Guest Interview: Liviam Capital
(Edition Number: Ten)
Today, we are bringing you the tenth edition of the Investment Talk Guest Interview series, whereby I bring you some discussion with a selection of my favourite investors in the Fintwit environment.
Today’s guest interview features Liviam Capital.
Today we are welcoming Liviam Capital, a disciplined an experienced investor who claims to be in search of reinvestment moats, with a preference for big tech, cloud, Saas, fintech, and e-commerce. He also frequents Twitter, where he posts under the handle @LiviamCapital.
Influenced by legends such as Patt Dorsey, Munger and Buffet, Liviam is primarily in the business of searching for great companies that exhibit favourable reinvestment opportunities and optionality within their operations.
Originally stemming from a background in software development, it comes as no surprise that Liviam is interested in the sectors that we detailed earlier. Today, we explore the thought process behind his investing process, as well as an interesting rebuttal on Facebook, from our ninth edition guest, Kermit Capital.
As well as Liviam’s excellent Twitter feed, you can find some long-form writing on his substack page.
Introductions over, lets get into it.
Welcome Liviam. Thank you for agreeing to field some questions today, I am looking forward to this one, and I am sure the readers are too.
I typically start these things off by asking the guest to share with the readers a little bit of historic backdrop.
So, if you could introduce yourself, and take us through the sequence of events that led to you where you are today, and perhaps some flavour on the kind of work that you are up to. Perhaps also detailing what factors influenced your life in such a way that allowed you to discover investing.
Thanks for having me. I guess it all starts out with Apple. I’m a software developer by background (I’ve gone on to do different things since then), but when I got my first job out of college I was still living with my parents and all basic living expenses were paid for. This was around the time that Steve Jobs introduced the first iPhone to the world and I invested my first few paychecks in Apple.
I guess I was lucky that Apple did very well right away, because I can see now that ignited my passion and led me to devour anything related to investing that I could my hands on -- and that led me to studying Buffett and Munger. I did very well during those first few years despite some mistakes made in the name of diversification. Rather than invest everything I had in what I knew well, I decided to invest in banks, energy, etc. A few years later in 2008/2009, I lived through the great financial collapse, like anyone else investing at that time.
Right at the tail end of the recession, Apple was trading at the price I initially bought it at -- about $85/share pre 7-1 split and pre 4-1 split, and I decided to sell what was left of my portfolio outside of Apple and concentrate only on that. And so I would say I learned a ton in those early years with my investment in Apple, the results of diversification, and also having lived through the recession, which I know now was a great learning experience for a 23 year old to go through so early in my investing career.
After getting to know a little bit about your background it would be great to understand your investment process and goals. You state that you are mostly attracted to reinvestment moats, big tech, cloud, Saas, fintech, and e-commerce.
So, could you take us through your investment process, and perhaps outline why these areas are of most interest to yourself?
It wasn’t always this way, but I focus mostly on businesses that have plenty of reinvestment opportunities, or some might say businesses with moats early in their S-curves. And like so many people, I like to anchor my thinking around returns on invested capital, but there are two elements of that equation that need equal attention. The first part is to see the return on every dollar invested, but equally important to me is to look at how much is being reinvested in the business. The really special businesses are those that earn high returns on capital, with massive amounts of capital being redeployed towards future opportunities.
That’s really how you compound revenue and profits meaningfully over a period of time. To give you an example, I think Visa and Mastercard are maybe the two best businesses that have ever existed in terms of durability of moat, ROIC, and profitability. They absolutely just gush cash -- it’s astounding. Yet I don’t own either businesses because while returns on incremental capital invested are astronomical, they don’t actually invest all that much in the business. Obviously, the business is extremely capital light, but it’s also because opportunities for reinvestment are more limited.
Furthermore, any other business that Visa and Mastercard enter will achieve far worse returns on capital than their current business, because it’s hard to compete with the best business ever created. So, the best use of capital is probably to pay it out to shareholders through dividends and buybacks. There is absolutely nothing wrong with that. But the businesses I like are the ones that have considerable opportunity for reinvestment.
You have been investing for a considerable time. I am interested to know what about your investment style has changed over the years, and what led to those changes? This could also be a great question to lay out some of the biggest mistakes you have potentially made.
