TTI Is Banking On The Eighth Wonder Of The World

It’s funny how my portfolio updates and performance tracking posts generate so many views. It really is.

It takes me minimal time to write up those posts, since I track the returns on my own anyway, so it’s just cutting and pasting. It doesn’t take much effort to pen my thoughts either since I’m very well familiarized with the companies I own, and can write it off the top of my head.

Yet these posts generate so much more interests than other generic posts that sometimes take a lot more effort to research, find data, compile, analyze and present.

Since my recent post (TTI’s Portfolio Updates – November 2017), I’ve had some guys who have discussed your personal returns with me. It seems like everyone’s having a good year. Or at least those who bother to email me to show off a bit.

On IN, there are some guys with reported what… 40%, 50%, 70%, even 80% (gasp!) returns YTD! WOW!

Hmmm, on the other hand, it really makes one wonder if we are near the top of the bubble market created by the Fed. When everybody’s popping champagne and having a good time, that’s when we’d better be like Cinderella and make for the exits before the clock strikes 12.

With the incoming new Fed chair, we gotta worry if the transition will finally be the proverbial straw that broke the camel’s back.

I don’t try to predict what will happen though; in my experience that’s a futile effort. Knowing what I don’t know, is probably more important than knowing what I do know.

Well, I hate to be the party popper here, but here’s what I really think:

Having a single great year, is not going to make you rich in the long run. 

For retail investors at least.

It might make you really rich if you leverage up, use OPM (other people’s money), like professional fund managers, leverage on 1 big idea, and BOOM!, do a go-big-or-go-home kinda move, and am proven right.

Kinda like John Paulson.

1 great idea, 1 great bold move, 1 big win, and subsequently, he’s been dead wrong all the way since the 2009 GFC. Yet, he remains a billionaire. (I think). Or at least a multi millionaire.

For retail investors, it doesn’t work that way unfortunately. Cos you have no fancy hedge fund 2 / 20 fee structure to insulate you from losses and glorify you when you win.

Retail investors who have had a stellar 40%, 50% type of gain in a single year, usually fall under 1 of these categories:

  1. Small capital
  2. Unusually large proportion of capital in 1 winning idea
  3. No long term track record

When your capital gets larger, that’s when you’d run into trouble trying to find that 1 gem in the rough. Sometimes, there isn’t even that 1 gem.

Someone on IN said that he is “100% invested” in Geo Energy Resources because it is a “high conviction idea”. Another commentor said that “high conviction means it’s a no brainer right, so must 100% in”.

Readers would know that I am optimistic about the company, and am vested since August last year and currently hold 500,000 shares.

But 100%?! Wow. Thank you very much for your support, but seriously 100%?!

I can only conclude that the 100% capital must be relatively puny.

And if there’s 1 thing I know about investing, it is that there are no no-brainers. If you think something’s “a clear no brainer”, guess who’s a level 1 thinker? (Read Howard Mark’s writings)


Does this mean there’s no hope for us, poor retail investors? Are we destined to be stuck at the bottom of the investing pyramid, feeding off scrapes from the pros?

Don’t worry!

There’s still the Eighth Wonder Of The World we can rely on!

640) stock-photo-milford-sound-new-zealand-34152775

When I googled “Eighth Wonder Of The World”, that’s the image that pops up:

Milford Sound in New Zealand, South Island.

Wow. That really looks like a piece of heaven on earth.

……………………………………..

BUT, how come when TTI went, it looked like this:

642) Milford Sound.jpg

Not quite the same right. Grrrrr…

OK, it’s still quite a nice place, with the myriad number of waterfalls, islets sticking out of the water, cool mist in your face etc., but nothing that resembles the Eighth Wonder pic on top.

And it’s really an inaccessible place to get to. It takes several hours by coach to get to and back from Queenstown. I’ve been to quite a few fiords, and this just doesn’t seem like it’s worth the effort, if I’d be honest.

In fact, I think Queenstown itself is even more beautiful. Queenstown is one of my favorite cities in the world, in my opinion, it ranks closely to Zurich and Zell Am See as the most livable places in the world.

