In the second part of our conversation with Christopher Tsai of Tsai Capital, we discuss Christopher’s heritage and what lessons he could learn from his family.
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We have discussed the following topics:
- Check out Part A
- Chris‘ personal role models
- An early life lesson by Chris‘ father
- Reaching a good size at the company
- Good Investing Plus - A warm invite to apply
- His relationship with his father
- Check out Stratosphere
- Gerald Tsai Jr.
- Reinvestment in his fund business
- Outlook on Omaha in 2024
- Thank you
- Disclaimer
Check out Part A
[00:00:00] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back for the second part of our interview with Chris Tsai from the new home studio. If you missed the episode, you find it on the YouTube channel or in your podcast player.
Chris‘ personal role models
[00:00:15] Tilman Versch: In this episode, we want to talk about role models. And Chris, we have two investor role models sitting on your left and your right as we’re in Charlie for sure that are role models for a lot of investors, but we also want to introduce two other figures from your family that formed you. One is your father and one is your grandmother. Can you introduce both to us? You can pick who’s first.
[00:00:42] Christopher Tsai: We’ll start chronologically. My grandmother’s name was Ruth. Ruth Tsai and she was an incredible lady. I wish I had more time with her, but I did spend a lot of time with her growing up. She was a real pioneer for women in China at her time. She was the first woman to trade on the floor of the Shanghai Stock Exchange, which is pretty cool. This was from 1939 until 1941. She found an opening and she, from what I understand, made a killing trading stocks on that exchange.
In December 1941, Japanese troops invaded what was called the Shanghai International Settlement. And trading was abruptly halted at that time, so she had a good 2 1/2 three years on the floor. She was also not only a pioneer for women in China, but she was a really, really feisty lady. Just give you an example, Tilman. My grandmother and grandfather had a small country property. One evening she gets a knock on the door from the communist authorities and they say to her that she has a short period of time to vacate the land, that the land was being confiscated.
The most valuable part of the land, incidentally, was the topsoil. So what did Grandma Ruth do? Well, she didn’t put up a fight. She said, when do I need to vacate by? And then the night before she hired a bunch of guys to strip the topsoil off of the land, which was the most valuable part, and she sold it. So she was truly a capitalist, and she left. My father got a lot of that kind of feisty mentality and attitude from her, but she was also great with people, dealing with people, so she had this expression. She had a lot of great expressions, but one of them was, why be a square table when you can be a round one?
She had a lot of great expressions, but one of them was, why be a square table when you can be one?
What she meant by that was that. Why make people upset about something if that’s not necessary? She intuitively understood Dale Carnegie. Who’s been a role model to Warren Buffett, who has been a role model to me and who’s been, I’m sure, a role model to so many people in the good investing community. She passed on that kind of sensibility, that kindness to my father. My father was amazing dealing with people he would not have been able to build up his career without that kind of sensibility. You could be in a room of a hundred people. And he would make you feel like you’re the only one in that room.
I think that’s one of the main reasons he wound up being so successful in building businesses. It’s one of the main reasons he was so successful in deal-making. Eventually, he became the CEO of the Dow Jones 30 company. And later on in life, spending a lot more time dealing with philanthropy and in people, again, in different ways. So Grandma Ruth and my father were certainly role models. My father always pushed this idea of perseverance and being your best, he said to me and my sister when we were both young. We didn’t care what we did in life as long as we gave it our very, very best. That’s how I think about my life. And again, this idea of Kaizen and continuous improvement. This idea of trying to always be your best. And dealing with people in a kind and respectful manner and the last person that I want to mention is the late Fred Rogers.
An early life lesson by Chris‘ father
[00:05:11] Tilman Versch: Let’s maybe stick with the family because you told me an interesting and good story about the family right now and what I learned that family is also can be a darker place. I would call it a dark place and you have struggles and pains with your family. These are also important to build yourself and your firm because your father has this large footprint in building a huge asset management firm. How have these struggles and conflicts in your family helped you to be who you are and also to build Tsai capital in the way you’ve built it?
[00:05:49] Christopher Tsai: Yeah. When I decided to go into money management, I told my father I was launching a business. And he said that that’s great, but you’re on your own. So unlike a lot of other investors who have had larger-than-life figures in that field, my father never backed Tsai Capital. My mother actually did. My mother gave me a small amount of money to launch the business, I think was about $1,000,000 at the time. And the other two million I raised from local business people that I knew growing up in Greenwich, Connecticut.
