원문 보기
An investor just completed their first year managing a fund with a 19% loss. Customers are worried, a major investor withdraws capital, and the newly established company struggles to survive. A few years later, that investor changed his portfolio management approach, resulting in a less volatile fund .
During the collapse of the US tech market, the fund did not record losses and even made a small profit, attracting new investor funds . From the outside, everything seems to be going in the right direction. But the strange thing is this. It was precisely this seemingly successful period that made him consider closing the fund.
The person we're talking about is Lilu, the founder of Himalaya Capital, someone who later earned Charlie Munger's trust to invest in his ventures, but who, in the early 2000s, was still caught between two different investment paths . One approach involves focusing on the business, understanding the product, identifying competitive advantages, buying when prices are below value, and patiently waiting for accumulation and profit to occur.
The remaining path is toward a volatility control portfolio, balancing buy and sell positions, monitoring market movements, and attempting to make the return curve more favorable to investors. There is no reason to assume the second path should always be used by many organizations. It's a strategy with its own goals and tools .
But for Lyu, the question wasn't whether it could make money or not. The question is whether it will allow him to best utilize his abilities in handling the theft . What Lilu later regretted most was n't just the losing investments . He admitted that his biggest mistake was not investing enough in the best ideas that he understood well.
That will be the central question throughout today's episode. When does trying to avoid short-term losses cause us to miss out on bigger opportunities in the long term? And why is it that sometimes, to become a better investor, one doesn't need a new valuation method, but rather a complete change in how they organize their life?
Back in early 1998, as Himalaya was just starting operations, Lilu left his investment banking job to pursue a path he believed suited his abilities: value investing , envisioning that initial scale. According to Lilu's own account , he held almost every position. From running the company to searching for stocks and researching financial reports, the only tools available for work are laptops and phones.
The funding came from a small number of people who trusted him, including close friends. But that year wasn't a smooth environment to start in. The Asian financial crisis, which erupted in 1997, put immense pressure on currencies, banks, and businesses in many economies across the region. Commodity prices, including oil, have fallen sharply.
Assets bearing Asian characteristics are being sold off by international investors. Lilu saw opportunities in some Asian businesses and in oil and gas companies in North America. But the fact that assets are cheaper than their estimated intrinsic value doesn't mean stock prices will stop falling immediately.
In its first year, the portfolio showed a paper loss of approximately 19%. Please read this number very carefully. 19% isn't proof that all the businesses Ly Luu acquired are correspondingly weak, but it ca n't be ignored just because it's called a paper loss. For fund managers, falling asset prices can trigger practical decisions, clients may stop contributing, request withdrawals, or lose confidence in the manager's abilities .
One of Lilu's largest investors withdrew all of his capital the following year. This is where the story gets really difficult. Investors looking to buy a good business might want to wait 3 or 10 years, but their capital is sometimes only available for three or six months. If managers are forced to sell to meet withdrawal requirements, time is not entirely on their side.
A long-term investment perspective might be economically sound but organizationally unsuccessful simply because investors' money doesn't have the same timeframe as the investment argument. Lu opposes the view that all fluctuations in stock prices are equivalent to investment risk. He emphasized that the most frightening risk for a value investor is the permanent loss of capital, the weakening of the business and the wiping out of equity, or the purchase price far exceeding the true value the business could generate.
This is an important point, but we need to interpret it accurately. A stock that drops 50% while maintaining its cash flow potential can become an opportunity. Conversely, a stock price drop of 50% due to a company losing customers, accumulating excessive debt, or being forced to issue dilutive shares can be a very serious warning sign.
Therefore, the formula isn't simply to buy whenever the price drops. A more accurate formula would be to rephrase the two questions. Does the intrinsic value of a business change? And can we hold on long enough for the market price to reflect that value? There's a third variable that's often overlooked: the survival rate of the holder.
Suppose one investor buys shares with spare cash, without leverage, while another buys the same shares with mortgage-backed loans. Both own the same business, and the price both fall by 30%. But for the second person, fluctuations in market value could trigger a requirement for additional collateral or foreclosure.
At that point, the upheaval was no longer simply a psychological issue . It becomes a liquidity risk and a risk of losing option rights. With an investment fund, that mechanism can occur without leverage. Investors withdrawing capital at the worst possible time is enough to force the fund to sell assets.
