How much Fred Liu is in Hayden Capital? A talk with the investor

I had the pleasure to interview Fred Liu of Hayden Capital. Here you can find the full video of the interview and the transcript. This conversation is also available on the Good Investing Talks Podcast.

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Introducing Fred Liu

[00:00:00] Tilman Versch: Hello Fred! It’s great to have you back for an interview after our last year’s interview. Let’s start with the most important topic. How have your cooking skills evolved over the last year?

[00:00:13] Fred Liu: Unfortunately, it hasn’t gotten better in the last four months or so. I haven’t had as much time to cook this year, so that’s the unfortunate part of it.

[00:00:24] Tilman Versch: Were you super busy with research or what kept you busy?

[00:00:28] Fred Liu: A bit of research. Our business has gotten a little bit more complex. We are looking at a private deal a little bit earlier. Yeah, so just a lot of moving pieces inside of Hayden at the moment. So, I’ve been busy with that.

SPV and preparing for new options

[00:00:40] Tilman Versch: Does a private deal mean you’re going into non-listed equities or that you’re thinking about going into this space?

[00:00:46] Fred Liu: Yeah, we have an SPV set up at the moment and if we come across any interesting private investments, it’s an option that’s open to us.

[00:00:59] Tilman Versch: What is this option of SPV? Can you maybe describe it a bit to help our viewers to understand it?

[00:01:06] Fred Liu: We got close on a deal earlier this year, but you know that one didn’t come to fruition. So right now, it’s still on the shelf and we don’t have anything identified just yet but hopefully over the next year or two, just through the natural course of our research, we will. As we are researching public companies, occasionally we come across interesting private ones. So yeah, it just leaves our options open here.

[00:01:27] Tilman Versch: So, there’s a good point to follow up in the future on this topic.

Recommended books

[00:01:38] Tilman Versch: But maybe let’s go back to a lot of questions I got from the audience. One was about books that have influenced you as a human and an investor. We already talked about some. I already bought one that I think you recommended, “The Sleuth Investor”. What are the other books that have influenced you?

[00:01:54] Fred Liu: I mean, honestly, I think that books are good for learning the basics and learning the philosophy and foundations of this industry. They are basically good for timeless wisdom.

The problem is that a lot of investment books just basically say the same things. To be honest, I haven’t put much focus into reading investment-based books over the last couple of years. So, I still have to say that my biggest influences are really the classics, so Phil Fisher’s books and “The Sleuth Investor” *. Previously I’ve mentioned “The Art of Execution: How the World’s Best Investors Get It Wrong and Still Make Millions” * in some of my letters. I think a lot of my learnings nowadays have just come from reading articles, following companies, and following the development inside of new firms. I learned a lot from just having conversations with people to be honest, probably more than written materials these days and I listen to a lot of podcasts. I love podcasts.

I learned a lot from just having conversations with people to be honest, probably more than written materials these days and I listen to a lot of podcasts. I love podcasts.

Fred’s input via podcasts

[00:02:50] Tilman Versch: What are your favorite podcasts that you listen to?

[00:02:55] Fred Liu: There’s a lot. I’m not going to name any because I don’t want to put anyone on the spot, but there’s a lot just focused on different business models. There’s some focused on Indonesian tech that I listen to and some on China tech. Different venture-based types of podcasts are always interesting as well, just to see how other investors are doing it in the earlier stages within private markets.

New information through conversation

[00:03:19] Tilman Versch: So, you moved a bit from a book-based model that you used at the beginning to a mentor- or conversation-based model to inform yourself and get better?

[00:03:29] Fred Liu: Yeah, because books were written let’s say five or ten years ago. They’re good for information that has a long shelf life and is probably timeless in building the foundation for how you think like an investor, but they’re not as helpful for the up-to-date, newer business models or what’s changing in the world. Information just happens so quickly nowadays, that honestly, the quickest way to iterate it is through articles and podcasts. It’s real-time information, rather than books that take several years to get published.

Information just happens so quickly nowadays, that honestly, the quickest way to iterate it is through articles and podcasts. It’s real-time information, rather than books that take several years to get published.

Self-improvement

[00:04:05] Tilman Versch: Are there any non-investing aspects of your life like diet, sleep, daily habits, routines, or rituals that you do to optimize your ability to do your job well?

[00:04:17] Fred Liu: I think the biggest change that I’ve made in the last six months is consciously putting in two thinking days or reading days into my calendar. So, no meetings, no calls; just being able to, whether it’s working from home or the office, sit quietly, think and catch up on some of the reading that I’ve been meaning to do. I think that honestly has been the best from both a creative aspect and then also being able to manage stress and my own emotions.

I have one book for you. My wife recently recommended the book, “The Power of Now” to me. When I first saw it, I thought it was a little bit hocus pocus, a little bit cheesy, but when you start reading it, it’s like meditating through a book. This has really helped me be more present and not think as much into the future in terms of my mindset by just being more present and aware of the current moment and how everything has come together. So that’s a book that I’ve recently been reading very slowly.

