One of the best Annual Letter’s we like to read is from Christopher Tsai at Tsai Capital. In his latest 2023 Annual Letter, Chris includes what he calls Exhibit II, Core Disciplines. Its a fascinating insight into his investing strategy.
Chris emphasizes a collective, all-in approach with aligned investors, aspiring for win-win outcomes in investment management. Inspired by Einstein, the focus is on long-term capital appreciation, disregarding short-term volatility.
He employs the principle of “Invert, Always Invert,” prioritizing capital preservation and requiring a margin of safety at the time of purchase. Long-term investment decisions are guided by a multidisciplinary approach, seeking knowledge from various sources to minimize risk.
Market agnosticism is emphasized, rejecting the idea of consistently predicting market movements. Instead, Chris concentrates on business fundamentals and a swing-hard approach when attractive investment opportunities arise.
The portfolio is relatively focused, centered on compounders—high-quality, growth businesses with a durable competitive advantage. Preference is given to business models benefiting from network effects or positive feedback loops for sustained growth.
Here’s an excerpt from the letter:
All-in and Win-Win: Tsai Capital, today, is the result of more than two decades of hard work and continuous, incremental improvement in all areas of the business. Our success – and our clients’ success – would not be possible were it not for an aligned group of investors who share a similar mindset. We are all-in.
It’s our mission to bring a scientific spirit and integrity to the business of investment management and to create win-win outcomes. We seek to build long-term relationships with all our counterparties while being guided by the African proverb: “If you want to go quickly, go alone. If you want to go far, go together.”
Remember Einstein: In choosing individual securities, Tsai Capital ignores short-term volatility and instead focuses on the long-term potential for capital appreciation. This approach broadens the universe of our investment opportunities as other market participants, generally operating under institutional constraints, have a much shorter time horizon.
Once we have made an investment, we seek to hold it for the long-term. Our long-term strategy is inspired by Albert Einstein who said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Invert, Always Invert: Preservation of capital is paramount to long-term investment results as illustrated by a simple mathematical principle: while a 50 percent loss reduces $1 of capital to 50 cents, a 100 percent gain is then necessary to recover the initial $1 of capital. Moreover, this phenomenon expands in a nonlinear fashion: for example, a 400 percent gain is required to offset an 80 percent loss. Carl Jacobi’s quip “invert, always invert!” may apply to investing, for the best way to make money is first not to lose it.
So, no matter how outstanding a business may be, we will only commit capital when we believe the market offers us a large discount to intrinsic value. In other words, we need a margin of safety at the time of purchase.
Never Forget Tussman: Knowledge acquired through a multidisciplinary approach is essential to understanding the world and to minimizing risk. Our extensive network of fellow investors, analysts, executives, and business owners help in idea generation and due diligence.
We strive to be open-minded in order to understand all the major factors that might affect the outcome of an investment. Our goal is to eliminate blind spots. Our research process is inspired by the late Joseph Tussman who said, “What the pupil must learn, if he learns anything at all, is that the world will do most of the work for you, provided you cooperate with it by identifying how it really works and aligning with those realities.”
Follow the Business, Not the Market: We don’t think that anyone can consistently predict what the market is going to do. That’s a fool’s game. Our capital allocation strategy is therefore market agnostic.
Rather than obsessing about the general market as so many others do, we focus on business fundamentals.
All of our attention is devoted to finding the best individual investments that offer significant upside potential and a margin of safety at the time of purchase.
Past performance is not indicative of future results. See “Important Disclosures” at the end of this letter.
It’s All in the Swing: Our preference for inaction motivates us to swing hard when we see a pitch we like.
This results in a relatively focused portfolio – which may substantially deviate from our benchmark over short time frames.
We are solely focused on investing in compounders, which we define as a high-quality, growth business that we believe has a durable competitive advantage and can reinvest capital at high rates of return over a long duration.
Finally, we prefer certain business models, particularly ones that benefit from a network effect or other kind of positive feedback loop. That’s because growth created in a self-reinforcing manner can be highly durable.
You can read the entire letter here:
Tsai Capital 2023 Annual Letter
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