Therefore, the important conclusion is that volatility is not always harmless. In conclusion, it is necessary to distinguish between the risks of the business and the risks of the ownership structure . In 1998, Lyu learned that lesson through firsthand experience . He may believe in the value of the asset, but he cannot assume that everyone who deposits money shares the same belief and the same ability to wait.
For Value Lab Research, this is a principle that must be incorporated into every valuation model . A business might be worth buying at a certain price, but the investment is only worthwhile if the buyer is prepared for the journey to reach that value. The irony of a crisis is that it simultaneously creates attractive prices and makes people least willing to spend their money.
According to her own account, in the early stages of the crisis, Lilu was anxious and missed several opportunities to act. This is what makes his story far more valuable than many success stories told after the results are already known. He was n't someone who remained calm from the start. He was affected by pressure from investors and by his own sense of uncertainty.
But in the latter half of 1998, he began making some of the bigger investment decisions. Lilu said that these investments yielded very good results over the next two years. The important detail is not that he hit the market bottom. We don't have enough transaction data to say that. The key detail is that he gradually resumed taking action after confronting risks and reassessing the businesses he was researching.
There is one particular company worth mentioning during this period. Timberland. It was a branded manufacturer of shoes and outdoor apparel, but the market at the time was concerned about the impact of the Asian crisis and the company's own problems. Lilu researched the business's ownership structure and the factors that caused the stock to be sold off.
We will dedicate a separate episode to fully examine the Timberland deal. Here, we only need to identify one key feature: long-term investment opportunities often require significant research time. While the market rarely gives advance notice, today's Trending day is actually the cheapest day. When analytical ability, pricing, and a willingness to act converge, an advantage can emerge.
But for all three of those things to happen, investors must also be able to focus on researching the company instead of being constantly drawn into short-term price movements. That lesson leads us to a seemingly logical choice made by Lilu, which later became a burden. Put yourself in the shoes of someone who invested in the fund in 1999.
You've just witnessed the value of your investment plummet. The managers explained that the businesses were still doing well and that the stock prices were undervalued. He might be right, but you can't be sure. One more thing you should know right away: if you withdraw your money today, you'll put an end to the fear of further price drops.
Now put yourself in the position of the fund manager. You may believe that some stocks are significantly undervalued, but if clients demand quarterly stability, those very investments you believe in could be the ones they abandon. You have to choose between a highly volatile investment outcome that could be very good in the long term and a more comfortable outcome in the short term but potentially less profitable.
This is a matter of interests and time horizons, not simply a question of who is smarter than whom. Lilu said he found it difficult to explain Buffet and Mers' philosophies to investors who are more interested in short- term volatility and price-based risk metrics . He felt that his way of thinking and managing assets at the time were like two different languages.
We also need to be fair to the client side; an investor who needs money in the near future and has a payment obligation or risk limitation as stipulated by regulations has perfectly legitimate reasons to be concerned about volatility. Not all of them were wrong. The problem arises when managers receive short-term capital to pursue opportunities that require longer terms.
A fund can create a portfolio tailored to client requirements. But not every fund structure is suitable for every strategy. If the two parties don't agree from the outset, even sound investment choices can be forced to change midway. And Lilu compromised. He tried to find ways to reduce the volatility of the portfolio.
The chosen approach is to combine buying stocks with short selling positions. The long-short strategy sounds balanced. Investors buy stocks they believe are undervalued, while short-selling stocks they believe are overvalued. If the design is appropriate, some of the impact of general market trends can be mitigated.
Profit then depends more on the performance difference between the buying and selling groups. This is a well-founded strategy used by many professional funds. We shouldn't interpret Lilu's personal failure as the conclusion that all long-short strategies are ineffective. But Lilu found it didn't fit with how he wanted to spend his time.
To understand the reason, let's look at a simple example that is for illustrative purposes only. A person who buys a share for 100 dong is not using leverage . If the business goes bankrupt, the maximum amount that person can lose in this position is 100 dong. But if the business expands successfully in theory, the price increase is not capped at a fixed level .
Conversely, a short seller at 100 dong is borrowing shares and then selling them in the hope of buying them back at a lower price. If the price falls to zero, the maximum gross profit of this position is 100 dong before costs. But if the stock rises to 200, 300, or more, the potential losses could continue to widen.
The danger lies in the time it takes you to correctly analyze that a business is overvalued. But to make a profit from short selling, you also need to be correct about the likelihood of the stock price falling within a period that allows you to sustain the position. Therefore, the fees associated with borrowing stocks, the margin requirements, and the lender's risk of recalling the stock can make timing a critical issue.
Lilu pointed out another difficulty: many attractive short-selling opportunities are linked to very well-hidden issues. Even if the analysis ultimately proves correct, it may take years for the market to recognize it. When short selling, knowing the truth is sometimes not enough; investors also need sufficient funds and a capital structure to survive until the truth becomes clear.
The risks associated with price and margin are something many people can understand immediately. But in my opinion, the deeper issue in Lilu's story doesn't lie in the profit and loss formula of a short selling position. It lies in a resource that is even rarer than capital. The investor's time and attention .
To properly study a business , an analyst must read reports over many years, understand the business model , meet with or evaluate the management team, compare competitors, study how the market is structured, and examine worst-case scenarios. That requires the ability to concentrate for extended periods, even months.
Meanwhile, short positions may require a decision today. Stock prices surged, driving the market against the volatility of underlying assets . A rumor emerges, or the stock lender changes the terms. A manager may be forced to halt research work to process a price signal. There's a very human paradox here.
The more Li Liu wanted to protect his portfolio from volatility, the more time he had to spend observing those fluctuations. The more he stared at the trading screen, the less time he had to delve into the businesses he considered to have long-term value. But don't assume that simply not trading means you're a good investor.
A buy-and-hold portfolio can also fail if investors don't monitor changes in the business. What Lilu seeks is a focus on the right target audience, monitoring business operations and value, rather than being caught up in the need to react to every fluctuation in market prices. If someone truly has an advantage in business operations analysis, shifting a significant portion of their time to volatility management could undermine the very source of that advantage.
This is an expense that never appears as a clear line item in the fund's financial statements. There are no items labeled as missed opportunities because managers were too busy dealing with short selling three months ago, but the economic impact could be significant. Lyu only fully understood this price after years of experience.
When the tech bubble burst, the US market underwent a deep correction. According to Lilu's own account, during the difficult period of 2001-2002 , Himalaya's Long Short strategy helped the fund avoid recording losses and even generated a small profit. Well, if you only look at the short-term results, this might be something to be commended.
Minimizing losses in a bad market is no simple skill. Volatility has decreased, and the portfolio looks more stable. and the fund received additional interest from investors in the industry. But Lilu was n't happy. He realized he had spent too much time trading and managing positions while the best opportunities he was able to understand deeply were not being bought in large enough quantities.
We need to separate the two concepts. Success in relation to volatility is one thing. Success in relation to an investment strategy where one has the greatest advantage is a different matter. A fund aiming to preserve capital and reduce market correlation can certainly consider low volatility as a success.
But an investor looking to generate high returns for decades from a handful of deeply understood businesses might consider missing out on a big opportunity a failure. No single measure is always right for everyone. The key is whether the chosen metric reflects the true goals and commitments to investors.
Assume both funds start with 100 units of capital. The first fund earned a consistent 4% for several years with little fluctuation. The second fund may experience a significant drop in value within a year, but it owns businesses that will generate substantial value in the long run. We ca n't just look at one year to conclude which fund is better, but neither can we use a strong future performance to negate all the risks of the second fund.
The entire capital flow, loss tolerance, liquidity level, and results over a sufficiently long period must be evaluated. For Lilu, the problem is that he feels the current model no longer allows him to optimally utilize his time and abilities. In his autobiography, Lilu states that the most painful mistakes in his career were n't necessarily wrong acquisitions, but rather his inability to allocate sufficient capital to the best quality ideas.
This is an observation that forces us to change our misconceptions about the definition of investing. When someone buys shares at 100 and sells them at 80, the 20% loss is easily visible. That person can check the purchase price, the selling price, the quantity of shares, and immediately calculate the amount of money lost.
But if someone understands a business well and had the opportunity to buy at an attractive price but didn't because their capital was tied up in other strategies, the consequences of that inaction are almost invisible. There were no losing trades, no negative lines, only a future that could have happened but was overlooked.
To give a mathematical example, this is absolutely not a transaction involving Ly Luu. Let's assume an investment of 1 billion VND can triple in 5 years. If only 100 million VND is allocated, the additional amount is 200 million VND. If 500 million VND is allocated, the additional amount is 1 billion VND.
This difference of 800 million stems from the scale of capital allocation, despite having the same investment rationale and the same rate of return. But this is where critical thinking is needed; no one should assume that they can buy enough shares at the bottom and hold them until the peak. An opportunity is only truly actionable if, at that moment, the information, liquidity, reliability, and risk limits allow the investor to make a decision.
Opportunity cost is a valuable concept as it helps us improve the use of capital. It becomes dangerous when it turns into a story of regret reconstructed using knowledge from the future. The right question for Value Lab Research to ask is: at the time of the decision, how deeply do we understand the business, how thoroughly have we tested the worst-case scenario, and if we still have the money, is this truly a better option than our current holdings?
Investing isn't just about knowing what to buy; it's about knowing how much capital you need to allocate to things you truly understand. From Lilu's story, I think we can categorize three hidden costs that long-term research investors often overlook. The first cost is the cost of attention, a position that may be very small in terms of capital size but extremely large in terms of the level of anxiety, monitoring, and response it requires.
If 10% of your portfolio requires you to stare at the trading screen for hours each day, the actual cost may far exceed transaction fees and capital costs. The second cost is the cost of the choice. When a leveraged portfolio requires short-term liquidity or contains positions that must be closed under unfavorable conditions, investors may lose the option to choose when to act.
This is especially dangerous during a crisis, when the rarest opportunities often appear at the same time as the greatest liquidity pressures. The third cost is the cost of the incentive structure. Fund managers may be rewarded for increasing assets under management, reducing quarterly volatility, or avoiding falling behind the index.
But those goals don't automatically equate to generating the best possible returns over 10 years from a number of high-quality businesses. When compensation and expectations are misaligned, behavior can stray from the original principles in ways no one intentionally wants. Thus, these three costs share a common characteristic: they are very difficult to observe directly in reported profits.
A portfolio that looks safe, a chart showing a steady upward trend, and a fund attracting new capital are not enough to conclude that the manager is using their time most effectively. Conversely, this does not mean that investors who concentrate their capital absolutely will always win. An excessively large allocation to a business, or one that is misinterpreted, can destroy years of hard work.
Concentrating capital only makes sense when it is accompanied by research quality , a margin of safety, the ability to tolerate risk, and the discipline to admit mistakes. Lilu isn't looking for unlimited risks . He sought an investment approach that would allow him to focus his efforts on areas with the highest probability of generating value without constantly being forced to act due to external factors affecting the business.
And that change ultimately began not with a new financial indicator, but with a conversation. Lilu had known Charlie Munger since her years working in finance in Los Angeles. But according to his account, the truly in-depth exchange took place during Thanksgiving in 2003. Lilu brought up the topic of the businesses he had invested in, the companies he was monitoring, and the challenges he was facing in running the fund.
Charlie Munger discussed each case individually, and the discussion gradually moved beyond specific stocks. MER sees the constraints Lilu faces as a problem inherent in the way investment activities are commonly organized on the Full Wall Street. If we continue on the current path, that pressure is unlikely to disappear.
But if Lilu chooses to build a different model, MER is ready to become an investor. What's noteworthy is that the story doesn't follow a typical formula. A young genius discovers a miraculous stock, his experienced mentor immediately invests, and everything changes. The first issue they discussed was finding an investment path that suited the nature of the business and its capital structure.
Lilu wants to research businesses with long-term prospects. If so, investors must also understand and accept a time horizon of many years. Lilu wants to avoid having to react to every change. If so, the fund must limit mechanisms that force him to trade solely to improve short-term results. Innovation here doesn't necessarily come from a more complex trading system.
This could come from removing unnecessary constraints and aligning the interests of the managers with those of the trustees. According to Lilu, he restructured the company in the spirit of Buffet and Merer's previous investment partnerships. He shifted to a model that prioritizes the long-term commitment of investors rather than trying to please every short-term inflow of capital.
That 's a change in system design before we can talk about a change in investment returns. Lilu itself stated that from the 4-year period of 2004 to the end of 2009, the restructured fund achieved an average compound annual return of approximately 36% after operating expenses. In his self-report, he cited a return of over 29% per year for the period from its inception in January 1998 to the end of 2009.
These are very impressive figures, but a serious study needs to pause before drawing premature conclusions. Firstly, these are the ratios published by Lilu herself , not the net asset value chain data that we have independently audited. Secondly, the two figures used represent two different time periods and operational structures that are not entirely identical.
Thirdly, we cannot definitively say that the entire improvement after 2004 was due to changes in fund structure, as investment results are influenced by company selection, entry points, market volatility, and even the recovery cycle following the 2008 financial crisis. However, there is something more important than simply comparing returns.