The role of writing and investor letters

[00:05:24] Tilman Versch: You have a pen in or close to your hand and a keyboard on the left of you. What role does writing play for you in your process of research, and are there any secret journals to one day discover?

[00:05:41] Fred Liu: Yeah so, I write our quarterly letters, and I actually really love it. Originally, I wrote them for myself because it was a way to synthesize all the information that I had.

I’m probably doing, I don’t know, anywhere between one and three calls every day and it’s just a lot of information. Through these conversations that may last an hour, you may only get one tidbit out of it but it’s still a great use of your time because it’s a data point or piece of information that you honestly didn’t know before. So, you do a lot of these over a quarter and these data points are all jumbling around in your head and you need to form it into a picture. That’s basically what writing does for me. It helps me tell myself a story, like how all these different data points fit into a broader picture and that’s what I love it for.

I’m probably doing, I don’t know, anywhere between one and three calls every day and it’s just a lot of information. Through these conversations that may last an hour, you may only get one tidbit out of it but it’s still great use of your time because it’s a data point or piece of information that you honestly didn’t know before. So, you do a lot of these over a quarter and these data points are all jumbling around in your head and you need to form it into a picture.

It’s surprising that our letters have gotten relatively popular over the last couple of years because I feel like more people should be doing it. I’m surprised it has gotten popular because I think there was a void in this market of investors actually explaining how they think and how that picture in their minds is forming. It just felt like a natural extension of me as an investor to formulate it and put it on paper. That’s what it really does for me and I’m glad that other people are getting value out of it as well.

Games – Community exclusive

[00:07:11] Tilman Versch: Games have the influence to form you as an investor. I was reading through your letters and there was a mention of poker as being one of them. So, what role do games play for you?

Hey, Tilman here. I am sure you are curious about the answer to this question, but this answer is exclusive to the members of my community, Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investors day by day. If you are an ambitious long-term-oriented investor that likes to share, please apply for Good Investing Plus.

How would your friends describe you?

[00:07:56] Tilman Versch: If I would ask like 20 of your friends, how would they describe you and your personality?

[00:08:07] Fred Liu: Good question. You know I think what’s amazing to me and probably only my close friends know this, acquaintances don’t, is that I’m actually a really introverted person. I have a lot of conversations. I like chatting with people, but it actually takes energy away from me. A lot of my friends would say that I’m actually pretty quiet and I don’t really talk that much. I’m more of a thinker, so that’s probably something that other people wouldn’t be able to recognize from the outside.

[00:08:45] Tilman Versch: Are there any other traits your friends would describe you with, that come to mind?

[00:08:53] Fred Liu: I would hope that they say that I’m genuine and that I don’t try to put on a façade. I don’t try to do things to try and impress other people. I think there are so many people in this world who make decisions based upon ego, status, or trying to impress others and I think my close friends would tell you that I’m probably the person least likely to do that. I do things for myself and my own enjoyment because I believe it’s the right thing to do, rather than doing it for others.

Fred’s personality in Hayden & craftmanship

[00:09:26] Tilman Versch: How much of your personality is reflected in Hayden Capital?

[00:09:32] Fred Liu: All of it. I mean absolutely all of it. I am running Hayden for myself and I hope that those who come along the journey with us, are as close to or 100% aligned with how I’m trying to build it. I think one of my biggest frustrations with this industry, and its why I think a lot of people in this industry aren’t building their firms correctly, is because they’re building it as a businessman.

The difference between a businessman and a craftsman is that the businessman is creating a product based upon the feedback from their customers. They’re building a product that their customers are demanding. A craftsman is building a product or a service that they truly want to build for themselves and that they’re going to use for themselves and then they go find customers who resonate and find value in it. We are really trying to be craftsmen here. This means that the majority of potential partners for us probably aren’t right for a partnership. This also allows me to be true to myself.

The difference between a businessman and a craftsman is that the businessman is creating a product based upon the feedback from their customers. They’re building a product that their customers are demanding. A craftsman is building a product or a service that they truly want to build for themselves and that they’re going to use for themselves and then they go find customers who resonate and find value in it. We are really trying to be craftsmen here. This means that the majority of potential partners for us probably aren’t right for a partnership. This also allows me to be true to myself. I get to build it the way that I want to build it. I get to run our portfolio and invest in companies that I find most interesting and hopefully our partners out there think similarly and want to come along this journey with us. But, if it’s not a good fit for them, then there are no hard feelings. There’s plenty of other different strategies and other ways to make money in this world.

[00:11:09] Tilman Versch: If you think about investing and investing businesses, it’s a very quantitative world. Successes are also measured – besides performance – in AUM. How do you keep yourself sane in a way that you stay with your craftmanship, if you have this craftsman focus?

[00:11:28] Fred Liu: To be honest, I try to surround myself with people who don’t necessarily give that pressure. I’m very cognizant of for instance our LP base, our Partner Base.

The Partner Base is the foundation of every investment management firm and if your partners are not truly aligned with you in terms of how they think about investing and how they treat their managers or their partners, I think it becomes a big distraction whether you realize it consciously or not. They will start to influence how you act as an investor and how your run your portfolio. They may take time away from time that should be dedicated to your other partners, because they may be asking for one idiosyncratic request. So, we definitely are a lot more cognizant of that. We actually screen our partners really well and I think that has actually had the biggest influence in terms of maintaining my own sanity and building Hayden in the way that I truly think that it should be built.

