so for the hearts and minds, pick must present a bit of a challenge because you've got to pick a great company, but you've also got to pick one that has a catalyst in the next 12 months. How do you approach that additional layer of analysis? 

Yen Liow: [00:43:24] So Ren, you've already nailed it. So first of all, you know, in general, we don't try to shoot for 12 month returns, our preferred holding periods actually forever. Right? So in general, how underwriting is five to 10 years, but our preferred holding period is optionality forever. And so to define a 12 month, you know, really high-performing stock and frankly, the pressure's even higher because I desperately want to come home to do this on stage with you guys next year. So the price is really heavy for me. But you know, so what's with the catalysts and how does it drive? So, you know, and I think Bennett said this really well, it's like for the short term, like not 100 hundred percent return. You need a change, you need a rerating, you need multiple to be a kicker. And so there's a couple of different ways I can tell you guys just generically how to do this. But how we do it specifically is one version. We call them coily. So coiling when you uncoil it is how you create 100 percent return in a 12 month period and it's multiple and earnings power combined creates that outcome. And so what triggers that rerating? So one of the things for us rerating is are caused by either changes in perception of the quality of an asset or changes in perception of stage of a cycle. And so the stock that we're going to pitch is a classic, like, really long dated monopoly and that has been severely impacted by COVID. But we believe the long term trend is 30 years of history and human nature, which we firmly do not believe. Covid changed and like the Aussies, are going to unleash when this catalyst hits. And that's the wave we're riding. So we're going to we're talking about a multiple rerating back or through historical bounce because we believe the ricochet is huge. We believe the earnings coiling is playing a 30 year trend that we just believe, frankly, is categorically unchanged. In fact, there'll be an echo boom on the other side of it, and you put the two together and it's going to happen sometime in the next. Like we do believe firmly, it's in the next 12 months. A lot of that value will uncoil in that first 12 months. But yeah, we'll make great money in the next year. But my God will make even more in year three four five six on this thing. And so we're coming hard and yeah, we can't wait to pitch and it would make it. Nothing would make us happier than Ben H.M one absolutely destroying it on the back of one of our picks. So we're rooting hard for it. [00:45:46][141.5]

Bryce: [00:45:46] Oh yeah. I'm so excited to see what the pitch is. I got a few ideas of what it could be, but I will let it play out on the 3rd of December. But that's a great opportunity just to chime in and remind the Equity Mates community that if you do want to hear Jen's whopper of a stock pick, plus the 11 other local and international fund managers, then you have the opportunity to do so. Head to the Zone Hearts and Minds website. We'll put the link in the show notes. Tickets are 500 bucks for the Equity Mates community. For the lucky first 50, there's a 20 percent off code of Equity Mates, so that's $400, and this could be one of the best investments that you ever make. Having the opportunity to listen to these guys talk, you will also hear from Charlie Munger and MIT Institute Professor Robert Langer, who is the co-founder of Maddern, but also on the side. Hearts and minds have a listed investment as well. Its ticker is H.M one and in it invests in a portfolio of high conviction stocks, including those that are pitched at the conference and in lieu of management fees. H.M one donates the 1.5 percent to Australian. Medical research at AZN has already discussed so a great opportunity for you to invest in the stocks that are pitched and a core portfolio as well. So yeah, we love it and definitely go and check it out, but don't miss that opportunity to see these amazing stock picks 

Alec: [00:47:15] now and we could talk. Investing in stocks all day. But we are running out of time, so we want to say a massive thank you for taking the time today to speak to us. We do like to finish with the same three questions in every interview, and we've got a fourth bonus one for the main speakers, so we'll get stuck into that. And the first one is, do you have any books that you consider? Must read? 

Yen Liow: [00:47:40] Yeah, it's a life changer for me, and I even named my fund after it is called Genghis Khan in the making in the modern world. I think it's a top five book investment book of all time, frankly, and I think it's a brilliant book written by a guy called Professor Jack Weatherford and again, comes down just to the essence of this. Investing really is competitive learning. Right. It's applied to competitive learning, that's what we're doing. And I believe Khan was the greatest applied learner in history. And this book is an absolutely showstopper. I just can't recommend it strongly enough. I learnt so much from reading this, and I don't even know how many times I read it at this point. So the book is Genghis Khan and the making of the Modern World. 

