Patrick O’Shaughnessy interviews Carl Kawaja of Capital

1. Carl says that two of the companies he has owned for multiple decades and which has made him the most amount of money are TSMC (the world’s leading semiconductor manufacturer) and Vale (the Brazilian miner). Both are distinctive franchises but in ways that people don’t realise. TSMC does super high tech stuff but its most distinctive capability is being able to satisfy the needs of diverse & demanding customers on a daily basis with ever growing volumes. Relative to TSMC, its 2 key competitors – Intel and Samsung – have not been able to address this issue. This is Carl’s “core belief” which has kept him invested in TSMC for decades and made him a lot of money (18.5% p.a.). Astonishingly, iron ore miner Vale has also compounded at 18% p.a. for Carl over multiple decades. So how is Vale able to pull this off? Vale is distinctive because the iron-ore found in the Amazon Basin – Vale’s home – is the world’s highest quality ore. Other countries like China need this ore to mix with their lower quality ore to make industrial grade steel. Vale’s mines are able to ship the world’s best quality ore to China at the lowest cost and this distinctive capability makes Vale a money machine. Carl says that Vale’s competitive advantage is more durable than TSMC’s or Amazon’s or Google’s!
2. Carl says that he finds that he “does better” in businesses that he understands. So ‘simplicity’ is one of the pillars of his investing style. He likes to explain to himself a couple of key metrics of the investee company. Eg. when he looks at a soyabean producer, Carl does the mental maths on the simple metrics that drive it i.e. how much do they buy the raw material for (on a per bushel basis), how much do they sell it for, how much therefore are gross profits on a per bushel basis and so on. That way if the price of the finished product falls from 70 cents to 15 cents, Carl can immediately figure out the impact for himself and then see if management is telling him the real story. Carl is also then able to figure why the said product works for customers and why it is compelling for customers. Apple is an example for Carl of ‘simplicity’. He bought the stock in 2007. A Capital analyst found that Apple was not recognising all of the revenue of iPhone upfront because Apple was concerned about “churn”. However, the said analyst explained to Carl that “no one was going to give up their iPhone” (because it is a superior product and will lock-in customers due to photos and music and apps) and hence Apple’s real revenues were higher than their stated revenues.
3. On most successful investments Carl has found that usually only “one thing matters” and Carl says that he spends a lot of time trying to figure out that “one thing”. If he can’t figure that one thing out, he feels super uncomfortable investing. Ideally, if on that one thing, Carl believes he has superior information and a differentiated point of view, he finds that he’s far more likely to make money. These points of view can come from company meetings or from Capital’s analysts or from Carl’s ruminations.
4. Carl uses a technique he calls “echo location” to figure out whether a specific investment idea makes sense. He throws the idea at his colleagues and sees their reactions and their feedback. If there is no or little feedback or pushback, that tells Carl that he should invest more of his resources in pursuing the idea. Carl cites the Google IPO in 2004 as an example. The Capital analyst was bullish but Carl figured that even if Google hired every PhD in the US, its operating margin compression would be much less extreme than what the Capital analyst was modelling. Carl then ran his earnings model in Google past a bearish fund manager in Capital who did not have give meaningful negative pushback. This process was central to Carl’s taking a position in Google at IPO.
5. Carl says that he does well when he feels stressed and worried and uncertain about his portfolio i.e. when he’s worried that his winners might be overextended and that his laggards could lag some more. That’s a good place to be says Carl rather than luxuriating in post-facto certainty.
6. You need to maintain a degree of mental ambiguity about stocks which you own and which are doing well. Once you convince yourself that the CEO is great and the moat is big and so on, you blindside yourself.
7. If you a fund manager, you need to bring your personality to work. Your personality and your investing style has to be true to each other. So if you like reading non-stop and you are thoughtful and patient, you will be better suited to “buy and hold patiently forever” style of investing rather than being a trader. Carl says that he is a highly mathematical individual who wants to optimise every decision i.e. only the best house on the best terms has to be purchased and then he will stay there forever. Vice versa if you a sparky, high energy, highly strung, extroverted individual.
   

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