10 Lessons Learnt from Yen Liow of Aravt Global
This article summarises my main learnings from Yen Liow’s appearance on the Capital Allocators podcast, which was one of the most informative investing podcasts I’ve ever listened to.
This short article summarises my main learnings from Yen Liow’s appearance on the Capital Allocators podcast in April 2021, which was one of the most informative investing podcasts I’ve ever listened to (link here). It’s a must listen for all aspiring investment professionals.
Yen currently manages the long/short equities portfolio at Aravt Global, an investment firm based out of New York which he founded in 2014.
Here are the 10 lessons (in no particular order):
An investor has four possible edges:
Informational - knowing more than other market participants through greater access to information (e.g., monitoring satellite images of car dealerships to determine demand for used cars).
Analytical - making better sense of public information than other market participants (can be qualitative or quantitative).
Behavioural - remaining composed and aggressive during market corrections.
Structural - having permanent capital and avoiding large fund outflows during periods of market weakness.
From 1990-2016, there were three characteristics of US companies that generated compound annual returns of 20% or more over a 10-year rolling period. These were:
Compounders at large - monopolies and oligopolies that can compound earnings at 20-30% per annum and trade at reasonable valuations. This is what Yen focuses on exclusively in his investment framework.
Secular within cyclical - a commodities business that experiences a demand shock with a delayed supply response in the industry.
Quality transition - companies that have undergone a structural change (e.g., via merger or large acquisition) that greatly improves the fundamental value of the business.
High-quality businesses that can consistently grow earnings at 20-30% per annum (e.g., Alphabet, PayPal) rarely trade at cheap valuations.
There is a large opportunity cost to holding cash for extended periods in a portfolio expected to compound at high rates of return. The best option for most investors is to remain fully invested throughout the economic cycle.
Investments can be categorised into higher and lower prediction bets based on the degree to which future outcomes can be predicted (i.e., predictability). A higher prediction bet is one that has a greater probability of a successful outcome than a lower prediction bet.
Competition within an industry is the single greatest detractor of predictive ability. Yen spends his time looking for global monopolies and oligopolies with higher predictability as these investments tend to have a lower risk of permanent loss of capital than investments with lower predictability.
Aravt Global’s portfolio is structured such that the largest positions are higher prediction bets with limited downside risk (e.g., PayPal), while smaller positions are lower prediction bets with greater downside risk (but possibly more potential upside!). This is a similar portfolio management approach to that of Joel Greenblatt (source).
It is very difficult to make investment decisions when faced with both price volatility (changes in share price) and business volatility (changes in intrinsic value). Yen looks for businesses which have stable or growing intrinsic value (low business volatility) that have experienced a reduction in share price to a reasonable valuation (high price volatility), which tends to occur during market corrections.
Yen makes investments on a T+1 schedule to reduce the likelihood of making impulsive and emotional decisions. In practice, this means that if he decides to make an investment on a Tuesday, he must wait until Wednesday to place the trade (i.e., sleep on it).
Not having a high enough management fee in a funds management business creates unnecessarily fragility and constrains the resources needed to generate alpha (excess returns over the market indices).
Best,
Jordan Martenstyn
Great insights here!