Bryce: [00:48:21] This episode has like 10 key quotes saying the same thing again. Just pumping out investing is competitive. 

Alec: [00:48:28] It's a good one. Yeah, yeah. Nice one Yen. Well, if if we might need to do a book of Yen. But the second question we like to end these interviews with Forget valuation. Forget you know what they're trading at right now, just purely looking at the company's fundamentals. What's the best company you've ever come across? 

Yen Liow: [00:48:52] First of all, I would say, you know, as a I like clusters two because it clusters just tell you, wow, it's not just the company. There's something about the industry first cluster. I'll tell you. I think software in general has an unbelievable number of great businesses. So these are subscription businesses, very low churn, huge margins, very high return on capital natural tailwinds they lend themselves to winner take most, if not winner take all. They naturally have high growth. These are really fast growing monopolies, so just a narrow a few, you know, let's go back home. I think Atlassian has got to be on the on that list, right? I think Adobe GitLab after ServiceNow, Snowflake, all of these businesses are amazing evolution gaming. These are businesses that have naturally ridiculously powerful tailwinds into big total addressable markets with very, very high unit economics. However, I'll give you a one company and we own it to be fully clear because I believe industry structure, great company and management team is the trifecta. And by the way, the names of the companies I listed before I respect them all great teams. But the one that's been most close to my heart is a company called TransDigm, and TransDigm is an aerospace company. So just quickly for your listeners, an aerospace company that focuses its one third defence, the rest of it is aftermarket civil aerospace, of which 90 percent nine zero has no second source the product. Wow. Right. This is a literal monopoly, right? And so for me, they chose a phenomenal industry aerospace natural tailwind six five to six percent tailwind every single year, 30 years. So the core business is insanely strong. That's a 35 to 40 year analogue monopoly they own. Is life on the platform of the plane, right? Like, you don't get technological disruption on that. Second is owner operators Nick Howley. He's a close friend of the firm. He was the founder and chairman of it. They are best in class operators by a country mile. They run, they run circles around their competitors. Capital allocation is breathtaking. These folks have put together an entity of almost 60 companies, putting up almost 30 percent returns. One deal out of 60 maybe has gone a little bit off shape, but they've done 60 M&A transactions from private equity. And then, you know, Nick, I just have to tell you, and again, this is resonating to the theme of today when you find a leader like Nick Howley. Please, please, please don't rent them. Marry them, right? You don't need many people like a Charlie Munger, Warren Buffett and Nick Howley in your life. Matter of fact, if you know it's like your friends, if you die with five great fans in your life, you will. You've crushed it in life. Well, the same is true for your portfolio. If you find the super elites who've chosen a great business highly ethical, incredibly capable, hungry as hell and they're aligned with you just really find a way to anchor deep into them and a nick, by the way. Coming back to the straights and turns, it went down 65 percent after market demand in Covid like the whole world. Stop playing, stop flying, these guys, you should see them in action. It's like the matrix. They were like the bullets were flying. They knew exactly what they were doing and like. When you see people under pressure performing at that level, I mean, you just got to stop and pay homage to that. It's just like, Wow, this is a company that generated almost a billion of free cash flow during the worst aerospace crisis in the history. It's like this was incredible. And this business did 40 percent EBITDA margins when the planes stop flying. I mean, it's like you got to go. This is almost a misprint. How is that even possible? That's what best in class leadership does. Hmm. 

Alec: [00:52:35] Yeah, there is so much I love about that, and I love the fact that it's a company I hadn't heard of before, but I love the passion that you have for the company. It's just great to see it. It's why we love having these conversations, because the the amount of effort and work that you and your team would have put into understanding this company, understanding this position. But the passion that you would have put into that work as well is something to really behold. Thanks, mate. So the final question that we normally in these interviews with, if you think back to your younger self as a teenager in Australia buying Santos, what advice would you give your younger self? 

Yen Liow: [00:53:15] The first and most important one to everybody is make sure you have an crazy amount of fun, whatever you choose. Look, life is short, and it's a real privilege to be able to be on this journey. So, you know, yes, take the mission seriously, but don't take yourself so seriously. Have a lot of fun. That's point one. And I think the most important here is the stuff from an investment perspective, you got to work out what matters. Very few things matter, but the things that matter really, really matter. So study the patterns of the outliers for the time frame and the style that fits you. So that point one is work out what really matters and find those patents. The second part is it's got to match who you are. Just because you know you like Warren, buffet style of investing doesn't end. You've got 80 day and you've got to be able to trade every day. The two don't match up. You've got to match up who you are with the style. And then the last one, which cannot be underestimated either is you need design. You need to build a structure that enhances your traits and your strategy and lets it thrive. So the first step again is no what matters and that comes down to frameworks and pattern recognition. You can study it. That's a deployable skill. The second thing is knowing who you are, that's introspection. And frankly, experience need to go through a few things to work out who you are. It's not something you work out day one third and the third part that is you've got to work within a structure to design that enhances and reinforces your strengths, builds patience, allows the insights to flow and when the three come together, oh my God, it is so much fun and don't take it too seriously, but go really hard at it. And if you focus your effort there, you'll get your end goal much quicker than you think. 

Alec: [00:54:53] Not so unloved that that's some great advice. Now again, that's normally where we would end the interview. But for the HM1 speakers, we do have one final question. Charlie Munger is going to be speaking at the conference, which is just incredibly exciting for everyone. If you had five minutes alone with Charlie, what's one thing that you would ask him? 

Yen Liow: [00:55:15] So the most important question I have and Charlie is obviously being incredibly gracious in sharing knowledge with the world over the multiple decades. But he's talked a lot, and this is again the most important theme I wanted to share with you guys today was ultimately, I think the biggest difference is people. I really think this, you know, Charlie and Warren Buffett, there was actually a third guy in Berkshire Hathaway called Rick Guerin were the three guys who, like, created a community around them, but they invested alongside one another for multiple decades. And like, you know, Rick got taken out in 73 74. It was over 11 and they bought him out. That's why you don't read as much about Rick, but he was actually part of the original Berkshire trio. But the main thing I wanted to understand from from Charlie is he's talked a lot about the traits of the people that he like reverse age, invert your life. These are the things you want to model yourself over. But what I'm most curious about is what is his practical tests are? So these people have over the years become incredibly gifted on spotting, aligning and partnering with some of the best men. Jews in the world. Their reputation clearly is extraordinary, but I'm just curious at a tactical level, what do they actually do to test for all the traits they're looking at? Bring it down to a level that we, the average Joes have a chance of, like applying it and going, OK, that's someone I want to partner with. That's a clear no. What gives them conviction in their community? I personally think and as a as I've become a little bit more mature in my investing. Can't stress this enough, guys. It's like, I think people are by a mile your best investment. There's optionality inherent in great people that you can't quantify. And one of my investors said this to me and really gave me the the powerful insight in the language is you come to two final quotes on this one is one is look, you can't always guarantee you're going to win. But when you back really high quality people, you never actually lose. And it's one of my, you know, fellow portfolio managers give me another quote, which I love. It's like, you're always going to lose money in investing. It's just an inherent part of the game. You might as well do it with people that you actually like, right? Because it's just going to happen. And so if you stack your stable full of people that are highly honourable, work really hard, highly capable, they generally find a way to make sure you win overall. And so that's my real question to Charlie is like, it's clear that, you know, Warren Buffett and Charlie Munger have done extraordinary job of curating a world class team around them and a community around them. And you know, what is it that they tactically do to differentiate what they view as stars that they want to partner with and those that they don't? 

Bryce: [00:57:52] Well, hopefully Charlie opens it up to a bit of a Q&A because I'd love to know the answer to that question. So thanks again, it's been an absolute pleasure chatting with you today. I'm feeling so inspired just listening to your enthusiasm for investing in stocks and and your process. And I think, you know, our community would have taken so much enjoyment from that interview as well. So much value. And yeah, we both learnt a lot. So thank you so much for sharing your time and and we look forward to hearing your whopper of a pitch at the Hearts and Minds conference coming up. No pressure. 

Yen Liow: [00:58:23] Oh, thank you so much, guys for this, for this privilege, and I wish you and your listeners all the best. And I honestly, I mean this. I can't wait to come over and actually have some fun with you all. Thanks and choose. 

Bryce: [00:58:34] Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group. We're on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. Well, that's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.

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