Close fight amongst the 3 contenders:

Queenstown

643) Queenstown.jpg

Zurich

644) Zurich.jpg

Zell Am See

645) Zell Am See.jpg

Damnit, how come I didn’t take a panorama of the lake and the city. Anyway, “See” = “Lake”, so the whole place is a series of interesting low-rise buildings littered around a mega lake, which is also bordered by mountains on both sides.

有山有水, what more can one ask for?

But I digress.

Milford Sound is NOT going to save the average retail investor.

The Eighth Wonder Of The World that really will….. is this:

641) Eighth Wonder of the world.jpg

COMPOUNDING.

The power of compounding returns year in, year out, over a long period of time, is what will make the average investor rich. Mega rich.

You don’t have to take TTI’s word for it. But if Einstein says it……………

This means instead of trying to shoot for the stars with a single year of unbelievable returns, we should instead focus on the avoidance of mistakes aka not a single year of terrible returns. (Something I’m guilty of! I’d one year of massive losses, in the quest for the 1 holy grail, the 1 idea that’d make TTI rule the investing world…)

I read somewhere that the human brain is not equipped to really understand compounding. (Einstein’s brain is not considered human)

Our brains think of things proportionally.

2—> 4000

4 —> ???

Everyone can tell it’s 8000.

Our brains can visualize arithmetic, but somehow the effect of compounding is something that our brains cannot grasp easily. We have to illustrate the effects of compounding, and the illustration is what our brains can grasp.

So let me do exactly that, illustrate, with myself as an example.

TTI’s portfolio size for listed equities (excluding illiquid stuff like private equity, property etc), is…. I estimate, around SG$1.2mil right now. I am not sure exactly what it is right this instance. But just for convenience’s sake, let me round that down to $1mil.

Assuming I start now (at 35 yrs old), and stop/die/become retarded at 70yrs old, and if I can get an ROI of 20% annually, how much will this $1mil capital grow to when I’m 70 yrs old (35 years from now)??

Don’t play cheat, don’t take out a calculator to do the math.

Just guesstimate. Use your brain’s visualizing powers. Go on, make a guess.

Now, I’ve already primed you to think of an obscenely large number right? What, with all my pep talk about the human brain’s inability to understand compounding.

Still, the answer will shock you. (It shocked me)

Yr Beginning Capital Capital at Yr End
1 $1,000,000 1.2 $1,200,000
2 $1,200,000 1.2 $1,440,000
3 $1,440,000 1.2 $1,728,000
4 $1,728,000 1.2 $2,073,600
5 $2,073,600 1.2 $2,488,320
6 $2,488,320 1.2 $2,985,984
7 $2,985,984 1.2 $3,583,181
8 $3,583,181 1.2 $4,299,817
9 $4,299,817 1.2 $5,159,780
10 $5,159,780 1.2 $6,191,736
11 $6,191,736 1.2 $7,430,084
12 $7,430,084 1.2 $8,916,100
13 $8,916,100 1.2 $10,699,321
14 $10,699,321 1.2 $12,839,185
15 $12,839,185 1.2 $15,407,022
16 $15,407,022 1.2 $18,488,426
17 $18,488,426 1.2 $22,186,111
18 $22,186,111 1.2 $26,623,333
19 $26,623,333 1.2 $31,948,000
20 $31,948,000 1.2 $38,337,600
21 $38,337,600 1.2 $46,005,120
22 $46,005,120 1.2 $55,206,144
23 $55,206,144 1.2 $66,247,373
24 $66,247,373 1.2 $79,496,847
25 $79,496,847 1.2 $95,396,217
26 $95,396,217 1.2 $114,475,460
27 $114,475,460 1.2 $137,370,552
28 $137,370,552 1.2 $164,844,662
29 $164,844,662 1.2 $197,813,595
30 $197,813,595 1.2 $237,376,314
31 $237,376,314 1.2 $284,851,577
32 $284,851,577 1.2 $341,821,892
33 $341,821,892 1.2 $410,186,270
34 $410,186,270 1.2 $492,223,524
35 $492,223,524 1.2 $590,668,229

Answer: $591 million!!!

Wow. Ok, how many of you got a number that’s around that ballpark? Or more?

I would’ve thought it’s maybe…. $250mil or so.

So all I really need to achieve, is a 20% IRR every year, year in, year out for the next 35 years. Great.

And this is assuming zero capital infusion for the next 35 years.

It also excludes other possible assets like PE, property and other collections.

So putting all these figures and esimates together, is a $250 mil listed equities portfolio size by 2052 reasonable??

(LOL, this illustration is specially for my wife. She thinks I’m a dreamer. I think all achievements start from a dream)

Now, let’s paint another scenario.

Instead of an annualized 20% return for the next 35 years, what would the final figure be like if I had gotten :

YEAR 1: 10%

YEAR 2: 10%

YEAR 3: -10%

YEAR 4: 10%

YEAR 5: 60% (!!)

And repeat this 5 year cycle 7 times for the entire 35 years?

Would the figure be higher or lower than a consistent 20%?

Hmmm, seems like a close fight right? 10% ROI is not too bad, with a single bad year of -10%, but it’d be saved by an absolutely fabulous year of 60%.

There’s no doubt that if you are a professional fund manager, this 2nd scenario is much better. Why? Cos the year with 60% ROI would guarantee you primetime appearances on CNBC, your AUM would swell like mad, and people would throw money at you.

Coupled with 10% in most years, with only a -10% every 5 years…. that’d really put you at the top of the hedge fund world.

But for the retail investor…. guess which scenario is better?

Yr Beginning Capital Capital at Yr End
1 $1,000,000 1.1 $1,100,000
2 $1,100,000 1.1 $1,210,000
3 $1,210,000 0.9 $1,089,000
4 $1,089,000 1.1 $1,197,900
5 $1,197,900 1.6 $1,916,640
6 $1,916,640 1.1 $2,108,304
7 $2,108,304 1.1 $2,319,134
8 $2,319,134 0.9 $2,087,221
9 $2,087,221 1.1 $2,295,943
10 $2,295,943 1.6 $3,673,509
11 $3,673,509 1.1 $4,040,860
12 $4,040,860 1.1 $4,444,946
13 $4,444,946 0.9 $4,000,451
14 $4,000,451 1.1 $4,400,496
15 $4,400,496 1.6 $7,040,794
16 $7,040,794 1.1 $7,744,873
17 $7,744,873 1.1 $8,519,361
18 $8,519,361 0.9 $7,667,425
19 $7,667,425 1.1 $8,434,167
20 $8,434,167 1.6 $13,494,668
21 $13,494,668 1.1 $14,844,134
22 $14,844,134 1.1 $16,328,548
23 $16,328,548 0.9 $14,695,693
24 $14,695,693 1.1 $16,165,262
25 $16,165,262 1.6 $25,864,420
26 $25,864,420 1.1 $28,450,862
27 $28,450,862 1.1 $31,295,948
28 $31,295,948 0.9 $28,166,353
29 $28,166,353 1.1 $30,982,988
30 $30,982,988 1.6 $49,572,781
31 $49,572,781 1.1 $54,530,059
32 $54,530,059 1.1 $59,983,065
33 $59,983,065 0.9 $53,984,759
34 $53,984,759 1.1 $59,383,235
35 $59,383,235 1.6 $95,013,175

Answer: $95 million!!!

Vs $591 million in the 1st scenario with a consistent 20% return.

The difference is massive.

Real massive.

Of course, in both scenarios, the law of diminishing returns kick in as the capital increases. It’s easy to get a 20% ROI when you’re dealing with $100k. A 20% ROI when you’ve $10mil is another ball game. 20% when you’ve $100mil? That’s when you really need to start doing asymmetrical stuff that nobody else does.

So that’s it. The gauntlet is set. 20% for the next 35 years!

Now, let me get back to work.

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10 comments

  1. Hi TTI, this means that my returns are real bad compared to them. I think for myself, it is hard to find a balance when you are going to have zero capital injection soon.

    This means there is little margin of error. You cannot have large drawdown on the portfolio if you are living off it. If you have a large drawdown and holding it, it means my assessment of its margin of safety needs to be top notch.

    I admire the folks whose capital injection is like 2-3% of their total capital, yet are able to position 100% in 5-6 stocks. They must have good prospecting skills to have that level of conviction.

    I ask myself if its ok to see a 20% position go down 25%. That is 1.7 times of my annual injection. It is hard to stomach emotionally.

    Everyone will have a different emotional stop loss. But i felt that most are still having their capital injected, so this drawdown does not impact that much. They don’t even consider the emotional stop loss.

