Interview with Yen Liow, managing partner at Aravt Global LLC, from the Graham & Doddsville Spring 2019 Issue.
In this issue’s in-depth interviews, you can also read about:
- What appraisal system Bill Stewart, executive chairman and a founder of Stewart Asset Management LLC., puts to use;
- Why John Hempton, founder and chief investment officer of Bronte Capital, has a trifecta investment philosophy and what bringing originality back into the process means;
Interview With Yen Liow, Aravt Global
Yen Liow is the Managing Partner at Aravt Global LLC. Mr. Liow directs the firm´s research process and actively researches many of the investments in the portfolio. Mr. Liow was previously a Principal at Ziff Brothers Investments (ZBI) and a Managing Director at ZBI Equities, ZBI´s equity market-neutral fund in New York. Mr. Liow joined ZBI in 2001 and ran a team that oversaw ZBI Equities´ investments in the media, telecom, energy, and agriculture sectors.
Prior to ZBI, Mr. Liow was a Consultant at Bain & Company in its San Francisco, Sydney, Singapore, and Beijing offices.
Mr. Liow earned a Bachelor of Laws (Hons.) and Bachelor of Commerce from the University of Melbourne in 1994 and a Masters of Business Administration (George F. Baker Scholar) from Harvard Business School in 2001.
Mr. Liow lives in Manhattan, New York with his wife and two children. Mr. Liow serves on the Finance and Audit Committee of the Trinity School (NYC), is a board member of the Success Charter Network and is a board member of We.org (Tristate area). Mr. Liow is an Adjunct Professor at Columbia Business School and guest lectures regularly at universities around the country.
Graham & Doddsville (G&D): Could you start by discussing your background and how you got into this business?
Yen Liow: I´m Malaysian-Chinese Australian. I was born in Kuala Lumpur, Malaysia, but I immigrated to Melbourne, Australia in 1976 when I was four years old. My dad was a dentist and my mom was a teacher. They didn't know much about business, but I fell in love with it at a really young age. My best friend´s father was a gentleman named Peter Gunn; he was a self-made transportation magnate in Australia and I was very fortunate that he took me under his wing and became one of my key mentors when I was young. At the age of 15, Peter essentially helped inspire the next 25 years of my life.
I started working when I was 14. I worked every summer and took every opportunity I could find to learn about business. It was mostly a lot of manual jobs that eventually led to professional internships and opportunities. I bought my first stock when I was 14 (it was Santos, an Australian Oil & Gas company) and have been investing ever since.
For my undergraduate studies, I did a double degree at the University of Melbourne in Commerce and Law. I originally started with a triple degree – I also studied Actuarial Sciences for the first few years – but I wised up to the fact that it was far too much work and I wanted to have some fun.
After that I went to Bain & Company. I started off in their Sydney office and then went to their San Francisco, Singapore and Beijing offices over the course of five years. Bain was an amazing, diverse set of practical experiences. But the most important part for my development was the two years that I spent consulting with Dell Computers. Dell´s stock price grew tenfold over that period. I learned an unbelievable amount about hyper-growth and what world-class execution looks like, which had an important impact on my focus and philosophy as an investor. After Bain, I went to Harvard Business School where I graduated as a Baker Scholar in 2001.
During the summer in between my first and second year at business school, right at the peak of the dot-com bubble, the startup that I was interning at shut down. I was fortunate to get a summer internship at Ziff Brothers Investments for the remainder of the summer. Ziff Brothers really opened my eyes to the professional investing world. I thought hedge funds were traders, which was not appealing at all to me. What I found at Ziff was a great group of people who did deep and creative research. Ziff had a learning culture in which I spent the next 13 years helping to build an amazing business. Eventually I ran their Technology Media Telecom, Agriculture, and Energy groups.
Ian McKinnon was the portfolio manager there. He was one of the greatest human beings, coaches and mentors one could ever wish to work for. Ian had a huge impact on my career and remains a close friend.
While I was with Ziff Brothers, I also had the opportunity to spend time with Eddie Lampert, who opened my eyes to case studies. I asked him how he developed such an incredible business acumen so early in his life, and he shared with me that he spent a substantial part of his twenties and thirties purposefully training by studying the best investments in history through a case study methodology. I took that on. We started doing cases internally at Ziff and taught our approach at Harvard Business School in 2008, and continued the process at Columbia Business School in 2013. The case study methodology was the most important part of my personal development and is one of the cornerstones of Aravt Global´s creation.
In 2013, I was a bit over 40 and I had to scratch the itch - to find out what it would be like running my own investment firm. So, in February 2014, we launched Aravt Global.
G&D: What´s the inspiration behind the name?
Yen Liow: Aravt means the number “ten” in Mongolian, which was the smallest unit in Genghis Khan's army and represent our humble beginnings. Genghis Khan´s army had 200,000 cavalrymen who conquered 10 million square miles of the Earth over 30 years in the 13th century. This is relevant to investing because you can´t do something of that scale by picking fair fights. You can´t just do common things. The central premise of Genghis Khan´s strategy was unfair fights. Genghis Khan was successful because he hated putting his men in harm´s way, and that is the first principle of Aravt Global. We just don´t back situations where the win rate is even. You can´t compound capital if the odds are not well in your favor. We're looking for unfair fights, where a company´s advantage is substantial and repeatable.
G&D: Can you talk a little bit about the other principles that guide Aravt Global?
Yen Liow: Albert Einstein said that compound interest is the most powerful force in the universe. We agree – we think compounding is the most important framework in investing. Our business model, portfolio and structure is built around it. We focus on horses, a sub-genre of durable compounders that grow more briskly than the broader market.
Over ten years ago, my team did a deep empirical study on stocks that compounded at north of 20% on five- and ten-year rolling periods over the last three decades to try to understand what drove performance. We wanted to deeply understand the patterns and if they could be repeated.
This led to over a decade of examination and dissection through the case study methodology. Over the past few years, we have integrated that knowledge into the processes and culture that define how we approach our business. Let me share a few of the elements with you.
The first and most important element is game selection. We had to decide where to focus our efforts.
Most of the market will revert to the mean over time. That is one of the most important laws of economics – that excess profits get eroded away by competition. We focus on the small percentage of stocks that resist those forces, primarily economic monopolies and functional oligopolies. That is where we spend all our time and resources. The inefficiency we exploit is the absence of mean reversion.
When I started my career, I thought I needed the largest possible investment universe to find opportunities. We have learned that in fact the opposite is true. We needed to find a rich vein of repeatable inefficiency in a finite universe that we could focus on, so when price dislocation occurs we could exploit it. When the universe is too big, that is an unachievable goal. At least it was for me.
What we focus on is durable growth businesses that can compound free cash flow or earnings per share at a healthy rate, which we describe as between 15% and 25%. Durable growth businesses are more predictable businesses. As investors, we are studying history to try to predict the future. In situations that are highly dynamic, which I would define as lower quality businesses or lower quality industry structures, there is a loose link between history and the future. As such, your ability to predict is low, regardless of how many hours you spend researching.
When you spend your time in durable businesses that are highly moated, the opposite is true. Our job is to find situations where history does hold, and to constantly ensure that new dynamics do not jeopardize the durability of that moat. When the moat breaks down, our ability to predict breaks down. When our ability to predict breaks down, it is hard to know what to do with volatility. Is it opportunity or is it risk? Our portfolio is highly durable and easier (but still not easy) to predict. When volatility hits, at worst we hold through, and at best we exploit it. It´s a profoundly different place, and that is all about game selection. Simply put, our stocks may be volatile at times, but our businesses, in general, are not.
In game selection, we also focus on the replication phase of a business life cycle. There are three stages we view as the life cycle of a normal business: proof of concept, replication and maturation. The first phase has explosive outcomes, both up and down. It is very hard to predict however, with very wide outcomes. We focus on the second phase: on businesses that have won their niche and can replicate over long periods of time.
The second element is systems design. We´ve created a firm, a culture and a process to support our game selection. Great systems design allows for engineering tolerance. When we are dealing with capital markets, we need to have tolerance for a lot of imponderables – mistakes, randomness, stress – but still be able to perform. Our organization is built around purposeful preparation and error minimization.
Built into that systems design is having a purposeful culture. None of us have a Bloomberg terminal. We have an outsourced trader, in Vancouver. We don´t generally trade the same day we make decisions. These are culturally important factors. We have four analysts on our team, plus me as the portfolio manager. We only need a few great ideas each year for our portfolio to stay healthy and well-stocked. There is no need for immediate reactions on anything that we do. There was a 20 month period where we only bought one stock. It is really hard to build a culture and process where the whole team deeply understands the important distinction between intense research activity and value-added portfolio activity.
After another detailed study of market returns three years ago, we cut off both tails in our portfolio. Specifically, we don´t pursue the extreme upside one-year stocks, because we don´t need to - we found that tremendous short-term downside risk exists there, and it usually doesn´t let us size and stay well-invested for long periods of time. We adjusted our focus to the compounders that can still compound at 20%, 30% or 40%, and where we can be bigger for many years. We still get the occasional up 75% to 100% stock in a year, but our performance is not dependent on it.
This brings us to the third area, which is portfolio concentration. We developed a search algorithm that narrows our universe of 3,000 or so stocks into a far more defined universe of 200-300 companies that qualify for what we do. We then deploy capital into the best 15-20 of those ideas. This concentrated portfolio allows us to hold the bar high and be patient in deploying our work.
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