So we launched with $3,000,000. And from that moment it’s been a constant struggle in terms of building the business, but it’s also been extremely rewarding. Over time, I’ve come to realise, at least for me, that happiness comes through the overcoming of struggle. I think that if you’re given something too easily, there’s less happiness associated with that success. At least that’s how it feels to me. And so we are now, as you mentioned, over 20 years in business and now clients come to us. And I realise that that is not something that just happened automatically. Most of our clients come to us through referrals.
That’s not something that happened automatically. That’s something that has happened over years and years and years of building, not only a performance track record but building a certain reputation in terms of how we manage money and how we treat clients. So that to me is a huge, huge sense of joy. And I’m sure it’s to a lot of your fellow. A lot of the fellow investors in this community and being able to have clients recognise you and come to you is a truly rewarding experience.
[00:07:53] Tilman Versch: So to make it clear what you’ve just said, your father didn’t fund you. He rather turned you away and you had to build all this you have with the firm. I think you have 100 million in assets at the moment yourself.
[00:08:08] Christopher Tsai: Yeah, and my father, like I said, didn’t didn’t back me at all. My mother put in $1,000,000 and the other $2,000,000, I raised. Actually, when I was 16 years old, I started managing money informally. So what I did was. I knew I wanted to manage money from a very early age and when I was 16, I felt like it was the right time. There was a Chinese restaurant in Greenwich, CT called Lotus East and it was run by this really wonderful man. His name was Johnny Chang. And I would go to Lotus East as much as I could to have his orange beef, which was my very, very favorite dish.
And Johnny, like many Chinese, loves to gamble and they love to play in the stock market. So we had many, many conversations about the market, in stocks. And I eventually convinced him that’s not the way to make money. You’re not going to make money buying and selling all the time. You need to think long-term. Eventually, after many, many conversations, effectively marketing, right? I convinced him to give me 400,000. It was his entire life savings and fortunately did very well for him. So he really became one of my first clients. I convinced another local businessman to give me capital. So in total, I raised, when I launched Tsai Capital, I pulled together 2 million from these relationships that I developed, a million from my mother.
So we launched with 3 million and my father did not contribute any capital. It’s been a struggle building that and as we know how compounding works, compounding not in terms, just in terms of building goodwill, but compounding in terms of building capital, it takes time. And it’s about laying a foundation, building a network, building a reputation, and now it’s 20-plus years. As I said, clients come to us now, but that was not the case until let’s say maybe five to eight years ago clients started coming to us. So we’re talking about more than 15 years of laying that foundation, building a network before we kind of got organic.
Reaching a good size at the company
[00:10:45] Tilman Versch: How much time did it to build the firm to a level that you could also invite friends for the beef you just mentioned? The beef you like because you also have to get income from the fur.
[00:10:57] Christopher Tsai: Well, the nice thing about the asset management business is that it’s scalable. And it didn’t actually take long for me to be able to invite friends to dinner called Five Years. And I have always run Tsai Capital with an extremely lean infrastructure. I started the business out of my apartment. I have moved into an office building only maybe three years later. And we’ve been in office building, different office buildings, one on Park Ave. We were in the Chrysler Building. We’re now at 590 Madison Ave.
We’ve been in different office buildings ever since. But in all cases, I’ve had a very, very basic office and that’s all I need. I feel having a small office is all we need in terms of running the company and because so much of the functions of Tsai Capital, so much of the back end, the administration, the counting, the compliance, the legal, that’s all done by other people, I’ve outsourced all of it. So there are over a dozen people working on the Tsai Capital business constantly.
So there are a lot of people involved that are not. As I said, from our legal and compliance who I’m in touch with probably every week, they’re all working on Tsai Capital, but they’re not in the office and we don’t need to be. Interestingly like post-COVID, the world has actually moved that way. Just coincidentally, we’ve operated with a very remote kind of structure from the very beginning and that was done as a result of necessity, really. Running the business in a lean manner so it could be profitable with 3 million in AUM or 5 million in AUM, whatever the number was at the time to hit profitability. So we’ve operated with that kind of remote structure pre-COVID.
Good Investing Plus – A warm invite to apply
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His relationship with his father
[00:13:28] Tilman Versch: Let me ask a follow-up question on your father. He normally turns you away when you ask for funding when you study your business, but he also turns you away because you made it public that you’re gay. And this was a point where you just stopped talking to each other for seven years. How did you manage this?
[00:13:53] Christopher Tsai: Well, it’s definitely character-building because when your parent, one of your parents refuses to speak with you. It’s not the best feeling in the world, right? But it also helps you to form your own identity. And it happened to coincide with the same moment that I launched, or roughly very close to the same moment I had launched the business. So it really helped me to focus and forced me to focus on just making sure that it was a success because probably thinking about it now and thinking about it live with you and your viewers, I probably wanted to prove to my father that I could build something successful, so I was very focused on making sure that that happened.
