Fred Liu Is Up More Than 164% and We Are Not; An Agent's Mistake Cost an NBA Player $3 Million. He Paid Him Back; The importance of controlling your emotions
1) I enjoyed this interview my old friend Aaron Edelheit of Mindset Capital did with Fred Liu of Hayden Capital, who's up roughly 200% this year: Fred Liu Is Up More Than 164% and We Are Not. Here's Aaron's introduction, with links:
Hayden Capital's Fred Liu is having a breakout year. As I write this and based upon what I believe are his largest positions, Fred Liu and his fund might be up close to 200% after fees for the year. What I know for certain is that in the first three quarters of this year, his fund was up over 164%. In fact, in the second quarter alone, he was up over 93%! To do this just by investing in equities and not using fancy derivatives or crazy leverage is an amazing accomplishment. For me, he is the standout money manager of the year.
I recently had the opportunity to interview Fred in order to learn not necessarily how he posted such a performance, but instead to understand more about his strategy and his thought process. I am so grateful for the time he graciously gave me and I'm still ruminating over the nuggets of wisdom I took away from our conversation.
Here are some big points I took away from our conversation:
1. Fred views his firm and his fund as a startup, which means since 2014 he has been working on product market fit and truly hit on it in 2019. Considering how he has adapted and changed is fascinating. (See page 3 of the transcript for this discussion.)
2. It is interesting to think that in consumer technology the bigger a company gets and faster it scales, the less risky it becomes in a winner take all world. (See page 2 and page 17 of the transcript for this discussion.)
3. 64% of Fred's fund is invested in stocks that trade outside the U.S. I have been seeing this opportunity as well and have written up Nintendo and La Francaise des Jeux as examples of the value and quality you can get when you step outside of the U.S. financial markets. (See pages 4-6 of the transcript for this discussion.)
4. Fred presents his thesis on AfterPay (APT.AX) on pages 10-14 of the transcript.
5. My favorite line of his by far from the interview: "I also tell our partners, every single one of them, that I promise you one day your portfolio will be down 50 percent. Peak to trough I guarantee it to you."
Here is the full transcript of our talk: Interview with Fred Liu.
I will also add as an addendum that while 2020 has been good to some people like Fred, lots of people are suffering and some, like Chris Kelly, have seen huge reversals of fortunes. I wrote about his year here: What do you do when you lose almost everything?
P.S. Here are links to Fred Liu's Q3 investor letter and to his AfterPay research report:
2) Picking up on my comments in yesterday's e-mail, one of my New Year's resolutions is to spend at least as much time praising good behavior as criticizing the bad. With that in mind, I wanted to share this story: An Agent's Mistake Cost an NBA Player $3 Million. He Paid Him Back. Excerpt:
After the 2002-03 season, Carter, then 27, was planning to exercise a $4.1 million player option to remain in Miami. Picking up the option was a no-brainer. Carter was coming off a disappointing season in which he averaged 4.1 points on .356 shooting in 49 games. For a player with that stat line, $4.1 million was a fortune.
Except Carter's agent, Bill Duffy, failed to notify the Heat by the June 30 deadline that Carter was coming back. Instead of locking in another season in Miami, Carter accidentally became a free agent.
The mistake cost him at least $3 million. Carter had to settle for a minimum contract with the San Antonio Spurs – roughly $750,000 – the next season, rather than the $4.1 million he would have locked in by exercising his option.
As criticism rained down on Duffy, the agent offered to make it right. He would pay Carter $3 million out of his own pocket – through an agreed-upon payment schedule – to make up for the mistake, essentially the difference between his Spurs contract and the Heat salary he had forfeited. It was an unusual and virtually unprecedented move.
This year marked the last of those payments, with Carter confirming in an interview this week that Duffy made good on his promise...
Duffy's mistake could have been as damaging to his future as it was to Carter's. But in promising to pay back Carter, his loyalty instead became a selling point for his services.
"When this happened, I was hearing from a lot of people because I took responsibility," Duffy said. "I took ownership of it and took care of it and he was taken care of.
"I've had Wall Street people call me and say: 'Man, that happens all the time. Everybody tries to hide from it. They try to pass the buck. You stood up for it. You took care of it.' I actually gained a lot of respect from people."...