Going back to the point about Hayden not being right for everyone. You know, a couple of years ago when I was first starting Hayden, I was in China meeting a bunch of potential investors. Someone said to me that the problem they see with Hayden is that it’s basically a pill manufacturer or a drug manufacturer. We have one product or one thing that does the job really well but what we are not, is a general practitioner or a doctor, or a family doctor who offers that objective opinion on whether this pill is actually right for that client. For us, we know that our pill does one thing, and it does one job really well, but it may not be right for everyone. It’s probably not right for 99% of people out there. So that’s what we have to be cognizant of too, just finding the partners who that pill really is correct for.

We have one product or one thing that does the job really well but what we are not, is a general practitioner or a doctor, or a family doctor who offers that objective opinion on whether this pill is actually right for that client. For us, we know that our pill does one thing, and it does one job really well, but it may not be right for everyone. It’s probably not right for 99% of people out there. So that’s what we have to be cognizant of too, just finding the partners who that pill really is correct for.

Dealing with change & pushing the circle of competence

[00:13:29] Tilman Versch: The world is a dynamic and changing place. How do you manage – besides being stubborn and following the craftsmanship – to not being unreflective or closed to suggestions from the outside? How do you manage this tension?

[00:13:52] Fred Liu: It’s definitely a conflict. You want to stay within your circle of competence, but you also want to constantly be pushing the boundaries, because it’s through that stress and constant pushing that you’re going to be able to expand it.

I think it’s tough as the world is changing. There’s a bunch of interesting businesses out there, some of them may not fall within our circle, so it’s a constant struggle, to be honest. If our circle is here and there’s an interesting circle way out there, and we recognize that we don’t have the skills or tools necessary to go and evaluate that business and be the top 1% knowledge holders on it, we are probably going to have to pass. But if our circle is here and there’s a business right out here, maybe we can push it a little bit and test our skills and see if we have the data and the resources necessary to go on the right path. So, I think it’s tough, but there are a lot of different businesses out there that can make our investors some money. We don’t have to capture all of them. Some of the potential returns out there just aren’t earmarked for us. So, it’s just recognizing that.

There are a lot of different businesses out there that can make our investors some money. We don’t have to capture all of them. Some of the potential returns out there just aren’t earmarked for us. So, it’s just recognizing that.

[00:15:08] Tilman Versch: How do you decide whether to go out of your circle of competence or evaluate a business that’s closer to your circle of competence? Is it like saying I want to use my resources to go deeper into SEA?

[00:15:27] Fred Liu: It’s basically a trade-off in terms of where you want to spend your time. Do you want to spend your time expanding into a business slightly outside of your circle of competence or do you want to go into one that is fit squarely within it? I think it just comes down to opportunity. You have to evaluate the two side by side and make a comparison. Is the time that we spend with a greater risk that doesn’t actually fit what we are looking for, worth it in terms of return, or should we look for something that fits squarely within our competence? We would have more confidence around our processes to go evaluate that. Maybe it has slightly lower returns, but maybe it’s a better trade-off. I think it’s on a case-by-case basis.

A lot of times, we are not making that many decisions. We are buying very few names per year, like one or two. The majority of the time is just spent understanding new businesses. So, if there’s really no pressure to do anything, which we really haven’t had, especially in the last couple of months, we can more willingly spend extra time pushing the boundaries of our circle and learning about new business models.

LP’s and building long-term partnerships

[00:16:43] Tilman Versch: How would you describe the LP relationship you’re looking for?

[00:16:48] Fred Liu: I think a lot of people in this industry think of LP relationships as a transactional relationship. What they’re saying is someone will give us $10 million, they may not be the right fit for us, but we can put legal restrictions, lockups, and gates or whatever on them to kind of force them into this box, even though we are shoving a pill down their throat that’s not right for them. When they have a bad reaction to that pill because they’re just not emotionally suited for it, it’s not the type of strategy that they’re looking for, they’re locked in for the first three years or five years. Then when they do finally go out, we can go replace them with someone else. Honestly, I think that’s the biggest problem with this industry, that type of mentality.

We’re looking for partners that hopefully we can partner with for the next 20, 30, or 40 years. I really think of Hayden as a family, and I tell everyone that at some point we are probably going to have to close for capacity reasons. But once you’re inside of this family, our goal is going to be to run your capital for the next several decades ahead.

So, we are all just trying to learn together. I think that the commonality among Hayden’s Partnership Base is that the returns are great, that’s kind of why you are an investor, but that’s actually not the primary focus for a lot of our partners.

