32-year-old Intern
Have you heard of that old adage: “Sometimes you have to take a step back to make a step forward?” Well, in December of 2019, I did just that. After more than 10 years of work experience, two degrees from well-regarded universities, a track record of investing, building and growing businesses, leading teams, and launching new products, I chose to become an intern at the ripe age of 32.
Let me tell you how I came to that decision. Fred Liu, the Founder/Managing Partner of Hayden Capital, a New York-based hedge fund, sends out quarterly letters for the fund and regularly encourages interns to apply to work with him. Now, when he does this, he’s typically picturing some wide-eyed, bushy-tailed 20-something-year-old who is trying to break into the industry and is moldable and coachable. I don’t think he was picturing, well… me. But when he announced in his Q3 2019 letter that he was looking for interns, I decided to throw my hat into the ring.
There were a few reasons why I thought this would be a fantastic opportunity: First, I’ve known Fred for a few years now, and some of Farrer Wealth’s clients and principals are investors in his fund. As an investor in a fund, there can be no better way of getting to know a fund manager other than by working with them. As a trusted advisor for my clients’ capital, I owe it to them and their capital to do whatever diligence I can on an investment before I recommend it to them and even after the recommendation, ensure I stay diligent. Second, Fred is one of the best investors I have met at specifically, identifying flywheel models, breaking down the unit economics of a business, and at paying attention to the value of scuttlebutt. I knew the chance to learn these things from him would be invaluable for my own career (which I hope lasts another 50 years).
The decision to intern for somebody else this far into my career didn’t come easily for me. My old friend, ego, got in the way; The reasons for this are simple and as usual with these things, incredibly petty/short-sighted. For one, I’m older than Fred, not by much, but still older. For another, I have more work experience than he does, and a greater variety of experience. Third, on paper I have more degrees than him (although he is a CFA charter holder). Fourth, I run my own investment advisory so at this stage, would it look weird for me to intern with someone else? What would my current/prospective clients think? Shouldn’t I know everything already?! Lastly, I’m not always agreeable when taking direction from others - it’s one of the reasons I work for myself.
See, I told you, petty. But, after grappling with these unimportant issues, and after some encouragement from my wife and a friend (who, incidentally, also interned with Fred and is older than the both of us!), I decided to reach out.
To his immense credit, none of my qualms bothered Fred in the slightest, and he was very encouraging and open to the idea. So after a couple of weeks, we got started on our journey, and boy oh boy, was it one of the best decisions I ever made. I’m not sure if it worked out as well for Fred, but hey, that’s his problem :)
What I learned:
It was a delight working with Fred. We worked together for about four months, and would speak every week/biweekly, typically at 5:30 am Singapore time (my idea, not his) for several hours. We started by exploring a number of companies, discussing them in detail, doing quite a bit of on-the-ground-work and then narrowing it down until we were focused on just one. In this case, we focused on Afterpay, a buy-now-pay later company based in Australia, but expanding in the USA. Now, I’ll talk about the end result in a while, but first I want to highlight what I learned from the process.
Only work on investments you find exciting: This was a simple, but important revelation for me. When we first started, we short-listed about 5 companies that we thought were valuable to research, and just when we were about to wrap up the call, Fred said: “Oh, by the way, if you’re going through these and find any of them boring, just leave it and move on to the next one.” Now, as analysts we are sometimes led to believe that we should know a bit about everything, and should apply tools we’ve learned in school to any industry. But as an Investor, especially one who thinks of buying parts of a business rather than a stock, and one who plans to be invested over a long period of time, the business has to excite you. Excitement is different for different people (nothing puts me to sleep faster than a Pharma company’s 10K). If you like the business and are excited by it, you’re going to analyse it better, learn more, push harder to understand the underlying economics, and constantly follow it. The excitement-driven hard work will make your thesis stronger and help you hold on when the company has a few bad quarters. This simple message was quite profound to me, and reinforced my belief you don’t need to know everything, but really only need to invest in a few companies that you’re excited about. And the beauty about public market investing is that because the universe of potential investments is enormous, you are bound to find a few businesses that make your heart flutter.
There’s no information quite like first-hand information: Reading 10Ks, investor letters, and earning call transcripts are a must, but sometimes the most important information you get about a company is what you do away from the reports/excel sheets. We’ve talked about the value of scuttlebutt before, but every time I put it into practice, I see how valuable it is. There’s nothing quite like cementing your thesis and conviction behind an investment than first-hand information. In this case, we did do the typical speaking to past employees, merchants, competitors, etc. However, a really fun aspect of researching Afterpay was following social media, in this case, specific Facebook groups. Afterpay has an almost maniacal fan base and when they love something, they shout it from the rooftops (or in this case on the Facebook groups) and when they’re upset, it’s not hard to know. We learned a great deal through ‘going undercover’ in these groups, especially about Afterpay’s strengths/weaknesses and how they shaped up against their competitors (turns out – they shape up very well).
