Yen Liow of Aravt Global on Game Selection & Learning

I first learned about Liow on the capital allocator’s podcast. Once he referenced Genghis Khan as an inspiration for his investing philosophy, I was hooked. He summarized better in his interviews but my interpretation of his strategy is a relatively concentrated portfolio of monopoly/oligopoly compounders. The following are thoughts from Liow’s presentations on “Never fighting fair fights” and “Mastery: Learning How to Learn”.

Right Tail Games

Liow points out the goal of investing is to get above-average returns. Seems obvious enough but it’s one worth spending time to cement into one’s head. No one is picking stocks gunning for average returns. Most end up with average returns because the game itself is fucking hard. 

Everyone is gunning for the right tail, whether they realize it or not. In the right tail are businesses that have compounded value for 20%+ for 20+ years. They are a rare breed of companies and the ones investors with a long-term strategy hunt for. All to get results like Eddie Lampert, who was able to return 30% per year for 20 years. Liow shares how there are other games of hitting the right tail but it isn’t his game so it’s not emphasized.

Inherent in the goal of above-average performance is the importance of game selection. It’s not just about figuring out what works (not to be confused with what has worked). It’s also figuring out how your temperament and abilities align with the various games available. 

Most who are passionate about investing probably fell in love with it because certain aspects aligned with who they are. But the enterprising investor needs to dig deeper to understand the self. Investing is more art than science and part of that is the art of knowing the self. 

This isn’t only essential in picking out the strategy one should deploy but also the environment. Some may be suited to invest as an individual instead of working at a fund or even managing another person’s capital. Some may have learned about investing through Buffett’s long-term holding of compounders but they might actually be better suited to be commodity traders. Liow references the practice of daily journaling to be one method for learning to understand the self. For what it’s worth, I agree. It’s a crucial step for those serious about investing. 

Learning, Feedback & Process

A feedback I once received from a portfolio manager was that given I was a powerlifter, I might be better suited for work that had faster feedback cycles than investing. His interpretation seemed to be that powerlifters would know every day whether they were getting stronger or not. With long-term investing, one might not know if they are right or wrong until year 5 or 10 of an investment. 

I had to educate my portfolio manager that there are years in powerlifting where, after 216 training sessions (52 weeks x 4), I’ll see a mere 5-10lbs improvement in strength. This doesn’t happen all at the end of the year either. There are huge volatility swings in training from surprise injuries or training program error or my psychology getting smacked about by life in general. So, I might get 20 lbs stronger, then lose it, possibly having a training cycle placing me weaker than the start of the year, then gaining 30 lbs in strength, etc… This is a long way of saying powerlifting is more like investing than the layman would understand. But, the words stuck with me and I did wonder for a period if he was right. 

It wasn’t until I heard Liow mention how he considered the public markets to have the fastest feedback cycles that I felt a spell lift from my mind. In the sense of prices, it’s true. VC or PE don’t get the noise of daily price quotes nor liquidity like one does in the stock market. Some consider this a behavioural disadvantage of the stock market because it induces poor trading behaviour but I see it as an advantage for someone willing to train one’s discipline. 

It’s no different from an idiot who walks into a gym trying to lift weights he has no business lifting. A gym has all kinds of distractions for one’s ego and many will stray from training because adding 5lbs to a 400lbs weight seems immaterial. The serious lifter ignores such vanities and sticks to the training for long-term growth instead of momentary strokes of ego. Just like the stock market, the gym is filled with distractions. In this manner, the daily noise of the market may be more similar to powerlifting than different. 

Prices alone can’t act as feedback but they can be used as tools in tandem. Liow presses for the importance of building a repeatable and refinable investment process. One that doesn’t rely on the changes of prices as feedback but looking at the clusters information that gives evidence of a thesis playing out the way one predicted it would or even looking at the pattern of events throughout one’s own investments. Once again, the daily prices can help to aid this process. It’s something the private markets lack. As I think about it, it further draws me into the public markets as one that parallels powerlifting. A place where I can continuously train to ignore the noise and stick to the training plan. 

Meaning

There is a line Liow says that I love. I’ll paraphrase it as such:

"Struggling is pain with meaning. Suffering is pain without meaning.”

This leads to the age-old philosophical question of “what is the meaning of life?” One interpretation (one I ascribe to) is that life itself is inherently devoid of meaning. A conclusion one reaches when considering the blue pill versus red pill scenario. The red pill leads one down the rabbit hole of constant questioning until the realization smacks one in the face that the meaninglessness of life means it’s up to you to give it meaning. A turning of roles where life may cease to be something that happens to a person and the person is now the thing that happens unto life. 

Pain is unavoidable. All professions and practices will bestow their practitioners with pain. Only the ones who have a purpose and/or meaning behind the practice will be able to keep at it without quitting. The value of this is so you can take advantage of compounding. 

Stress

Your emotions will tell you who you are when you are under stress. Consider this not only in determining whether you should be an investor but in anything you think is worth doing. Compounding works in everything from money, relationships to skills. Before you let compounding take effect, explore the self to figure out where you should be building the foundation. 

Temporal & Structural

Investing is about playing in inefficient markets. Liow notes this can come in the form of structural or temporal advantages. Structural being one an investor might find in the micro/small caps that fund managers can’t get into because of liquidity constraints. Even if they can invest in these businesses, they might not be able to build the size they want. Temporal would be the kind of advantage an investor has in large-cap companies where indiscriminate selling results in momentary sell-offs of high-quality assets.