[00:14:46] Tilman Versch: The good outcome of your relationships is that after seven years you started talking again to each other and came up with like he became a kind of like more helpful to you and advise you on building.
[00:15:00] Christopher Tsai: Yes, so roughly 7 years it might have been six, it might have been eight. I’d have to look through letters and diaries to figure out exactly when, but it was roughly seven years. So it coincided with my marriage in 2005, which actually took place here in Berlin. So I invited my father to the wedding and his goddaughter convinced him to go. And so our relationship rekindled. Around 2000, around the summer of 2005, we became extremely close to his passing in 2008. So I had three really solid years with him during those three years. He was an amazing mentor of mine.
I actually started out working with him as a teenager, so I did effectively an internship with him. I helped with a lot of the business that was going on that he was handling for his philanthropic organisation and I learned a lot about looking at companies and thinking about businesses and hearing from him really like how not to think about companies. It’s important to think about inversion, right? We’ve got Charlie over here. Charlie always talks about Carl Jacoby and inversion. So my father taught me a lot about what not to do which was super helpful in terms of building the portfolio that we have today.
[00:16:43] Tilman Versch: Your father became a mentor, but you decided to not do things he did. Why did you make it differently outside of building your whole own thing as a friend?
[00:16:55] Christopher Tsai: Well, I decided that one marriage is better than four. So I focused a lot on marriage. I mean, I think that having the stability within family, having very strong relationships with children. I have two daughters who are now 13. And they’re amazing children, so smart and so curious, so kind. And you’re having a strong relationship with your children, having a strong relationship with your partner. That’s super important to building a business and having a good track record because think of all of the distractions you would have if you’re involved in separation, divorce or conflict with your children. I mean, that can’t be good.
So, Peter Kaufman has also been in many ways a mentor to me in many ways. I’m sure mentor to a lot of people within your good investing community. He put together this piece called one ladder, and he talks about seven steps of the ladder. The problem is that most people think about getting to the first step and then to the second and to the third. In other words, let me focus on building a career first and then I’ll spend more time or we’ll be able to spend more time here. Then once I get here, let me think about getting here because I’ll be able to be in a position to get to the next ladder. The next step of the ladder. The problem with that and Peter Kaufman lays this out and his One Ladder presentation is that a lot of this is multiplicative.
So he talks about health. He talks about family, friends, career, spirituality, hobbies. He talks about the seven elements of the ladder and how everything works together. So I’ve tried to live my life focusing on these areas and health being really number one because if health goes to zero, everything kind of goes to zero. But just like right next to your own health, you have to take care of yourself first. It has to be your family, to me. So I focus a lot on family and making sure that I have strong relationships with family.
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[00:19:47] Tilman Versch: For the investor role models, it’s obvious that Warren and Charlie are role models for you. Which other investors have influenced you in an interesting positive or sometimes even negative way?
[00:20:01] Christopher Tsai: Yeah. So I want to mention two role models. One, not in investing and one, directly in investing because they come together to help build a business, at least for me. So on the non-investing side, there was a person named Fred Rogers, who many of you will know and many of you will not know. Fred Rogers was an author and a Presbyterian minister, but most most well known as a TV host for an American show called Mr. Rogers Neighbourhood which first aired in 1968.
And Fred Rogers was an amazing person. He was such a kind person. And he said that there are three ways to ultimate success. The first is to be kind, the second is to be kind, and the third is to be kind.
Fred Rogers was an amazing person. He was such a kind person. And he said that there are three ways to ultimate success. The first is to be kind, the second is to be kind, and the third is to be kind.
That is such a simple way to go about life. And it is so fulfilling to go about life with kindness, like in your heart and you will always come across people who are not kind, and that’s fine. But the point is that there’s this expression like, you are what you eat. I think that you are also how you behave over time. If you behave kindly, it reflects on yourself and you internalise it. So that’s how I think about life and that’s how I think about interaction with clients and building a business. I mean the whole Tsai Capital ecosystem, the service providers, the clients. Everybody who is involved one way or another, you want to deal with them, talk with them, be with them, with respect and kindness.
