Macro Aware, Micro Focus
Our General Posture
At LIONS, we are not macro investors, but we seek to be macro-aware to understand where we are in the long-term economic cycle and to inform our micro-focus on specific industries and companies.
We appreciate the complexity of the world and seek to understand the underlying drivers of change, including political, economic, social, and cultural from first principles. We pay keen attention to top-down and bottom-up changes to make judgments about possible future policy shifts to avoid potential landmines. When we detect major adversarial changes in an industry, we do not fall in love with our investment decisions and will thoroughly revisit our thesis and part with our mistakes.
Furthermore, as fundamental investors, we believe good companies are very rare. Most fail to become the moonshots they claim to be. Thus, we avoid fads and only play to our strength by focusing on industries where we have deep knowledge, both from an investing and operating perspective. We strive to maintain the long-term focus and rational judgment of a market practitioner and are extra cautious about overheating markets.
Our Investment Framework
1. Long-term growth of intrinsic value as the primary approach: invest as in companies with wide and sustainable competitive moat, enjoy the long-term compounding of earnings, cash flow, and intrinsic value.
2. Short-term opportunity for value reversion to the mean as secondary: based on deep fundamental analysis, reap the benefit of short-term reversion to the mean from recoveries of operating results and market sentiment.
On top of this two-pronged approach, we abide by our circle of competency and apply margin-of-safety with entry price to build a relatively concentrated portfolio of investments.
How We Pick High-quality Companies:
Social Value
- Develop insights into customer demand trends
- Focus on the company’s products and services
- Conduct comprehensive primary and on-the-ground research
- Understand motivations
Business Value
- Attain expert-level understanding of the company and industry
- Accumulate industry-cycle knowledge over the long term
- In-depth analysis of business, finance, and management
- International perspective
Investment Value
- Possess a high batting average in predicting the future
- Pay attention to macro trends and market sentiment
- Hold positions across business cycles
- Intrinsic value as the core of risk control
Our Investment Strategy & Tactics:
1. Investment Universe: Companies listed on Mainland, Hong Kong, and the U.S. exchanges.
2. Core Long Portfolio Holdings:
Core long positions could take ~60% of the portfolio. Best quality companies, relative certainty of long-term business performance, and return expectations. No single position shall exceed more than 15% of the portfolio.
Benefiting from long-term positive trends, early innings into the cycle, where the market has not formed a broad consensus.
Short-term financial performance is decoupled from long-term potential. Near-term trading activities mask long-term trends.
3. Opportunistic Long Positions:
May loosen business quality standards in this scenario, given the market provides attractive risk/reward. No single position shall exceed more than 5%.
Extreme price movements provide attractive short-term opportunities sometimes, when price vs. intrinsic value provides enough margin of safety., often caused by short-term negative events and over-selling from irrational fear.
Our Posture toward Risk Management
Risk management is paramount and we take it seriously by pre-emptively preparing for and constantly evaluating what could go wrong with our investment thesis.
However, “price swings” do not equate directly to “risk.” The key to risk management is evaluating fundamental changes in a company’s intrinsic value. A sudden drop in intrinsic value is the main driver of sub-optimal long-term compounding returns.
In addition, a rigorous risk management system and mid-office are core to the long-term success and stability of an investment organization, and we strive to build one from Day One.
Our Investment Goals and Alignment with Clients
In an industry often mired with client interest misalignment, we strive for an absolute return target and win-win over the long term:
1. Absolute return target: ~15% annualized long-term return.
2. High water-market fee structure: First, we invest in our own products. Second, our fee structure is fully aligned with client interest, where returns under a certain performance threshold are not subject to performance fees. This is a tradition from Buffett Partnership to a few contemporary value investors, and we believe it is doing right for our clients by upholding it.
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