(Bloomberg) -- In his first-quarter investor letter for Hayden Capital, Fred Liu devotes a lot of space to thinking like Top Chef star Tom Colicchio.
Liu was inspired by the chef’s seminal cookbook “to free [readers] from feeling you must follow a recipe—to help you trust your instincts.” It’s a philosophy he compares to Elon Musk’s idea of viewing learning like a tree, making sure you understand “the fundamental principles, i.e. the trunk and big branches, before you get into the leaves/details.”
The excerpt from his investor letter follows:
Recently, I came across Tom Colicchio’s cookbook, “Think Like a Chef” [Colicchio’s restaurant empire includes Craft and the Wichcraft sandwich chain, among others]. It’s unlike any other cookbook I’ve seen before. What’s interesting, is that his goal isn’t to teach you recipes step-by-step at all. Instead, the book instead focuses of “techniques” and building a repertoire of skills that can be applied to any ingredient. (It’s similar to Elon Musk’s idea of viewing learning like a tree. He said “it is important to view knowledge as sort of a semantic tree – make sure you understand the fundamental principles, i.e. the trunk and big branches, before you get into the leaves/details or there is nothing for them to hang on to.”)
It starts with the basics – roasting, braising, sautéing, etc., then shows how you can use those building blocks as the foundation to create something more complex … In a nutshell, it teaches you how to think in “frameworks” (sautéing an onion is very similar to sautéing a carrot), rather than simply handing you step-by- step instructions. Once you master the basics, the idea is you can encounter a brand-new ingredient and immediately know what methods / combinations of flavors will pair best with it.
I found this to be very similar to how I think about investing and learning about business models. Once you understand the key drivers of an e-commerce platform, for example, it’s very easy to see a brand-new e- commerce stock and pick out / focus on the 1 – 3 factors that matter. Everything else is just noise. Charlie Munger has a similar idea regarding multi-disciplinary learning and is why he talks about “mental models” so often. Without that “framework”, you wouldn’t know where to start.
This in turn, it got me thinking about how similar portfolio management is to the restaurant business. First, there’s thousands of restaurants in NYC, just like there are thousands of investment firms in the world. They all have the same goal – putting food into your hungry stomach / providing investment returns for customers. Both are very competitive fields.
Now, within these thousands of options, they all try to accomplish the same goal but in different ways. A restaurant may serve Italian, Chinese, Sushi, Japanese Izakaya, “New American”, “Old American”, or French cuisine. Some restaurants may serve tiny 3-star Michelin tasting courses at $300 a person (or what I like to call expensive vegetable foam...). Or it may serve $6 delicious tasting, halal mystery meat from a street corner.
Likewise, investment firms might specialize in low-cost ETFs, socially responsible investing, hedged portfolios, long-only portfolios, emerging markets, or US-only portfolios.
The key is to recognize these restaurants have different goals and are serving different needs. One is going for diversity of options / offering something for everyone, while the other is providing the highest quality and best tasting food possible within its niche. Neither is necessarily the “right” answer or has a higher chance of success (they’re not even trying to accomplish the same goal anyways).
For us, our “success” is defined as providing the highest, most durable returns, over a full-market cycle … The probability of success is highly dependent on the “chef’s” personality traits and skillset. You wouldn’t want a diner chef to be cooking at that 3-star Michelin restaurant. Or a classically trained Italian chef serving Malaysian food.
In both the restaurant business and the investment business, the key is to find a loyal set of customers who appreciate what you’re serving. Your offering will never appeal to everyone out there, nor will it be appropriate for them. The goal is to find core customers who encourage and support you, so that you can continually hone your chosen craft, keep improving the quality of the “menu”, and provide the best solution to what your particular set of customers are looking for.
Imagine if the chef of an Italian restaurant had customers who demanded Malaysian dishes on the menu every day. Do you think he or she would be able to focus on creating the perfect lobster risotto? It’s unlikely the Italian nor the Malaysian dishes would be any good. This is similar to the investment business and trying to serve clients who may not be the right fit for the strategy. I think it’s better to avoid that external pressure in the first place, and put a large “No Malaysian Food Served Here” sign on the door.
Additionally, Hayden shared two stocks on his current long-term “menu”: Zooplus AG, a $1.5 billion market cap online retailer of pet products based in Munich. Another is JD.com, an e-commerce giant commonly referred to as “the Amazon of China.” Liu cites the company’s appeal to China’s “ever-wealthier consumer” in addition to shares trading at one-third the valuation of its U.S. peers.
Before launching Hayden Capital in 2016, Liu, 27, covered small cap equities at JPMorgan Chase & Co. and then the cable industry at New Street Research LLP. The new fund, named for Liu’s New York University freshman dorm, focuses on long-term investments and has assets of less than $10 million.
“Not everyone has the patience for the long term,” Liu tells Bloomberg. “It’s the kind of fund for people who have a favorite restaurant that they want to keep going to over again, for a decade.”
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