All the information, all the models, any conversation that we have is open property to our partners and we want to give value to our partners in that way. Hopefully, our partners will also reciprocate because it’s a two-way street. Hopefully, they introduce us to interesting entrepreneurs that they’ve met, other interesting managers that are doing cool things that we can learn from, or managers in different geographies. Some of our partners will sit on the boards of some of our competitors and so we can get to hear about interesting things that our competitors are doing, or maybe what similar businesses are doing in different geographies. So, we are all just trying to learn together. I think that the commonality among Hayden’s Partnership Base is that the returns are great, that’s kind of why you are an investor, but that’s actually not the primary focus for a lot of our partners.

The primary focus is that we are doing something interesting in a certain part of the world. A lot of our partners are professional investors themselves or former professional investors and they recognize that what we are doing is valuable, but they don’t have the skillset, or they don’t have the time to keep eyes on this segment of the world or this type of investment strategy. So, they hire us to keep tabs on what’s going on in this segment and I think that’s really cool. That’s a different relationship because it’s about learning how this world functions together rather than necessarily being a pure transactional type of relationship.

So, they hire us to keep tabs on what’s going on in this segment and I think that’s really cool. That’s a different relationship because it’s about learning how this world functions together rather than necessarily being a pure transactional type of relationship.

Partnering with Hayden

[00:19:24] Tilman Versch: Do you have a rough feeling about the percentage of the net worth of your LP’s investment in you?

[00:19:35] Fred Liu: Yeah, honestly, I tell all our new partners that trust takes a long time to build and it’s different once you’re inside of the Hayden family in terms of how we interact such as the type of data partners can have access to. They get to see the portfolio on a real-time basis. We have full transparency into the portfolio tick by tick. You can literally watch our trades if you want in real-time.

It’s a different experience. I tell our partners, number one, we never want more than 5% or 10% of your net worth. If it’s a family, probably even less than if it’s more institutional. At the same time, because trust takes a while to build, do not give us the full allocation all at once, give us a fraction of that and size it up over a period of two years so that we can both build comfort with each other and continue building that partnership. Once we are both have a good understanding of each other, then hopefully we are 100% allocated and then we will just run that money for the next couple of decades. I think having that slow process helps to build that trust and set expectations with our partners.

Generally, we don’t want a large portion of our partners’ capital. The reason for that, number one is from a selfish standpoint. We never want to be the source of liquidity if our partners need it, for whatever reason, because we have a longer duration investment strategy and if they need capital a year from the date when they invest, maybe we don’t produce any returns. It could end up being a bad experience. We don’t want that type of pressure. We want them to go find that liquidity elsewhere. Then number two, I think, again having them invest a smaller amount upfront. It helps make them more comfortable because it’s a new strategy and something that they aren’t as familiar with, so they get to have the freedom to build it up as they see fit.

Volatility & drawdowns

[00:21:39] Tilman Versch: What do you think about volatility and drawdown. What roles do they play for Hayden?

[00:21:45] Fred Liu: It depends on the reason for the drawdown. We have hedged a couple of times in our history and the reason we had to is because there could be the potential for impairment on the earnings stream itself. So that’s a fundamental reason that we are worried about what that earnings stream looks like over the next couple of years. If the drawdown is for, call it sentiment-based reasons or because of a market reaction, but it doesn’t really affect the earning stream of our businesses or the fundamentals of our businesses, then that’s really the market correcting because say stocks have run too much and so people are trimming or selling or raising cash or whatever. That doesn’t really play a part in our process, to be honest.

Most often if they get cheap enough, we just suffered a drawdown a couple of months ago north of 30%, we are going to use that opportunity to invest more in our existing portfolio. This is given that the fundamentals themselves haven’t changed and the valuations still look attractive. So, it really depends on why.

Hayden Capital’s transformation since 2014

[00:22:51] Tilman Versch: You started Hayden in 2014. What hasn’t changed since then, or did you change out of purpose and where have you gotten better?

[00:23:05] Fred Liu: I think Hayden has evolved a little bit since then and it’s just natural to evolve as an investor. In 2014, 2015, and 2016, I’d say we were probably a lot more diversified. My background prior to starting Hayden was in an industrial team for several years and so you would have seen a bit more industrials-based companies within our portfolio. We were actually a bit more diversified as well, we had a lot of cash that we needed to use. We started with over 60% cash in the portfolio. It took many years to go down to where it is today, which is less than 1%. So, it took a while to deploy that capital.

I would also say over the course of Hayden, I just started to recognize, number one, my own interests and where my own skillsets lie where we focus today, which is a lot of consumer tech and internet-based businesses in the US and Asia. Then number two, a big part of our edge is having these conversations, getting these data points from these individuals that we chat to on a regular basis. Building that network is hard when you’re spread so widely across many different geographies and industries.

For me, I found the most interesting conversations just naturally coming from the tech sector and that’s where we have built our connections and it just snowballed on top of itself. So, that’s where we have really started to lean into over the last four years or so. Some of our partners have previously told me that they sensed a change of our tone in our letters around mid-2017, which is really when we started narrowing our circle of competence, the bull’s eye really being e-commerce and then slowly expanding it outwards again.

For me, I found the most interesting conversations just naturally coming from the tech sector and that’s where we have built our connections and it just snowballed on top of itself. So, that’s where we have really started to lean into over the last four years or so. Some of our partners have previously told me that they sensed a change of our tone in our letters around mid-2017, which is really when we started narrowing our circle of competence, the bull’s eye really being e-commerce and then slowly expanding it outwards again.

