How We Invest: Vision Capital Fund Owner's Manual

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We will invest Vision Capital Fund's capital only in publicly listed stocks, making us part owners of businesses.

According to Jeremy Siegel's research in the 6th edition of his book "Stocks for the Long Run", over the past 220 years (1802-2021), stocks have significantly outperformed long-term bonds, short-term bills, gold, and inflation.

Vision Capital Fund's investment mandate is global, meaning we can invest in any stock globally from any country's stock market.

At Vision Capital Fund, we are committed to a long-term investment strategy. We aim to invest in the best stocks, believing they will follow their trend of business returns, appreciate over time and create generation-changing wealth.

Below are the constraints we have placed on Vision Capital Fund:

• Own up to 50 individual stock positions at any time
• No individual stock can exceed 25% of the fund's assets under management (AUM)
• Will not use leverage/margin in any form
• Will not engage in short-selling
• Will not hedge its exposure or use any form of currency hedging
• Will not use any derivatives (i.e. options, etc.)
• Will have no geographical or sector concentration limits
• Will cap annual net fund inflows at 10% when fund AUM exceeds US$25m 

In short, Vision Capital Fund is an investment fund that will invest only in stocks worldwide, with a long-term buy-and-hold approach. We are not convinced that we have a persistent advantage in market timing, hedging, FX movements, using leverage/margin, or derivatives. 

Thus, we want to avoid engaging in any of these activities, incur unnecessary costs, and take our time and attention away from what we should focus on and do the most: long-term investing in businesses.

Despite the first stock market being established in Amsterdam over 400 years ago in 1611, one thing remains: the stock market is still a place to buy and sell stocks, and stocks are part-ownership stakes in businesses.

Therefore, a stock's long-term price movement will depend on the performance of its underlying business. If the underlying business does well, its revenues, profits, and free cash flows should grow. That should make the company more valuable and drive the valuation of a business higher, and accordingly, its stock price to rise over the long term (i.e., years and decades). 

The chart below shows a high correlation between the rising S&P 500 and its growing earnings per share (EPS) over the last 80+ years. Thus, we seek to do well by owning companies that can keep growing revenues, profits, and free cash flows for the long term while riding through frequent short-term market price volatility.

We are long-term optimists on the stock market. Businesses improve people's lives by taking a share of the economic value they create through innovative and quality products and services that customers are willing to pay for. 

That said, prices matter, even if it is for the best businesses in the world. Overpaying excessively and even a great company can be a horrible investment. If stock market valuations become ridiculously high, similar to the 1960s Nifty 50 bubble, the 1980s Japan bubble, and the 2000 US dot-com bubble, that could temper our optimism significantly.

As mentioned earlier, Vision Capital Fund will only invest in stocks, but we are not investing in any stock. We seek to own long-term compounders that become multi-baggers, companies that go up 5x, 10x, 20x, 50x, and 100x+ while enduring frequent drawdowns. 

Like venture capital investing in early-stage startups, power laws also exist in the public stock market. The top ~1% of globally publicly listed companies (i.e. 632) accounted for ~90% of overall net returns. Utilising our bottom-up fundamental analysis combined with a top-down search for structural tailwinds, we focus on the best companies that matter.

We will invest most of the fund's capital in durable, quality compounders. These have a proven track record of growing revenues, profits, and free cash flows, and are capable of reinvesting at high rates for years and decades. 

"Where a company's revenues, profits and free cash flows go, the stock price eventually flows" - Eugene Ng

The companies that excel tend to have all or most of the following ten criteria:

1. Large & growing total addressable market riding long-term secular tailwinds
2. Earlier in the growth phase of a company’s S-curve life cycle
3. Top dogs, innovative disruptors with market structures that become monopolies, duopolies, and oligopolies, where winners take most
4. Strong & durable competitive advantages, prefer network effects.
5. Highly recurring revenues, scalable, with strong operating leverage
6. Strong consistent/growing profitability with strong reinvestment opportunities
7. Strong balance sheets, preferably little to no debt, definitely net cash
8. Founder-led leaders, strong management with high integrity, capability, innovative mindset, strong culture, and high insider ownership
9. Should pass the snap test and preferably have some form of optionality to keep growing and stack new S-curves
10. Lastly it must be changing and shaping the world for the better

These criteria often lead us to top companies that can continue growing revenues and profits and ultimately generate free cash flows for long periods, which should contribute to the majority of long-term shareholder returns.

