We have two primary investment goals:
- Protect capital from permanent loss.
- Outperform the S&P 500 by 6-8% per year (net of fees) over rolling 5 year periods.
To achieve this two-fold goal, we adhere to the following investment philosophy:
- Take one idea and take it seriously. Harness the power of long-term compounding.
- Clone the best investors.
- When the odds are strongly in our favor, act decisively, and put down a big bet.
Patient, Focused Value Investing:
- Enceladus’s strategy is to make concentrated investments in high-quality businesses at attractive prices with the goal of compounding over the long run.
- Simple litmus test. Right strategy = sleep well.
First, seek profitable businesses with good returns on total capital that don’t use too much leverage.
Second, look for management teams with equal measures of talent and integrity.
Third, look for businesses that can reinvest their earnings and compound their value or that practice sound capital management techniques such as good acquisitions, dividends, and share repurchases.
Fourth, seek these attributes at fair and reasonable prices.
Lollapalooza is, as personified by Charlie Munger, the critical mass obtained via a combination of concentration, curiosity, perseverance, and self-criticism, applied through a prism of multidisciplinary mental models.
When Charlie Munger uses the word lollapalooza, he often attaches the word “effects” (as in “lollapalooza effects”) which means that multiple factors are acting together in ways that are feeding back on each other.
We look for Positive Lollapalooza (Berkshire Hathaway) and avoid Negative Lollapalooza (IPOs, Auctions).
What kind of Business do you Invest in?
There are primarily three types of businesses that:
- Solve a customer’s problem.
- Scratch a customer’s itch.
- Exploit a customer’s vulnerability.
We invest in first, and ignore the second and third. We believe that the businesses that focus on solving a customer’s problem are the most lucrative and enduring.
- Make a few high probability bets. Sit on ass investing. Stay within the circle of competence.
- Focus on protecting the downside. Margin of Safety. Protect capital from permanent loss.
- Heads I win, Tails I don't lose much.
- Investment Checklist with 120+ criteria. Primarily designed to avoid mistakes than to find the winners.
- Find great businesses when they are little. Big enough to have been through baptism by fire. Small enough to give you a huge multi-bagger upside.
- We are not interested in a stock which is 30-40% below its intrinsic value. We are looking for something which we expect to rise 5X to 100X. We are ok to be unreasonable and patient.
- Clone the best investors.
- Look for sustainable competitive advantage. Pricing power, switching costs, network effects, low-cost producer, intangible assets (brand, mind share).
- Opportunity cost.
- No shorting. No hedging. No IPOs.
- Ask what would Warren and Charlie do? In investment and life.
- Avoid being stupid.
- Even for the best, one-third of all investment decisions are wrong. Learn from the mistakes and move on.
Clone the Best Investors
- One of the filters we use is to follow the 13F filings of 15 successful top value managers (focus investors) who have significantly outperformed the market for more than 25 years. We clone their best and high conviction ideas. It’s a simple idea, but most people don’t do it.
- A good example is 13F filing of Berkshire Hathaway (Warren Buffett), of which 50-60% of the stocks have been multi-baggers. This process tremendously improves the quality of stock picking, with a very high probability of capturing a few winners in the basket. You have to get only a very small number of decisions right for this type of strategy to really pay off. The companies you get right will harness the power of compounding and grow to dwarf the mistakes. Investing is a highly forgiving endeavor. Investors who make twenty or so sound purchases over a lifetime will come to see one or two grow to become a significant percentage of their net worth.
- The best bet is to filter from something which is already heavily filtered and acted upon, the high conviction bets which the investment managers have actually taken in their portfolios. There is a big red X mark there which says dig here, and there is a very high probability of finding a treasure.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
‘We’ve really made the money out of high quality businesses. In some cases we bought the whole business. And in some cases we just bought a big block. But when you analyze what happened, the big money has been made in the high-quality businesses. And most of the other people who’ve made a lot of money have done so in high quality businesses.
Over the long term it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years, and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount.
Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.
Long-term margin of safety comes not from an investments price but from the value of a company’s competitive advantage”
"The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It's just that simple." - Charlie Munger
A know-nothing investor should diversify. Professional investors should not diversify. It would be a mistake of your life if you know something’s a cinch and you don’t load up on it. Very good opportunities don't come along that often. The whole secret of investment is to find a safe and nice place to non-diversify. - Charlie Munger
"If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into the seventh one instead of putting more money into your first one is going to be a terrible mistake. Very few people have gotten rich on their seventh best idea." - Warren Buffett
- Few bets. Big bets. Infrequent bets.