So you might be able to tell from my answer to question 2 that I’ve been influenced to some degree by Pat Dorsey. One of the things he mentions is that it’s better to invest in a business that’s building the moat rather than the moat that has already been built. I guess there’s some Peter Lynch in there too. But I would say I started off studying Buffett and Munger and my attraction mostly was to phenomenal businesses at first, with little attention paid to TAM and the size of the end market. I was extremely lucky in my investment in Apple.
For a long time, Apple’s performance was a result of a massively long runway for smartphone adoption. But once that market was saturated, and Apple’s revenue was highly concentrated in iPhone, Apple became a so-called “value" stock. And so I guess I became a value investor, too. I think subconsciously because I viewed Apple as so cheap and so good, that in order for me to find something to invest in outside of Apple it had to be cheaper than it or else why invest in it?
That led me to take a position in American Express back when it first lost the Costco co-brand partnership, and it was trading at something around 8x FCF. I also loved that Buffet owned it. But that investment turned out to be one of my biggest mistakes even though it did fine. It taught me a lot because around that time both PayPal and Square IPO’d and obviously they have each outperformed Amex by a mile, and the reasons are that valuation matters a lot less than reinvestment opportunity and revenue growth.
When revenue compounds meaningfully over time, there is almost (emphasis on almost) no price you can pay for a stock where it won’t do well. So the transition I’ve made is to marry phenomenal businesses with long reinvestment runways. Both are important. Also, because I’m trying to compound money over a period of time, I generally stay away from “value" businesses where you have to make a sell decision when the gap between price and value has been closed.
A quick question, and one for my own curiosity. As someone who recently exposed their identify on Twitter, we both have shared that experience somewhat recently.
What were the motivating factors that led you to doing that, and how have you found the experience?
It was a suggestion from someone I’ve learned so much from, but I had already been thinking about it for a while. I wanted to be more accessible to people, and I think that it’s been successful in that regard. I use Twitter as a way to meet people who love investing as much as I do, and having a real identity helps foster those connections.
So everyone knows that you are currently a Facebook bull. We recently had Kermit Capital as a guest here, who had some interesting comments about Facebook’s bear case.
I have attached a snippet from that conversation below, and I thought it would be interesting to hear a rebuttal, from yourself, on the points made. Moreover, if you would like to outline the brief bull case for Facebook, that would be great too.
I think everyone knows by now the challenges Facebook has had around data privacy, hate speech, anti-trust, and so on. I’m not oblivious to those things. But I think the right question to ask is whether those things will erode Facebook’s competitive position, which would then impede revenue growth rates and its profitability. The answer to that question has so far been proved out in Facebook’s results over the last few years — it’s a resounding no.
And you can see it in a number of ways:
1) The network itself is still healthy on both sides — people generally don’t leave Facebook and the number of advertisers keeps growing and;
2) The numbers are still remarkably good. Revenue growth in the most recent quarter was 33% and FCF growth was 89% if my memory serves me well. Operating margins came in at 46%. So, while it may be difficult to do, it helps to separate your personal opinions from what is fact.
Saying you despise management without also acknowledging the depth and complexity of the issues they have had to face is probably a bit unfair. I think Facebook management is superb, and I don’t buy into the hyperbole I see on Twitter. Some may not agree, but I really do believe Facebook has been a net positive for society and especially for the economy. 200 million businesses use Facebook for free and 10 million businesses use Facebook’s paid advertising tools to find customers. I don’t have data around this, but empirically I believe that Facebook is a large part of the economic growth we are experiencing.
Regarding the comment on optionality, it is totally rational to say that Facebook needs to have the trust of consumers to exercise the call options they have in AR/VR, E-commerce, payments, etc. But there’s been absolutely no evidence at all that customers have not been open to Facebook’s newer innovations, and in fact the opposite is probably true. Oculus has been a clear hit. Portal has been widely accepted by consumers despite being released in the midst of all the privacy issues, and even though it is literally a camera in your living room. It’s quite clear already that Instagram is on to something big with Shopping. “Other" revenue is growing at 150%+ so clearly there have not been issues in that regard. Again, it’s another case of conflating fact and personal opinion.
Finally, a reminder to the bears that at these prices, even if you’re right about the business you could be wrong about the stock. Relative to their growth rates and opportunity set, the stock is extremely cheap in my opinion. If Facebook continues to perform as they have been, forward returns will be fantastic for current shareholders.