[00:24:59] Tilman Versch: Was there a certain “aha” moment for this postindustrial transformation?

[00:25:05] Fred Liu: No, there’s never really an “aha” moment with me to be honest. It’s just a slow natural evolution.

Hayden Capital’s first Portfolio

[00:25:11] Tilman Versch: What names would I have found in the portfolio in 2014?

[00:25:19] Fred Liu: For instance, we used to own PSX, we used to own a couple of energy-based names as well, more on the call it like tech sector of it, or services sector if you want to call it that. We owned credit acceptance, which was actually a really great investment for us, but a slightly different business than the type of businesses that we own today. I’d say anyone who’s interested can probably take a look at our holder letters and they can find them there.

Learning & Improving

[00:25:56] Tilman Versch: Are there areas where you want to improve further with Hayden?

[00:26:01] Fred Liu: To be honest I’m pretty happy with where we are right now. I always think we can get better on the process side. Building more relationships with interesting entrepreneurs, building more connections in certain regions where we want more of a presence and where we think the most interesting business models are going to come out of. Learning from interesting investors who are the craftsman that I really talked about because I think these craftsmen are so rare in this industry, whether you’re investing in private or public companies or PE or whatnot. I really want to learn from them and building connections with people who are 10 or 20 years ahead of me, and learning how they build such a successful, durable and resilient investment firm. Meeting these people in not just the US, which is probably a very diverse and deep pool of investors like this, but also abroad where it’s a little bit tougher. That’s kind of my hope in terms of where I hope to build Hayden a little bit more.

[00:27:10] Tilman Versch: Are there any names you want to disclose of these craftsmen?

[00:27:16] Fred Liu: Probably not, just again for fear of missing people and offending people that I may miss. I would also say that’s what is unique about me, I know some people may be looking for one source or one fund that I really admire and have learned a lot from. I would actually say my learnings and my development have come from just, again taking one aspect from each person and putting that together to form something a little bit different. Everyone is doing something that you can probably learn from if you can get that tidbit out of them and emulate them a little bit or consciously put yourself in that direction. I think that just helps me become a better investor overall. It’s not necessarily copying, it’s more of just taking a piece and then putting all these different pieces together into something unique. That’s what I’m trying to do.

I would actually say my learnings and my development have come from just, again taking one aspect from each person and putting that together to form something a little bit different. Everyone is doing something that you can probably learn from, if you can get that of tidbit out of them and emulate them a little bit or consciously put yourself in that direction. I think that just helps me become a better investor overall. It’s not necessarily copying, it’s more of just taking a piece and then putting all these difference pieces together into something unique. That’s what I’m trying to do.

Creativity

[00:28:11] Tilman Versch: Does this also fit your definition of creativity because in your letters you started talking about the creativity in certain CEOs and founders you’re looking for. Is this what you think about creativity as well?

[00:28:25] Fred Liu: It is a form of creativity because I would say there isn’t necessarily a conscious end goal that I’m trying to end with. When I put all these data points, it’s not like I want to create a certain picture, involving all these data points. It’s more if I put them together and see what works for me. Some of them I toss away because it doesn’t work for me and then the natural picture that evolves wasn’t planned. I don’t know if you want to call that creativity, and creatively formulating your own skillset and development as a person and investor, but that’s what I do.

I honestly think that it’s hard to predict where the world is going and so you have to just constantly stay on top of things and then ditch old habits that no longer work and bring in new habits that maybe you’re learning from whatever source. I hope our CEOs, entrepreneurs and other managers out there are doing the same. I honestly think that’s how you evolve as the world continuously changes.

I honestly think that it’s hard to predict where the world is going and so you have to just constantly stay on top of things and then ditch old habits that no longer work and bring in new habits that maybe you’re learning from whatever source. I hope our CEOs, entrepreneurs and other managers out there are doing the same. I honestly think that’s how you evolve as the world continuously changes.

Communication with partners

[00:29:36] Tilman Versch: The next question is the perfect challenge for an introvert. How much of your time do you spend communicating with your investors and potential new investors compared to other tasks?

[00:29:49] Fred Liu: I would say I spend probably between 5% and 10% of my time just in terms of communication. Really what I’m trying to build is something a bit more scalable.

So, number one, our partners need to have the same sort of viewpoint or way of treating this partnership. Then number two, I also try to get them as close to a front-row seat as possible into our portfolio to explain to them the “why” behind the decisions we are making not just the “what” we are doing.

So, number one, our partners need to have the same sort of viewpoint or way of treating this partnership. Then number two, I also try to get them as close to a front-row seat as possible into our portfolio to explain to them the “why” behind the decisions we are making not just the “what” we are doing. A lot of that comes through our letters. It’s a very scalable way to communicate with our partners. As long as we put the effort into being transparent and open with them and try to instill some sort of understanding, I think that helps a lot of the time that a lot of managers spend in terms of one-on-one conversations. We are able to do it in a more scalable way.

On top of that, a lot of our partners just want to understand how the world is developing within our universe and so we will just have very informal chats. All of our partners have access to my cellphone number, my WeChat, my WhatsApp, whatever they want. Some partners choose not to engage one-on-one even know I know they are reading our letters. It might be a year, two, or three years before I hear from them. I know that they’re actively reading our stuff. We have some partners that will message me a couple of times a week just to chat about what they’re seeing and how they can be helpful and that’s great too. So, it really depends on our partners.

[00:31:41] Tilman Versch: So, the most important part of your communication is the letters, or how do you see this?

[00:31:47] Fred Liu: I’d say our letters are great for instilling a base layer of knowledge in getting everyone in our partnership base on the same page in terms of what’s going on inside of the portfolio, our strategy, and where our head is at. But often there are questions on top of that which we didn’t cover and so we will have those conversations offline on a one-to-one basis.

Generally, our partners are fantastic. I would rather have 10 or 20 more of our current partners, than one single bad partner. We are really cognizant of that. I recently had a potential partner say that this is the first time that they have ever gotten interviewed by a manager instead of them interviewing me. I was interviewing them in terms of their potential fit. It’s surprising that more managers don’t do that because if you screen your partners really well upfront, I think it saves you a lot of headaches later on and allows you to build a more resilient and durable business.

Generally, our partners are fantastic. I would rather have 10 or 20 more of our current partners, than one single bad partner. We are really cognizant of that. I recently had a potential partner say that this is the first time that they have ever gotten interviewed by a manager instead of them interviewing me. I was interviewing them in terms of their potential fit. It’s surprising that more managers don’t do that because if you screen your partners really well upfront, I think it saves you a lot of headaches later on and allows you to build a more resilient and durable business.

Red flags from potential partners

[00:32:49] Tilman Versch: What is the process of screening your partners?

[00:32:56] Fred Liu: I can’t give you the secret sauce or else people are going to game it.

[00:33:02] Tilman Versch: Yeah, some ingredients.

[00:33:05] Fred Liu: I’ll give you a couple of things that are maybe red flags. Sometimes people will reach out and you can tell through their communications that they have a mentality of, “you are lucky to take this money” or that they automatically assume that you are going to accept them as a partner. I think that’s wrong because that’s a transactional type of relationship. Those types of interactions make me a lot wearier because if that’s the first interaction you’re having, it means that it’s a good sign that maybe you aren’t thinking about this partnership correctly.

I’ll give you a couple of things that are maybe red flags. Sometimes people will reach out and you can tell through their communications that they have a mentality of, “you are lucky to take this money” or that they automatically assume that you are going to accept them as a partner. I think that’s wrong because that’s a transactional type of relationship. Those types of interactions make me a lot wearier because if that’s the first interaction you’re having, it means that it’s a good sign that maybe you aren’t thinking about this partnership correctly.

Other ones may be around the questions that people ask, around your volatility or characteristics of the portfolio or certain drawdown metrics. It really depends on the questions. I think where everyone is going to have different criteria for what makes a good partnership because everyone’s investment firm operates differently and has a different process. Everyone has a different “thing” that their partners need to be comfortable with. I think it just takes a lot of reps in terms of pattern recognition. You recognize who your good partners are and who your bad partners are. You steer your questions and criteria more towards what the profile of what your good partners look like.

Support

[00:34:34] Tilman Versch: Interesting. I don’t want to ask further questions here because of your secret sauce. I think you put water in it but I’m not sure.

Hey, Tilman here. I hope you like my content, If so, I want to invite you to support me. Here you can find the link to my thank you page. There you can give me your support to allow me to further produce more videos and more great content like transcripts. Thank you very much.

Writing for yourself

[00:35:08] Tilman Versch: Coming back to your letters, what is the quality standard you have for your letters? Would you say, this letter is ripe, or I can publish it. What is the process before publishing a letter and what is the quality center?

[00:35:25] Fred Liu: To be honest, I think most writers probably think this way. Every time I publish one of our letters, when I hit send, I honestly think it’s crap. I’m almost never happy with it.

[00:35:38] Tilman Versch: I feel you.

[00:35:40] Fred Liu: Yeah. I don’t know. I don’t really know the answer to that question, because I always feel that we are not hitting that quality. I just write for myself; I write about something that through all these conversations that I have during the quarter, I feel that people are missing out on.

There’s usually one or two topics that keep coming up and I feel like wow these guys, just the entire community just really doesn’t get it and I have a different view on that topic and so I’ll write about that. It almost comes from a place of frustration or anger. It’s like I want to help other people understand what I’m seeing and so that fire within me helps me write our letters and gives me the motivation to write the way that I do.

There’s usually one or two topics that keep coming up and I feel like wow these guys, just the entire community just really doesn’t get it and I have a different view on that topic and so I’ll write about that. It almost comes from a place of frustration or anger. It’s like I want to help other people understand what I’m seeing and so that fire within me helps me write our letters and gives me the motivation to write the way that I do.

[00:36:26] Tilman Versch: It’s interesting that it motivates you to move the needle a bit with the letters. What are those topics that others didn’t get over time? Do you have examples of those topics?