    I think they are also very very sure that their value picks, are really value.

    Somehow I think i have too much insecurities.

    Like

    1. Hi Kyith,
      I read your comments a couple of times.
      I think basically what you’re saying is that if one is able to have significant capital injections, then he/she may be less affected by the risk of losing more, and hence enter into more concentrated positions with stronger convictions.

      I think it’s not so much the capital injections per say, but the earning power. Essentially if one’s earning power is so much greater than the potential gains/losses, then emotionally, it may not matter that much.
      But it cuts both ways.
      If it doesn’t matter so much for you to see the position go down 20%… then it wouldn’t matter so much either when it goes up 20%.
      So it cuts both ways.
      Can’t have your cake and eat it.

      Cheers
      TTI

      Like

    2. “This means there is little margin of error. You cannot have large drawdown on the portfolio if you are living off it.”

      Also, I’d add that I think if a 20% or 25% drawdown would make living expenses a problem…. then perhaps the portfolio is still not sufficient to support that particular lifestyle.

      Like

      1. Hi TTI, i think once in a while if you are 100% equities, you got to expect a big draw down. however, stocks can remain down longer than you need it. if it goes down 40%, and stays down, withdrawing from it will result you having less of it to go back to the original price.

        but partly you are right, if I have a 2 mil portfolio, a 40% draw down would mean things are still pretty ok.

        Like

        1. Perhaps the problem here is that most retail investors are long only when it comes to equities.
          If you’re talking about a drop of 40%, that’s not a drop… that’s a bloody depression already.
          And if we are faced with a depression 1930s style….
          then for sure. Even with a 2mil portfolio, you will feel the heat.

          So, IMO, there is strength in having different strategies.
          Like the ability and experience to take up short positions (not go short. There’s a difference!)

          On top of that, most retail investors have a huge geographical bias.
          So if that particular market is undergoing tough times, everything in the portfolio suffers

          Like

          1. Hi TTI, thats quite true. You seem to be aluding that if your portfolio is large, it requires a multi asset approach or looking from the portfolio perspective. I hope in the future you will be explaining the short positions versus go short. my sensing is that even in those market shorting on a short time frame is also extremely challenging.

            <Most of us are not just Singapore investors, but we are also individual stocks investors.

            Would having corporate bonds be in TTI's portfolio strategy? I know Angel/private fund is part of it.

            Like

            1. I guess the definition of “Going short” implies borrowing shares to short the stock, whereas one can take up a “short position” by many ways. For eg. by selling call options or buying put options. This is safer because your liability is limited, whereas borrowing shares to go short, you have potentially unlimited liability.
              One could also take up a short position by buying something inverse or an industry that would do well in the event this industry that you are short in, doesn’t.
              There are many inverse ETFs that are available, and some will even include instruments to allow leverage.

              I don’t own corporate bonds currently, and don’t have a particular intention to do so, unless I happen to chance across an opportunity to do so. In the very long run, equities have generally outperformed bonds.
              Also, even in the field of bonds, I think yield is too expensive now, because everyone’s chasing yield. So the investable grade bonds are too expensive. If anything, if I have to buy bonds, I’d start looking at the high yield, junk bond markets. But those are usually not listed and available to accredited investors. The min sum is $250k, and unless you have a huge multi million portfolio, otherwise $250k is too big an exposure.
              Finally, I also don’t have that much expertise with bonds, so why venture into something different, when I currently have enough work to do in things I am good at.

              I guess PE is a part of my overall portfolio, but I don’t normally associate it as part of my portfolio. I don’t value my PE holdings, cos there’s no market for it. They are separate from my SG TTI portfolio listed here.

              Like

    1. Hi
      I mentioned 20% over 35 years in jest.
      No harm setting very high targets, and if we fail, we end up hitting just high targets. LOL!
      In comparison, I think some of the very best investors in the world, didn’t even hit 20% over a 35 yr time frame.
      (Someone told me Buffett’s return is something like 19%+ over 51 years)

      Having said that, when we have a relatively small portfolio size like right now, it’s possible to beat these guys managing billions.

      Also, a 10% ROI over a 35 year period, starting with just 1m, nets you something like 23mil at the end.
      Which is not too bad actually…

      TTI

      Liked by 1 person

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