Lyu said that after changing his model, he could spend more time researching businesses that required less short selling and felt the work was a better fit for him. This is a personal account of this change in working methods . Well, it's not a cause-and-effect test, but it helps us understand why he considered this a turning point.
In an interview with Graham and Dotsville in 2013, Lilu also described the fund's remuneration structure at the time as being in the spirit of the Buffet partnership. No fixed management fee is charged. Investors receive a preferential return of 6% before any excess profit is distributed at a rate of 25% to the management.
He also stated that he would be investing his personal capital in the fund. That information demonstrates an effort to align the interests of both the operator and the depositors. We should not assume that the fee structure remains unchanged until now without more recent documentation confirming it.
At this point, we might ask how the story of an investment fund in the US over 20 years ago relates to an investor researching Vietnamese businesses today? I think there are three very practical questions. The first question is , does the timeframe of the investment proposition match the timeframe of the capital?
If we value a manufacturing business that is investing in new housing, expecting a payback period of many years but using the funds only a few months later, the investment itself contains a maturity contradiction. The pricing model might look great, but the implementation results could still be poor.
The second question is, how much of our time do we actually spend understanding the business? We might spend hours watching minute-by-minute price movements, monitoring rumors and foreign investor activity, but we don't read enough financial reports, understand working capital cycles, or verify the normalized profit assumption.
At that time, we were busy with stocks but not necessarily making progress in corporate analysis. The third question is, do we have a clear system for allocating capital? There is no need to specify any fixed allocation for all investors. What is needed is a disciplined assessment of the level of understanding, margin of safety, potential loss, liquidity, industry concentration, and opportunity cost compared to existing options.
For example, when studying a steel company during a downturn, instead of just looking at the low P/E ratio , we need to examine whether the new capacity is being translated into marketable output. What will the profit margin be per ton ? Is the free cash flow after investment sustainable? And can businesses withstand years of unfavorable steel prices ?
For electricity companies, it's necessary to consider contract profitability, fuel prices , mobilization capabilities, and environmental investment obligations. For pharmaceutical companies, it's crucial to understand the sustainability of cash flow, capital efficiency, and actual capital needs before concluding that a stock is cheap.
These examples illustrate how value-based research applies a mindset that isn't directly applied to the businesses we're analyzing in our data sources . The core principle is the same. Organize your research and portfolio so that the best insights actually have a chance to produce results, but always keep the risk within limits that can survive through repeated use.
There's a big difference between a success story told after the results are known and the story an investor has to live through when the future is still uncertain. Looking back, it's easy to only remember Lilu's high compounding returns, Charlie Munger's praise, or the multi-billion dollar scale of Himalaya Capital.
But behind those achievements was a period when he had to doubt the path he was taking. In the first year, he incurred a 19% loss on paper, clients withdrew their capital, and the pressure to survive prevented him from acting when opportunities arose. Then, a strategy designed to make the portfolio more stable led him to another job that utilized his long-term research capabilities, which he believed he possessed.
The lesson is that you shouldn't always buy and hold, and concentrating more capital doesn't necessarily mean you'll become more skilled. Value investing is not immune to errors in valuation, industry shifts, financial leverage, or the possibility of a good company being bought at an overvalued price.
The lesson is that investors must clearly understand what they are trying to optimize and whether their existing capital structure allows them to pursue that goal. You might have a good idea but lack the time to wait for it to develop. You might know of a business that's cheap but you don't have enough money to buy it.
You might have a sharp analytical system, but allow your attention to be diverted by fluctuations that don't create value. And sometimes the biggest mistake doesn't show up as a negative number in your account. It's impossible to act big enough when you truly understand a rare opportunity. Lilu found a different path after a conversation with Charlie Manger.
But what was it about Manger that made him change? What did the two of them discuss in depth regarding fund structure, long-term capital, and how to organize a true partnership? Why would a wealthy individual, with countless options for asset managers, choose to entrust their family's money to Lilu?
That will be the content of episode 3. As for us, I want to conclude with a question. In those failed investments , how often was the problem with the business, and how often was the problem with how we organized the investment? Thank you for following Value Lab Research. We approach investment research with one principle: understanding the business down to its roots, but also understanding the limitations of its owner.
This content is for research and method-sharing purposes only, not for making recommendations. See you in the next episode .
Comments 0