I recall that your previous Twitter avatar was a portrait of Mr Warren Buffet. Which investors would you say have most influenced your own style of investing and why?
I started as a student and a fan of Buffett and Munger. More recently I’ve been influenced by Pat Dorsey, Brad Gerstner, Dennis Hong, and Fred Liu. There’s also some fantastic people I look up to and learn a lot from on Twitter, who I don’t value any less. It’s important to curate a list of people you want to learn from and just surround yourself with them. I’m also a big proponent of working backwards — look at a position they own and ask yourself “why?".
The key thing is to learn something from everyone and apply your own thinking and set of principles to it. I think you reach investing nirvana (if there is such a thing) when you have a clear idea of who you are, but are also open to change. It also helps to have a little bit of paranoia, and that’s going to keep pushing you to get better.
Next, I wanted to discuss position sizing and concentration. Everyone I interview has a different view on this topic, so I find it useful to gather perspectives from several different investors.
So, I am wondering if you can provide us some colour on your allocation approach. Is there an upper-bound that you will allow a position to grow into? What are your thoughts on the sizing for new positions? How do you feel about concentration? I would be keen to hear you share your thoughts on this matter.
I used to be more concentrated in my approach because I really did believe that was required for outsized returns. I think it’s clear based on the performance of Ark and other ETF’s like WCLD and OGIG in 2020 that concentration is not a requirement. If you run a concentrated portfolio, you’ll probably need to focus more on downside risk and moats.
But for greater reward you do need to add an element of risk into your portfolio — and by that I mean smaller businesses with less defined moats, but with longer runways. So my portfolio is essentially big tech, which is a good balance of risk and reward at these prices, and many smaller positions in businesses that are less established but have higher upside. In terms of sizing new positions, there’s no set formula and it’s mostly just about comfort level. I generally don’t trim if they get too large, either.
A question I like to ask everyone now. I have seen your book collection, which is impressive. Could you please outline three books that you have gained the most value from? This can be related to any aspect of life, as well as investing.
Admittedly, I don’t read as much as I once did. Some of my favourite books are “Shoe Dog" by Phil Knight and “The Ride of a Lifetime" by Bob Iger. Those are easy to read because they are great storytellers. I also like some of the more popular ones like “One up on Wall Street", “The Outsiders", and “100 baggers". Personally, I’m at a place in my life where I think books are a bit overrated and critical thinking is highly underrated.
Obviously, one is supposed to help with the other but Twitter and Youtube are just as effective if used properly, maybe even more so. It’s sort of like that Mark Twain quote: “Don’t let schooling interfere with your education". The purpose is to learn as much as you can everyday. That’s the desired end result — get there however you may.
Luck. Skill. Mindset. Three very influential components to investing.
My question to you, is how do you view the relationship between these variables in investing, and to what extent would you say each is important over the short and long term?
Obviously the shorter the time frame, the more luck plays a part. Maybe that’s why I like to think in longer time frames subconsciously, because luck becomes a smaller part of the equation. I don’t think you can completely eliminate luck though, especially because you are investing in businesses and luck plays a part in their success too.
I think mindset governs everything in your life and can determine whether you have the capability of acquiring the skills required to do well in the first place. Having the right mindset can go a long way, and that’s probably the most important of the three you mentioned.
Skill is just an output of practice and that itself is an output of having a deep passion. So to be a great investor, I would say it’s important to have the right mindset and to be passionate about it, and when those two things align, you might find that you’re also luckier. It really is like that quote: “The harder I work the luckier I get".
Do you feel that a portfolio that allows you to get a good night’s sleep is important for those investors with a considerable time horizon?
You should not be losing even a minute of sleep because of your portfolio. If that’s the case you probably should consider changing things up or just indexing. For me personally, I don’t lose sleep at all, but I do need my portfolio to reflect who I am authentically for me to feel completely aligned. So that’s something people may not consider, if you’re investing in meme stocks but deep down you’re a value investor, it might affect you.
If you’re a growth investor but investing in deep value stocks, that might affect you similarly. This is where knowing yourself is important. If your actions are aligned with who you really are, I think stress goes away immediately.
When assessing a company. What are the must-have factors that must be present in the company before you would even consider allocating one ounce of capital into their business?