Ask simple questions: One day while asking discussing Afterpay Fred posed a very simple question, “why now?” He was essentially asking why has buy-now-pay later been exploding now. I almost thought it was too simple of a question, with an obvious but lazy answer: technology. But I held my tongue and we dived into it, and over the subsequent weeks, we discovered the declining trends of credit vs debit due to the 2008 crisis, the history of laybys, the change in millennial and Gen Z consumer habits, and the push towards shifting credit risk from the consumer to a third-party. These answers formed the basis of our thesis which we built on, and really got us excited about the product. And all of this was driven by a very simple but deep question. I’ve often found it’s the simple questions that make the best ones – questions like “why now?”, “why them?”, “why does it work?” Just on this topic, I read a phenomenal article from 2016 by Tim Hanson that explains the simplest questions are the best, but we are often too embarrassed to ask them. I won’t go into the article (do check it out, it’s a quick read), but this chart highlights the crux of the message.
Quantify what you can: Whenever possible, Fred looks to quantify a thesis. For example – we were told anecdotally from merchants that Afterpay sends millions of leads to merchants every month. Now, on its own, this is fantastic because merchants (and any business owners) love to receive sales leads. However, we found it would be more powerful to our thesis if we could translate these words into numbers. This led us down an exercise of comparing (see links at the end of the write-up for our research) what apparel merchant margins look like if they received a lead from Facebook/Google versus Afterpay. The difference was astounding and pushed a first-time customer from loss-making to profitable. This exercise really made this thesis stronger by proving to us that the Afterpay flywheel was legitimate and spinning quickly.
Get buy-in: This one doesn’t have much to do with investing, but is great for general management. Whenever Fred suggested a certain path, he always got buy-in from me by asking “does that sound okay?” or “would you rather do it differently?” I found this amusing at first, because being the good Asian boss I once was, I usually commanded rather than requested (something I learned the hard way not to do!). The simple buy-in made it seem that the decision to go down that path was mine, and I was not directed to do so. It made the process much more of a team-effort (which in the end it really was) and much more enjoyable.
Why it matters:
The lessons: Ask any investor to list their favourite activities is, and that list will inevitably contain something about reading the investor letters of other investors they admire. While the industry is competitive, one of the best parts of it is the information sharing that goes on between investors, and the more that is written/podcasted/tweeted, the better off everyone else is. The great thing about investing is that it’s not a zero-sum game, value is infinite. By interning with Hayden Capital, I got to experience the writings in its investor letters first hand, and picked up skills and understandings that will last throughout my career. Now granted, I wasn’t a typical ‘intern’, as I came with my own experience, my own track record, and own ways of doing things (some of which Fred happily adopted), but even then I’m sure my learning was just as deep and useful as any college student looking to cut their teeth in the investing world.
The money: Now, this was a textbook definition of an “added perk” but this was a very lucrative internship. I don’t mean the salary; Fred did not pay me[1]. In hindsight, maybe I should have negotiated harder. But as mentioned, my clients and I are investors in Hayden Capital, and after the experience, I had zero doubt that we should all increase our investments in the fund, and after the recommendation, most clients did. Now given the unreal year the fund has had (up 164% YTD September), combined with the 3-4x returns from Afterpay, which I recommended to my clients, the combined benefit to Farrer Wealth’s clients is in the millions of dollars. If we’re lucky enough, and stay in long enough, dare I say it will eventually reach hundreds of millions or maybe even billions? No pressure, Fred…
The outcome: Lastly, after it was all said and done, we came up with a really good piece of research that I think we are both very proud of. Now, it also helps that the thesis has been proven very right, but I think I’m happier about the quality of the work than the outcome itself. That said, do judge for yourself - you can read our written up thesis here, and Hayden Capital also published a more recent presentation on Afterpay which can be viewed here. As usual, we welcome feedback.
Ultimately, I’m very glad about my decision to demote myself, and shut down my ego in order to learn. Working with Hayden Capital was an invaluable experience (although I guess I did value it above), and showed me the true definition of life-long learning. My major takeaway is that I hope that when I’m 70, and I meet some 20-year-old who knows something I want to learn, I have the energy and courage to say “hey, can I do some work for you?” because, as Fred says “you’re never too old to learn.”
Thanks for reading all, and as usual, happy investing!
[1] He did however gift me a copy of the “Sleuth Investor” by Avner Mandelman, a must read on the topic of scuttlebutt.