- Highly concentrated portfolio. We do not like to invest in our 50th best idea.
- We are comfortable to invest 50-60% of the portfolio in a single high conviction stock for our personal account. But while managing other people's money, we think it's better to be more humble and give some room for error.
- Maximum 10% in a single stock, follow 2%-5%-10% rule while initiating the position.
- If the stock performs well, we will let it run even if it becomes 50%+ of the portfolio. We are not going to cut the flowers and water the weeds.
- Given a ten percent chance of a 100 times payoff, you should take that bet every time. Jeff Bezos
- Maximum 15 positions with 60-80% of the portfolio in 6-8 positions.
How do I define my Job Role?
- My job description, for the most part, is Reading. I read tons of books a year (skim and skip even more), several annual reports, quarterly transcripts, financial publications etc. I read at least 5-6 hours a day.
- There will be very little activity. Probably one or two decisions a year. I pride myself in making less and less decisions every quarter and there are some quarters when I don’t make any decisions at all.
- Extreme patience with decisive action with high conviction when the opportunity arises, I like to see the paint dry.
- I regard myself as the Chief Risk Officer of the firm and I do not think it makes sense to delegate this role to a committee. We are much more concerned about how our investment record is achieved than the record itself.
- People are trying to be smart. All I am trying to do is not to be idiotic, but it’s harder than most people think. Charlie Munger
- Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per year. Charlie Munger
- Life is mostly about applying the basics, and only doing the advanced stuff in the things that you truly love and where you understand the basics inside out. Naval Ravikant
- “I really like my life. I’ve arranged my life so I can do what I want. I am doing what I would like most to be doing in the world, and I have been since I was 20. I choose to work with every single person I work with. That ends up being the most important factor. I don’t interact with people I don’t like or admire." Charlie Munger
How big is our Team?
All investment decisions are made solely by Mayurkumar Gadewar. I do have part-time help, but mostly to do the paperwork.
- Most good investment managers work alone. Investing is not a team sport, no part of investment analysis should be outsourced. It is very rare to find a really good investment manager.
- We sift through 13F filings of the investment and hedge funds which hire thousands of analysts and pay millions of dollars for research. We use the ideas on which they have taken high conviction actions.
- Investing is a lone profession. Still, there needs to be someone to bounce off your ideas. We frequently discuss ideas with another like-minded high-quality fund managers. The advantage of talking to someone who is not on your payroll is that you can get rid of the vested interest and conflicts.
- Several benefits. Saves tons of costs. Saves from several psychological pitfalls.
- Having an investment team is a bad idea. Having good people to bounce off your investments is a good idea.
What is our Edge?
- Most of the edges (Intelligence, Ability to Analyze, Information Advantage) are already arbitraged away and competed into the ground.
- Edges around behavior, patience and long-term thinking (time-horizon arbitrage) are the last remaining edges and by definition impossible to arbitrage. Patience is a very wide intellectual moat.
- We do what other people are unable or unwilling to do. We do not focus on short term performance. Ability to endure discomfort/pain for short-term, gives a huge-long term advantage.
How are we different than other Hedge Funds/Mutual Funds/Investment Funds?
- Enceladus Capital Management has basic structural advantage over other funds. Right kind of investors, skin in the game and alignment of interest with fair fee structure allows us to do many things which other funds can’t do.
- It is very difficult to generate alpha returns. So other funds rely on annual fee, charging the customer irrespective of how the fund performs. They like to accumulate assets so that they can charge fixed fee on it. Fund performance is secondary to them.
- They try to attract as much funds as possible attracting all kinds of investors. Investors with short term view flee with even a small under performance. Under the disguise of “diversification” they like to “hug” the index (closet indexing) to keep the fund performance within the range of index performance (minus fees).
- Other funds hire analysts, PHDs and pay them high salaries. The fixed costs are just too high to survive on just performance based fees. We don't hire any analysts, and have no marketing costs etc. We pass all the cost benefits to clients.
- We run a highly concentrated portfolio (unlike closet indexing), and there will be very little activity in portfolios (very low transaction costs, highly tax efficient).
- If you stop to think about it, why shouldn’t a man who has to manage your money, who is 40 years of age already be rich? And if he is already rich, why should he charge you fixed fee irrespective of performance?
- It is highly likely there will be a recession/economic contraction in the next 5-10 years. Let’s say it’s a nasty one and takes 10 years to break even. There will be no fees charged whatsoever until we cross the high watermark. Please compare this to other funds.