It’s the two components that I mentioned earlier. It’s got to have good returns on capital with ample opportunity to reinvest. Now, if I had to choose one or the other, I would pick the better business even if it’s a more mature market. But I do like to see a business that has plenty of runway.
The idea of call options is important and this is kind of an extension of being a good business with a long runway. I mentioned Visa and MasterCard in a previous answer -- great businesses but limited in reinvestment opportunity. When I look at a business like Apple, even though iPhone is saturated and the end market is more mature now and revenue growth is slowing, I still think it’s a better business than Visa and MasterCard, and the reason is that Apple has optionality that is almost unlimited. The call option on “One more thing…" is unbelievably valuable. This is exactly the sort of thing I look for in a business.
I regard an Investing Policy Statement in high regard. I think every investor should write one, even if its brief. In my own IPS, I have a segment which outlines the red flags, or circumstances, that would allow me to sell a position.
I am curious, what are some of your ‘sell-rules’?
Generally I optimise around my buy decisions so that I never have to make a sell decision, which is the reason I stay away from “value" stocks in the first place. I don’t really like to sell for any reason aside from the business not being wonderful anymore, for one reason or another. I’m a firm believer in compounding, and as Munger puts it: “The big money is not in the buying and selling, but in the waiting". So that’s my worldview.
Very infrequently, I will sell a business if I believe it’s just “not for me". I know that’s a sub-par answer but I will say that alignment with who I truly am is important to me. For example, I sold American Express and bought Alphabet when I realised that my style was shifting from value to growth.
Lastly, I like to round-off this segment with my favourite quote, that comes from Graham. The one concerning the short-term voting machine and the long-term weighing machine. I find it helps me reconcile the irrational price action in the near-term.
I do not know who first coined it, but another of my favourite quotes is “If you don’t laugh, you’ll cry". I find this quote helps me appreciate the randomness of life and the lack of control we have over external factors.
What is your favourite quote, and why? Feel free to pick a few if you like.
There are a ton of quotes that have had a major impact on me, aside from the few I’ve already mentioned in this interview. Behind my desk at work I have the Teddy Roosevelt quote and speech “The Man in the Arena". “It’s not the critic who counts, not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better". It’s been a rallying cry in my life and helps me stay focused on my own path, and not worry about what others say or think.
One from Buffett that I don’t see being mentioned too much: “Someone is sitting in the shade today because someone planted a tree a long time ago.".
I think company slogans and quotes from CEO’s can go a long way in capturing the DNA of a business too, so I love thinking about them. Here’s some examples:
Mark Zuckerberg - “Move fast and break things"
Jeff Bezos - “Obsess over customers, not competitors"
Steve Jobs - “Simple can be harder than complex"
Tobi Lutke - “Shopify is trying to arm the rebels"
Questions from Twitter:
In this segment, we collected questions from the Twittersphere, and present them to Liviam.
@Wow22233: “What led you to an investment style of only investing in potential 10 baggers or FAANG?"
I think I answered this somewhat in a previous question. The short answer is that the risk/reward for big tech remains attractive, and I’m trying to round out the rest of my portfolio with businesses that can add upside to Facebook, Alphabet, Apple, and Amazon.
@Niv75566872: “What is your expectation for $CDON in the next 5 years?"
I don’t have a strong opinion on CDON because I haven’t done the due diligence. Marketplace economics can be great but the question is really about competitive positioning in that area, and I have no knowledge there.
@crembo97: “What platform do you use to invest?"
Schwab and InteractiveBrokers.
@inves2grow: “My question - What is your basic decision process or system for deciding to invest (or not)?"
I spend time thinking about the business itself, it’s competitive position within the market, and the end market. If the business meets my criteria (reinvestment moats with long runways and good economics) and I’m comfortable with the forward returns, I’ll invest.
That wraps up today’s guest newsletter, which marks the tenth edition of this series. I want to thank Liviam for taking the time to answer these questions today.
Liviam is a wise egg, and I get a lot from his Twitter feed.
Would like to say a special thanks to all the previous guests here too, after reaching a mini-milestone in ten editions of this series. I always aim to ensure the quality of the guest is of the highest’s regard, those with unique insight and processes. I am satisfied that I have hit that benchmark with each guest so far.
Stay tuned, as we have some excellent caliber guests lined up for you in the coming weeks.
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital