| Year | FFI | S&P 500 |
|---|---|---|
| 2024 | 55.74% | 23.31% |
The value that investors add to this world is making sure that the right people get the right support they need. Let us say we have two people who need one hundred thousand dollars to open a small restaurant. One person, let us call him James, is hardworking. James has spent the last ten years as a trainee chef and is now ready to venture out on his own. James is a good contender to run a restaurant. The second person, let us call him Judas, is a spoiled brat. He has not worked a day in his life. And now, as a last resort, thinks he will take a shot at opening a restaurant. 'How hard can it be?', he asks. Judas is a poor contender to be a restaurateur. Being an investor requires differentiating between the Jameses and Judases of the world. Success is only achieved when the right conclusion is reached. James should get the money for his restaurant and Judas should be rejected. Sounds simple.
However, investing requires us to go one step further. Investing only generates a return when the right person is overlooked. It happens a lot. Our universe is upside down sometimes. Sometimes, Judas gets the funding over James. People end up prizing Judas’s restaurant over James’s. Here lies the opportunity. The good investor realises that the right person is not getting the support he deserves. In supporting him when nobody else believes in him, an investor becomes the contrarian, but also the enabler of a positive outcome. In the end, Judas’s restaurant sells terrible food and goes out of business. James’s restaurant, on the other hand, sells delicious and affordable food. He goes on to expand his business with more outlets. The world is now a better place because it has more delicious food. This would not have happened if the good investor had not stood up for James when nobody believed in him.
The beauty of this system is that it is self sustaining. The good investor now has more capital from his successful investment to go on to make more investments, to identify more people worthy of support who might be overlooked. It is work in service of a positive outcome for the world.
So what are the steps to making a good investment? There are three. Narrative, numbers, and nerves. The first and last are harder than the one in between. Your numbers are only as good as your narrative, and your returns are only as good as your nerves.
We begin with the narrative. What is the story of the company? How much will it grow over the next ten years? How profitable will it be? And how well will it innovate? The market can get the story of a company completely wrong. A well run company with promising prospects is mistaken for a declining company. Having the right narrative is what separates a good investment from a bad one. Putting numbers to the narrative is then mechanical. There is no secret sauce. Among all the talk of AI replacing human work, I believe this step will be the first in investing to go. The third step, in stark contrast, is astonishingly difficult - perhaps even for AI. Having the nerves to hold on to your conviction when others tell you that you are wrong is very, very hard. But without nerves, your investment will not live to see a return. Peter Lynch put it best, the most important organ for investing is not your brain, but your stomach.
I see my role and my work as playing a small part in supporting the right people who are overlooked. Capital is allocated to the companies I believe deserve it, but are not appreciated. This allows the company to pay its employees and support its business. When the company is no longer undervalued, my job is done. I do not have a trader’s mindset of making profits off price momentum or trends. I do not hope an overvalued company gets even more overvalued so I can make a quick buck. It is my responsibility to hunt down the next company that is overlooked.
I believe this is the only way one can rightly steward the money that is entrusted. To achieve the dual objective of generating a return while adding value to the world.
I remain long on humanity.