[00:36:39] Fred Liu: I mean for instance, my last two letters. The two topics that I covered were building an investment firm and this mentality between being a businessman and craftsman. Our most recent letter was around the Gen2 companies that are starting to sprout out around South East Asia and how these Gen2 companies require an existing ecosystem in which to flourish, a nurturing type of environment more so than Gen1 type of companies need. I think there is a bit more confusion in terms of how these things happen. Maybe I’ve just seen enough of these patterns to recognize that these are the ingredients that are required. Those are our most recent.

The process of writing the investor letters

[00:37:25] Tilman Versch: So, you get the clarity you have in your letters, which is impressive. Is it very clear from the conversations you’re having all over, what seems to be the missing puzzle pieces? I have to ask about sharing knowledge on a scale. Is there any other strategy that you use when you’re building clarity before you write?

[00:37:54] Fred Liu: To be honest, no. I think the best way to do it is just to write and put it onto paper because then its visually in front of you and you can see your train of thought and then just edit constantly. There’s a lot of times where I will cut out entire sections or completely change the topic because I realize that it may be something that I don’t have a full understanding of and so I’ll just trash it and move onto something else.

Honestly, I don’t think there’s a better way to synthesize your thoughts than just putting it on paper.

[00:38:27] Tilman Versch: How much time do spend on that letter?

[00:38:31] Fred Liu: On and off, probably on average like two weeks. It not like full time every single day. Sometimes I’ll just leave it and step away for a couple days and clear my head and then come back to it. I would generally say about 2 weeks on and off to write one of the letters

Team growth

[00:38:54] Tilman Versch: You’ve grown your business or the number of people working at Hayden. You doubled your team; you hired an analyst. What has changed since then for you?

[00:39:02] Fred Liu: Doubling as in from one to two, so I mean our business has definitely grown. It was just me for a lot of years and then we would hire these amazing interns, from like NYU, Columbia or other schools. I recently brought on Phillip. Phillip is fantastic. I know you’re watching.

[00:39:27] Tilman Versch: Hello Phillip!

[00:39:31] Fred Liu: Yeah, it’s been absolutely fantastic. Just being able to work with him and kind of operate 24/7. He will email me information or memos overnight. I’ll get to review it during the day. Have feedback and we are constantly in communication over WhatsApp. Just being able to work 2/47 and also having someone else sit in a different part of the world where they aren’t talking to the same people as me, not living the same life experiences as me, having a completely different network to me. I think that really helps expand the breadth of exposure that Hayden gets to different sources of information and different viewpoints. I think that’s really valuable. That has really been fantastic.

Just being able to work 2/47 and also having someone else sit in a different part of the world where they aren’t talking to the same people as me, not living the same life experiences as me, having a completely different network to me. I think that really helps expand the breadth of exposure that Hayden gets to different sources of information and different viewpoints. I think that’s really valuable. That has really been fantastic.

Unfortunately, or fortunately, I guess, as Hayden grows there’s definitely more operational types of headaches and more paperwork involved. So that is an aspect that I am a little bit more cognizant of and probably need to spend a little bit more time on, so having Phillip onboard has been fantastic to help me scale.

Outsourcing

[00:40:45] Tilman Versch: Can’t you outsource the paperwork?

[00:40:49] Fred Liu: Honestly, the way that we run is already pretty little for us in terms of running SMAs and running a very scalable format so it’s definitely less of a burden than other managers out there. We have started outsourcing a lot of it. We just hired a compliance manager. I am potentially looking for a COO at the moment. These are just natural friction points that you run into as you grow.

[00:41:20] Tilman Versch: So, if there’s anyone out there, should they reach out to you?

[00:41:24] Fred Liu: Yeah, send me an email. Were always looking for good people.

The benefits of working with a colleague in Singapore

[00:41:29] Tilman Versch: How are you organizing this kind of long-distance work relationship with Phillip? Is it a challenge to have him in Singapore when you’re in New York or is it a surplus?

[00:41:41] Fred Liu: No, absolutely not, especially nowadays with the internet and how everything is global. I am surprised with how people still insist on having their entire analyst team in the same office or in the same city talking to the same people, living the same life, living the same life experiences, going to the same restaurants. That’s just reductant in my opinion. Your job as an investor, in terms of your process, is a funnel, and to have as wide of a funnel as possible which means you need to diversify your thoughts and viewpoints.

No, absolutely not, especially nowadays with the internet and how everything is global. I am surprised with how people still insist on having their entire analyst team in the same office or in the same city talking to the same people, living the same life, living the same life experiences, going to the same restaurants. That’s just reductant in my opinion. Your job as an investor, in terms of your process, is a funnel, and to have as wide of a funnel as possible which means you need to diversify your thoughts and viewpoints.

Philip and I have known each other for a bit now. We have worked together for a number of years on and off, so I know how he functions. I know he thinks, and he knows how I think, so it’s actually a really great type of relationship right now because we fully trust each other, and I don’t need to micromanage him or tell him how to do certain things. I think we are both on the same page by now and there’s that level of trust.