Duffy's business survived the mistake, too. Today, he has a stable roster of NBA clients, including Luka Doncic, Rajon Rondo, and Goran Dragic.
This story underscores a lesson that I've both experienced and observed again and again throughout my life: Doing the right thing isn't only the right thing to do, it's the smart thing to do.
3) I've been playing a lot of tennis recently, particularly with my buddy David Berman of Durban Capital. It's amazing how empty the outdoor courts are if you're willing to play in sub-40-degree temperatures! Here's a picture of us from a few days ago:
I had beaten him 6-0 a week and a half ago, but he got his revenge last Tuesday – crushing me by the same score.
I'm a super-competitive guy, and as the set unfolded, I got so pissed that I started swearing loudly and even threw my racquet a few times (I'm not proud to say)...
Do you think that helped my game? Of course not! Getting angry at myself and stewing over my missed shots detracted from my game – and, worse yet, by showing my feelings, it gave David a boost of energy and confidence. Talk about a lose-lose situation!
I saw this vividly on display recently when I watched a friend's match at a local tournament. He was up 3-2 in the first set, and it was deuce. It was no-ad scoring, so the next point would decide the game.
During the rally, my friend hit a deep ball, close to the baseline, but clearly in (to him and to me, anyway). But his opponent called it out. My friend argued the call, to no avail.
I could see that he was beside himself with frustration and anger. In his view, his opponent had stolen a critical game. He should be up 4-2, not tied 3-3!
He never recovered, spiraling downward mentally and emotionally, losing nine of the next 10 games (and the match, 6-3, 6-1).
As I thought about my friend's experience and my own, I realized that the following six terrible things are sure to happen in every match I play:
- My opponent will hit many winners,
- Worse yet, in many cases, they will be the result of my weak shots,
- Worse yet, in some cases, even when I hit a great shot, my opponent will get lucky and win the point on a fluke (few things are more aggravating than seeing your opponent's shot hit the net and dribble over for a winner),
- Worse yet, I will hit many unforced errors,
- Worse yet, some of them will be on the easiest of put-aways, and
- Worst of all, my opponent will likely call one of my shots out that I'll think was in – perhaps even on a critical point in the match.
Now that I know these six things are sure to happen, it's helped me mentally prepare for them so I don't lose my cool – and the match!
So, you might be wondering, why am I writing about this in an investing-related e-mail? Because the exact same factors are at work when it comes to successful investing.
Think about all the terrible things that are sure to happen to you at some point (probably many times) during your investing career:
- You'll carefully analyze a stock, but for some reason suck your thumb and fail to buy it – and watch it go up and up and up.
- You'll buy a stock and, after it goes up a bit, sell it – and watch it go up and up and up.
- You'll establish a position via options, which expire worthless – and only then does the stock move.
- A stock you own declines so, thinking it's even cheaper, you buy more and more and more – as it goes to zero.
- You "round trip" a stock – meaning you, say, buy shares at $10, they go to $20, you don't sell any... and the share price goes back to $10.
- You lose money on a stock and, feeling fatigued and frustrated, dump it – right before it skyrockets.
As in tennis, you need to mentally prepare yourself for all of these inevitable setbacks so you don't get emotional and make the wrong decision – often at precisely the wrong time – as I did years ago...
I still get a knot in my stomach thinking about how badly I played chipmaker Micron Technology (MU). After seeing a brilliant pitch for it by David Einhorn of hedge fund Greenlight Capital in late 2013, I bought MU shares around $19 (indicated by the red circle in this chart):
As you can see, it quickly doubled over the next year.
But I didn't sell any and then failed to see the turmoil that would hit the semiconductor sector, so I watched the stock crash to around $10 per share.
I was so miserable – and angry with myself for not having at least sold half of the position – that one day in early 2016, in a burst of frustration, I just blew it out (indicated by the second red circle):
Even if you don't follow the stock, you know how this story ends, right? It skyrocketed by more than 500% in the next two years... ARRRRRHHHHHHH!!!
I've written a chapter of my upcoming book, The Rise and Fall of Kase Capital, on what to do when a stock is running against you (and how to handle the inevitable emotions), which I'll be sharing in upcoming e-mails...
Best regards,
Whitney