We choose to be long-term investors in stocks because structurally increasing the length of our holding period increases our probability of positive returns. 

That is why we focus only on the long term, years and decades, and psychologically and emotionally shut out all the daily, weekly, monthly, and quarterly short-term noise.

To us, great stock investing is about swinging the probabilities and payoffs in our favour. We want to lose less often and lose less, then win more often and win really big. 

First, we try to lose less often. We know what bad traits to avoid, which allows us to avoid most losers. 

Second, we lose less badly. The maximum downside of being long-only is limited at -100% and not unlimited because we do not short-sell or use any leverage, derivatives, or hedging. 

Third, we aim to win more often because we know what qualitative and quantitative traits to seek for the companies that are more likely to win. 

Fourth and lastly, we tend to win much more, driven by the near-unlimited upside from the gains of the multi-bagger winners, which tend to overwhelm all the losses of the losers many folds over.

This allows us to generate very favourable long-term asymmetric return-risk profiles. Every stock position is like "being long a call option" (limited downside, unlimited downside), and the overall portfolio is structured to be like a "synthetic long call option".

If we do this right and remain consistent in our investment framework and philosophy through time, power laws will become increasingly evident in this near-infinite game. 

Our slugging ratio (gains from winners versus losses from losers) will gradually increase over time, and a few long-term winners typically drive the majority of portfolio returns. We will get it wrong and have losers occasionally, but they matter far less. Concentration then becomes an outcome rather than a process.

A robust investment analytical framework and process are necessary for finding great companies to buy. At any one time, we have a dynamic shortlist of ~70-100 companies that meet our string investment criteria.

All intelligent investing is a combination of growth and value. There are four drivers of long-term stock market returns, namely: (1) growth of earnings / free cash flow (FCF), (2) change in valuation multiples (PE or EV/FCF), (3) change in shares outstanding (buybacks/dilution) and (4) dividends. 

Our strategy primarily focuses on the first three drivers. This approach guides us to invest in excellent, durable, growing, and profitable compounders without overpaying for them excessively.

Portfolio construction and allocation of when and how much to buy, add, and sell are even more critical. We do not seek to play an investing game of buying $1 coins for 50-70 cents and then selling them when they go to 90+ cents. 

We prefer to pay more, $1.30-1.50, for premium-quality $1 coins that can become $10 or $20. More often than not, we buy companies that are "expensive" on a current basis but are "cheap" on a forward basis because of the future potential growth of FCF. In the former, price is the margin of safety; in the latter, durable growth is our margin of safety.

Vision Capital Fund's long-term investment return should closely reflect the weighted average long-term business performance and growth in FCF per share of the stocks it owns.

The medium-term revenue growth of the companies that we own should generally exceed 15-25%+. Most of these companies typically still have the potential to maintain and/or expand FCF margins, leading to even faster FCF growth of 20-30%+. 

Essentially, to outperform the benchmark index (i.e. S&P 500), we have to own faster-growing companies. These companies must be much more profitable, have stronger balance sheets, run by stronger and solid management, and not be bought at too high a price. 

We strive to remain disciplined and not pay ridiculous prices so that even after assuming valuation multiple contraction glides, the long-term business returns will drive our long-term investment returns.

The power of long-term compounding of winners will drive the asymmetry of our shareholder returns and, in turn, alpha, which should eventually drive our long-term outperformance versus the benchmark.

Excellence is a cornerstone of our investment principles and plays a massive role in how we think about asset allocation. 

We invest by finding excellence, buying excellence, holding excellence, adding to excellence, and selling mediocrity. We allow our winners to run high, preferring to add to our winners than our losers. We like to water our flowers anytime, not our weeds.

We typically buy companies earlier in their S-curve and sell and exit them when they are structurally reaching or past the peak of their S-curve. We buy far more than we sell, and if we ever sell, it is because the company's fundamentals have structurally deteriorated rapidly beyond our thesis (e.g. low single-digit revenue growth rates). 

Losers typically become insignificant. We stay highly focused on the business narrative, not the price narrative. In addition to our detailed investment thesis, we constantly monitor our portfolio companies' quarterly/semi-annual earnings and any significant developments.

Vision Capital Fund seeks to invest in the stocks of the world's best and fastest-growing profitable companies at reasonable prices and hold them for a long time. The more we trade, the less accurate our accuracy and the lower our returns will be. 

We see ourselves as part-owners of businesses, not traders of one. We don’t simply rotate out of them just because they are temporarily out of favour.

By design, we seek to actively do nothing most of the time, we target for the portfolio turnover to be lower than 20% (i.e. 5+ average holding period) and it should be significantly lower than the industry average.

Occasionally, the stock prices could run ahead faster than the businesses themselves from time to time; instead of trying to trade them, we see the stock price as just being temporarily ahead of itself, the business.

At the launch of Vision Capital Fund, we will start with 15-20+ stocks that represent our highest conviction, grouped by allocation into three buckets based on the attractiveness of their returns and risk: (1) ~7.5%, (2) ~5.0%, and (3) ~2.5%. 

The intention is to allow winners to run but mitigate risk; no stock can account for more than 25% of Vision Capital Fund's AUM. To avoid diluting our performance by owning too many companies, the fund can only own up to 50 different stocks.

We expect to stay fully invested at all times, 80-95%+. We will not attempt to time the market by managing the percentage of the fund's portfolio cash holdings. We do not have a durable advantage in timing the market for both buys and sells (and only a few can do it consistently). We believe timing the market is a fool's errand and a money-losing exercise for most. 

It is time in the market, not timing the market. It is far better to stay in the market because if we were to trade and miss the best days, that could significantly erode our returns. That said, if we run out of investment ideas or stock prices become ridiculously high, we will not allow new fund subscriptions from new investors or top-ups from existing investors. If needed, we will return capital to our investors.

When Vision Capital Fund needs to raise cash to meet investor redemptions, we will have to sell stocks if there is insufficient cash balance. In such cases, the first candidates for sale would be the companies with the weakest business performance in the portfolio. We want to sell our losers and trim our weeds first.

Conversely, when Vision Capital Fund receives new capital from investors, our preference would be to add to the companies in the portfolio with the strongest business performance or any companies that could be going through a near-term price selloff due to the market overreacting on something that we think is non-structural and have a very chance of recovering. 

As mentioned earlier, Vision Capital Fund will own up to 50 stocks. Each stock cannot exceed 25% of the overall portfolio. While there is no stated minimum, we generally prefer to own at least 15-20+ stocks.

Unlike some fund managers who favour a more concentrated portfolio of 5-10+ stocks, we prefer to invest in a broader selection of companies to spread risk and avoid over-diversification. We are not comfortable managing a portfolio with only a handful of stocks.

Our approach allows us to be more tolerant of the price declines of our positions. This resilience is a key factor in our strategy, enabling us to endure and allow our winners to really run without being forced to trim them too early on.

Allocations will not be sized equally. They will be sized depending on our conviction and risks of the business and our confidence that it will grow and deliver the returns versus the price at which we bought it.

Over time, the portfolio should become more concentrated as winners become more significant. Generally, the top 15-25 positions should account for 70-90 % + of the overall portfolio.

While our investment mandate is global, given the current opportunities, we still see numerous attractive opportunities in US publicly-listed companies, and we expect them to account for the majority of the portfolio holdings of ~70-90%+.

It is essential to understand that price volatility and risk are different. Volatility, or more specifically price volatility, is the measure of stock price fluctuations over a short period. However, it is a common but unfortunate misconception that many market participants equate this with risk. 

Instead, we see risk differently. We see risk as the chance of a permanent loss of capital, and risk can appear in individual stocks in a few ways:

1. High inflation: Persistent high price increases, which results in high nominal interest rates, FX depreciation, and loss of purchasing power of money.  

2. Confiscation: When government authorities seize assets by onerous taxes or through sheer force.

3. Devastation: Through acts of war, anarchy, and natural catastrophes.

4. Extreme valuations: When stocks carry valuations that are too high.

5. Management fraud: When a company intentionally inflate and misrepresents financial information to deceive.

6. Bankruptcy: When a company goes bust and becomes insolvent, unable to pay its debts, and its stock price goes to zero.  

We will not manage Vision Capital Fund's portfolio to smooth out price volatility. Our portfolio Sharpe ratio, or any return/price volatility metric, will be highly volatile. It will be very high during good years with upward solid momentum and low volatility and be poor during market selloffs when our holdings often decline faster and more than the market. We see price volatility as the admission ticket and the price to pay to be an investor in companies.

Instead, we are managing Vision Capital Fund's portfolio to lower the chances that it will suffer a permanent or near-permanent capital loss. 

Below is how we try to handle each source of risk:

1. High inflation: Diversify across geographies. Look for companies with the pricing power to raise prices and the ability to grow much faster than inflation and FX depreciation.

2. Confiscation: Invest in markets with relatively stable political regimes and economies where the government has a history of respecting the rule of law and shareholder rights.

3. Devastation: It would be similar to Confiscation for war and anarchy. For natural catastrophies, focus on ascertaining if the business can still operate as an ongoing concern when such a disaster happens. That said, in a very remote scenario, if the world were to come to an end, we would suffer an unavoidable significant permanent loss.

4. Extreme valuations: Compare a company's valuation history against history and our views on the company's potential future growth.

5. Management fraud: Study the management team deeply, understand their backgrounds, hiring, and compensation, and watch for unusual intercompany or related transactions. Diversify so the portfolio can still withstand the hit. Avoid companies with poor Glassdoor employee ratings.

6. Bankruptcy: Invest in companies with (1) strong balance sheets, most of which would be net cash, (2) a solid ability to generate free cash flow, and (3) operating in industries riding secular tailwinds.

Bear markets and recessions will occur. We will not attempt to avoid them because we do not have the skill to perfectly time the numerous selling and buying of all our portfolio companies, and we do not think anyone can do it reliably for long periods either. 

Regardless of bear markets and recessions, our game plan remains the same: stay invested and not time the market to seek to avoid the worst days, because it is time in the market and not missing the best days that matter.

We will invest in growing high-quality compounders who are top dogs riding secular tailwinds with strong balance sheets, run by solid, honest and capable management, with highly recurring revenues generating strong free cash flows. 

These businesses should be well-equipped to survive and even thrive during economic downturns. Owning companies with solid fundamentals will likely limit the business downside, correspondingly, Vision Capital Fund's portfolio over the long run.

You should note as well:

1. Recessions are normal because economic activity follows business cycles. On average, recessions occur every 5-20 years. We can’t perfectly time recessions; it is not about avoiding them but owning the best companies to endure them.

2. Price declines are frequent and to be expected. Historically, markets decline 5% a few times a year, 10% every year, 20% every few years, and 30-50% every few decades. 

Remember, stocks go down faster than they go up in the short term, but they go up more than they go down over the long term, which is the only term that counts.

We are psychologically built to be contrarians. During massive selloffs, when the markets are fearful and pessimistic, we are excited and see these significant declines as attractive shopping opportunities with price discounts to buy more of our highest-conviction companies at lower and cheaper prices.

In short, recessions and price volatility/market selloffs are features of financial markets, not bugs.

To us, investing involves:

1. Gathering lots of facts and information.
2. Analyzing long-term trends backed by solid data.
3. Applying critical and independent thinking from a first-principles perspective.

We are constantly seeking to filter long-term trends from short-term noise.

We get our investment ideas by reading widely to identify the most significant markets and industries driven by long-term secular tailwinds with favourable market structures and highly durable and profitable unit economics.

Our goal is not just to invest, but to invest in the best available companies. We seek out the top companies that are publicly listed, providing innovative, highly scalable, valuable products and services that customers are willing to keep buying and paying more, backed by solid management with happy employees that most likely do well.

Over the numerous years of our investing careers, we have built a latticework of mental models and a knowledge library to help us identify the best publicly listed companies to invest in.

The core principle that grounds us in our thinking is having strong but loosely held convictions. When the facts change, growth decelerates rapidly, and the trends reverse, we, too, have to change our opinions and make the necessary adjustments to the portfolio.

There are four advantages that a long-term investor can have, namely: (1) informational advantage, (2) analytical advantage, (3) behavioural advantage, and (4) philosophical advantage.

Financial markets are undoubtedly becoming more efficient than they used to be. With the internet, anyone can now access information that was reserved mainly for privileged investors in the past. This easy access to information combined with more data analytics has eroded any "informational and analytical edge" and levelled the playing field.

Despite the increasing efficiency of financial markets, it is still possible to outperform. The abundance of data and information has, in some ways, made the market more myopic and focused on short-term numbers, creating opportunities for those with a long-term perspective. 

Many market participants' quarter-to-quarter fixation causes even greater short-term volatility in stock prices. Because we see price declines of still solid businesses as attractive buying opportunities to provide higher potential future returns. 

The unfavourable stock price volatility that most wish to avoid, can create frequent price-value opportunities in even the largest companies in the world for long-term patient investors to exploit.

We are focused on riding long-term secular trends and tailwinds and avoiding short-term fads. We know that a company's growth path might be rising over time, but it is far from linear; it will zig and zag. 

At Vision Capital Fund, we are committed to a long-term perspective. We are patient and provide our companies with sufficient time and space to navigate through temporary weaker and more challenging periods. Our focus on each company's key business drivers and long-term trends allows us to concentrate on what truly matters.

At Vision Capital Fund, our investment philosophy is unique. We ensure that our portfolio companies align with our vision of the future, contributing to positive change and shaping a better world.

We will refrain from investing in companies that can harm our environment and society in the long-term, that create products to harm others and/or feed on addiction. That includes sin stocks from tobacco, marijuana, gambling, adult entertainment, and alcohol companies, etc.

We believe great companies can be found in all corners of the world, and having a broad global investment mandate allows us to take advantage of any attractive global opportunities we might come across.

Through Vision Capital Fund, our goal is to provide you with the opportunity to invest in and become part-owners of some of the best companies around the world, which are run by some of the best CEOs working for you.

There are no guarantees in the financial markets. We deal with ranges and probabilities. We cannot guarantee our investors any return. However, our target is an annualized net return of 15% p.a. after all fees or more for Vision Capital Fund's investors over the long run (5-7 years or longer).

We have to caution you here. The stock market is very volatile, and significant market declines are frequent and to be expected. 

We are very likely to experience even higher price volatility. When markets fall over shorter periods, we tend to fall more and faster than the market, but when markets rise over longer periods, we are more likely to increase by much more; this is how we think we will do over time.

That said, we believe in the stock market's long-term potential. Historically, stocks have been among the best asset classes for generating wealth. By finding the best compounders and investing in their stocks for the long run, we believe Vision Capital Fund can do very well for our investors in the years and decades ahead.

When Warren Buffett was running his Buffett Partnership in the 1950s and 1960s, he wrote:

“While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the [market]. If any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter would be three years covering a speculative explosion in a bull market.”

We couldn’t agree more with Buffett. We hope that you, as an investor in Vision Capital Fund, will judge our performance over a minimum of 3-5 years.

We are not aiming to be the best or in the top decile in any given year; rather, we aim to be consistently and durablely above average on a cumulative basis for a long time.

If we can be above average for a long time and last longer than others, eventually, we think we will get a good chance to become one of the best investors out there for you.