Taking board seats & adding value

[00:42:49] Tilman Versch: Let’s try to finish off the first part of our interview because we have time constraints today and we will do a follow-up. Will we be seeing you taking board seats at a certain point in time?

[00:43:02] Fred Liu: Only if its valuable for the company. I always think that we need to earn the right to carry our own weight when we invest with a firm. So, we don’t want to be that dumb money, that money that the company doesn’t even know our investors with their firm. We want to be able to add value in some way and earn that right to be invested alongside them. If there is some aspect that we can add value to, whether it’s knowledge of similar businesses in a different geography that went down one strategic path and has found success with it and maybe we can take those learning and relay it back to a company that we potentially have board seats on. Maybe it’s something like that. Maybe we can make introductions to some of our partners who may have expertise or have run similar businesses. It’s going to depend on the situation. There’s no conscious effort to become more active or to have to take a board seat. Its only when there’s a good fit for us and the company as well.

[00:44:11] Tilman Versch: Are there any examples where you have added value to a company that you invested in that you want to disclose?

[00:44:19] Fred Liu: We’ve been very fortunate that our letters, materials and write-ups have gotten sent to various corners of this world. It sometimes reaches the competitors of our company’s hands in addition to the company itself.

I think some of our investment case studies have added value and I actually know for a fact that they have added value to some of our companies, because the corporate finance departments or strategy departments are reading our work and understanding what their competitors are doing within different geographies or say how the demographics are changing in a certain geography. It helps them shape how they make decisions on a day-to-day basis. Sometimes they will reach out and engage and then we will share notes at that point. But I do know there has been quite a few instances with that with the companies in our portfolio.

Sharing data with others

[00:45:18] Tilman Versch: Are you more cautious now with what you’re writing in your letters if you know that this knowledge travels so much?

[00:45:25] Fred Liu: Not really to be honest. Everything that we’re publishing is pretty public and if you put in the effort, you can find the data. So, it’s not necessarily anything that’s a secret that we shouldn’t be sharing. My goal is to just help everyone understand how this world is functioning and evolving together. It’s kind of shining a light on certain aspects of this world. That’s really what I view our letters as. Our great companies that we hope to partner with, they’re going to embrace all this data and incorporate it into their learnings as well. Hopefully, we can make them better also in terms of how they think about the strategic decisions in their businesses.

My goal is to just help everyone understand how this world is functioning and evolving together. It’s kind of shining a light on certain aspects of this world. That’s really what I view our letters as. Our great companies that we hope to partner with, they’re going to embrace all this data and incorporate it into their learnings as well. Hopefully, we can make them better also in terms of how they think about the strategic decisions in their businesses.

Moving into the non-listed space

[00:46:12] Tilman Versch: You already disclosed a bit of the answer to my last question of whether we will see you going to the non-listed space. So let me refine it, will we see you have a bigger non-listed profile in the future?

[00:46:26] Fred Liu: I don’t know. I honestly don’t know. I even don’t know if this is a strategic direction that we want to move down in the next 5 years because it is a different process. It’s a completely different process in terms of getting the deal when in the deal, building your network, getting that deal flow, what have you. I don’t know if it’s a good use of our time. I don’t know if it’s a skill set that we have. So, we’re still testing those waters. All I’m trying to do is find interesting entrepreneurs and interesting businesses that we can partner with and help them create value for their ecosystems where they’re operating. Whether that’s public or private, it really doesn’t matter to me at the end of the day. Definitely, there are some liquidity considerations that I’d be more cognizant of on the private side, but I’m just looking for great people to partner with. At the end of the day, everyone is allocating capital in some sense and we’re just looking for the manager and founders who have great capital allocation opportunities within their own businesses. To answer that question, I don’t know.

I’m just looking for great people to partner with. At the end of the day everyone is allocating capital in some sense and we’re just looking for the manager and founders who have great capital allocation opportunities within their own businesses. To answer that question, I don’t know.

[00:47:41] Tilman Versch: Can you maybe disclose some of the questions you have when looking at the non-listed space? What do you still want to understand?

[00:47:49] Fred Liu: I think our skill set is really identifying businesses and business models and understanding the macro trends that are propelling them and that type of tailwind that is behind them. The actual deal process is very different and sometimes these rounds are very competitive and so you need to build relationships with these founders. You need them to understand what value you can bring to the table. That requires a lot of effort and I don’t know if that’s necessarily a skill set I have. If we decide to go down this path, we will need to hire someone else who does have that skill set to go do that. I think it’s more on the process side itself, and the technicalities of it, rather than the identifying great businesses aspect.

Goodbye

[00:48:42] Tilman Versch: Interesting. Thank you very much for your time and I’m looking forward to catch-up on our conversation soon. Thank you!

[00:48:49] Fred Liu: Sure. Thank you Tilman.

[00:48:50] Tilman Versch: And bye-bye to the audience and bye-bye to Phillip.

Disclaimer

[00:48:56] Tilman Versch: As in every video, here is the disclaimer. You can find the link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we are doing here is no recommendation and no advice, so please always do your own work. Thank you very much!