The other person who has been really influential to me on the investing side is Ron Baron, who has taught me about culture and people we spoke about people in culture earlier and how important that is to get an understanding of how companies are run and managed. He actually has a similar investing philosophy that my father had. Both Ron and my father were not shy about looking at growth companies just because the valuation appeared on the surface expense. I think that a lot of value investors and I consider myself a value investor, a lot of value investors will see a company that has a 50 price-earnings ratio and they won’t even do the work. They will just throw it in the garbage pile.
But the problem is everybody is screening for low PE ratios, so all of the great companies are already uncovered. Often companies sell for high or seemingly high multiples because they are reinvesting in their business today in order to build a higher intrinsic value later. They don’t screen well. When we bought Tesla in February 2020, Tesla’s price-earnings ratio was roughly 200. But it was 200 because the company was reinvesting so much.
And since that time the multiple has come down significantly because the business has now grown. So it’s important in the journey, in the discovery of uncovering the next Tesla, the next Amazon. That one does deep work and doesn’t dismiss a company just because on the surface it has a seemingly high valuation and my father understood that. And Ron Baron understands that. And so both of them have been hugely influential to me for different reasons. But on this topic for the same reason.
Gerald Tsai Jr.
[00:24:19] Tilman Versch: What kind of companies did your father invest in with this kind of framework? Do you have examples of this?
[00:24:27] Christopher Tsai: Yeah. I mean, his investments are well-publicised. I mean, he invested in companies like Polaroid businesses that were very early in some cases for me, way too early in their trajectory. But the wonderful thing about investing in growth companies is that there’s so much asymmetry. So when you have, when you have uncovered something and you got the story right, you got the thesis right, we’re talking about being able to make multiples of your money on that investment.
And so it’s super important that one does actually hold on to that investment for the long term in order to accrue all of the benefits of being right in the beginning, my father was much more short-term oriented than I am and I learned that that was not an approach that resonated with me. But we did think about businesses in a very similar way. We thought about companies that were building scalable technologies, businesses that were innovative and businesses that were run by incredible leaders in skilled capital allocators.
Reinvestment in his fund business
[00:25:43] Tilman Versch: You like these companies that reinvest therefore shine expensive and maybe as the last question, how do you think about reinvesting in your business? What is your framework for this as an investor with an investing business, how do you decide on what capital allocation? What are you trying out? Do you have an experimental budget for doing things you don’t know where the outcome comes?
[00:26:08] Christopher Tsai: Yeah. So reinvestment in terms of one’s own business, to me, manifests itself in two forms. So one is in capital and one is in time. And sometimes those two go together. The first one, capital for us, it’s about investing in the infrastructure of the business, making sure we have the top compliance in place. We have the top portfolio accounting in place. These things all cost money. We use one of the leading portfolio management software called Black Diamond. It’s all cloud-based now. It’s an extremely great system to help us manage the portfolios.
So the infrastructure that you don’t see, that clients don’t see, is something that we’re continuously investing in. Thousands of dollars every year in terms of the technology that’s behind that, of course, we’re investing in the brand and in getting our story out to people that might benefit from our services and people where there is that alignment that we spoke about earlier that is costly. Building a business is also about networking. So for people who are in the very early stages of building a business, I highly recommend taking part in some of these conferences where there are high-quality investors.
But there are so many wonderful conferences and just going to Berkshire, right, your incredible events that you host in Omaha every year through Good Investing is certainly like that’s where you’re making these relationships but it costs money, right? Be it a hotel, be it flights, be it whatever it is. Membership fees, whatever it is cost money, and so that’s the capital part in that connects with time. So as a money manager, it’s super important not to get distracted to the point where it’s infringing upon your ability to do research and do what you’re supposed to be doing, which is, you know, investing money for clients.
So I’m very careful in terms of what I do to make sure that somehow there’s a benefit to the underlying investors. So these conferences for me have been so wonderful in the sense that they are ways for us to bounce ideas off of other smart investors to hear the opposite side of our thesis, right, to hear the short argument against a company that we might be invested in or might want to invest in. So being able to have that exposure is an investment that is to me like a necessity.
Outlook on Omaha in 2024
[00:29:25] Tilman Versch: Thanks for mentioning our Omaha activities. We are planning them next year again and we’re happy to have emerging managers with us. So please apply it to the community where things are run through and thank you very much for your time, Chris.
Thank you
[00:29:40] Tilman Versch: Thanks for coming and thanks for being the first guest in my studio. Thank you.
[00:29:45] Christopher Tsai: Thanks for having me.
[00:29:46] Tilman Versch: And bye-bye to the audience.
[00:29:48] Christopher Tsai: Bye-bye, Good Investing.
Disclaimer
Finally, here is the disclaimer. Please check it out as this content is no advice and no recommendation!
