Lessons and Musings with Dennis Hong
The Meet the Investor session that happened on 1 December 2023 was so impactful that Sidhaarth VENKATARAMAN, graduating member of the ESG Investing Program, could not help but write an article!
Read Meet the Investor - ShawSpring Partner's Dennis Hong for context.
Author: Sidhaarth VENKATARAM
On the journey of understanding the intricacies of investments, I recently found myself immersed in the insightful reflections shared during our meet the investor session with Dennis Hong, the founder and Chief Investment Officer of Shawspring Partners. In a candid discussion that covered everything from his humble beginnings to the nuanced world of hedge funds, Dennis offered a treasure trove of wisdom, peppered with humour (like enjoying Taylor Swift concerts which honestly, same) and practical advice for young investors like myself.
(Sidenote: As someone who has spent the past 6 months working with people everyday whose trading horizon was at the very most 5 days, Dennis’s thoughts were doubly interesting and led to more internal questions about short term trading versus long term investing for me.)
A Humble Beginning: From Brampton to Yale
Dennis's narrative began in Brampton, Canada, where his early experiences shaped his tenacity. The tale of selling cigarettes and lottery tickets for his parents set the stage for a journey marked by grit and determination. This was particularly inspiring. I took away the idea that anything was possible and to dream big, plan smart and work hard for it.
His trajectory from Brampton to Yale showcased the transformative power of education. It sparked a personal reflection on the opportunities that lie within the pursuit of knowledge, transcending geographical and socioeconomic boundaries.
Yale Days and the Endowment Effect
The Yale chapter of Dennis's life unfolded with anecdotes from his time at the endowment, headed by the legendary David Swensen. The exposure to different investment strategies and the emphasis on boutique approaches fascinated me and probably many other young investors here. I believe there are many unique lessons and personalised experiences to be picked up at boutiques. After listening to Dennis, I know I, for one, will be looking out for opportunities in such places for sure.
The notion of "hall of fame returns" and the emphasis on simplicity in boutique partnerships left me contemplating the elegance in a focused and refined investment strategy. It triggered a curiosity to delve deeper into specific sectors, understanding that depth often trumps breadth in the investment world.
The Entrepreneurial Leap: Shawspring Partners
The transition from being an employee to starting his fund was a pivotal moment in Dennis's career. His candor about the challenges in the early days of Shawspring Partners echoed the entrepreneurial spirit required to navigate the world of investments. As a young investor, the insights into Dennis's journey emphasised the importance of resilience. It made me get excited over the allure of risk and the potential rewards that come with navigating uncharted territories.
One thing that surprised me was the genuine connection and friendship that seems to exist between Shawspring Partners and their investors. In my occasional daydreaming of starting a hedge fund of my own in the past, i have always thought of raising capital as difficult yes, but highly impersonal. Money is money, if you managed to get an investment, that’s good enough right? I’d never really thought about the faces behind the investments. As Dennis shared his insights on this, I started to see the significance of having a strong relationship and aligned excitement with your investors.
Navigating the Networking Conundrum
Dennis's take on networking was refreshingly pragmatic. While the word itself might evoke images of awkward coffee meetings and forced smiles, Dennis offered a perspective that aligned with my own reservations. The emphasis on meaningful connections and genuine friendships over transactional networking resonated deeply.
From my perspective, networking has often felt like uncomfortable and strange endeavour. Why would they want anything from me? Why would they talk to a person they know nothing about? What do I even ask them? I’ve always asked myself such questions and more, usually successfully convincing myself that networking was totally unnecessary and wasting their time. Dennis's advice to seek warm introductions and approach them with a purpose shifted my mindset. It encouraged me to view networking as an avenue for shared learning, collaboration and friendships, rather than a one-sided pursuit.
Overall, he emphasised that the best superpower you could have would be to build a reputation of being a likeable person. I, for one, am going to take this seriously. Watch me become Mr Likeable in 2024 everybody :)
Some Insights on Investment Strategies:
Optionality
In Dennis's thoughts on optionality, using the context of Sea Limited's Sea Money business, he emphasised the critical importance of charting a realistic range of outcomes. Shawspring invested in SEA Limited expecting nothing much to come out of SEA Money, and it turned out to be a pleasant surprise when they were wrong. While optionality provides investors with strategic flexibility and the potential for significant gains, Dennis cautioned against the common pitfall of justifying excessively high prices based solely on optimistic scenarios. This taught me the need for a prudent and realistic assessment of the potential outcomes associated with optionality. Effective investment decisions demand a balanced evaluation that considers both the upside potential and the inherent risks, ensuring a more accurate understanding of the true value of optionality within a given investment.
The Reality of Errors of Omissions
His candid admission about errors of omission, especially missing out on Nvidia, got me thinking. In my short wannabe investor stint with my personal account I have faced several moments of investing FOMO (I’m sure almost every one of you have as well). Several times, this has resulted in me jumped onboard the latest hyped up company, or a company that i found attractive but way too late. This has almost never turned out well, as the rush to get in on the action or just the fact that i only realise the company’s potential on hindsight meant most of the potential has already been realised or overhyped. Dennis calmly sharing the reality that you are bound to miss out on some good opportunities got me thinking about how as young investors, one of the key things for us to learn might be to trust in the process, and be firm in our thoughts and use these as lessons on what to focus on for next time.
When to Sell?
Dennis's general advice on when to sell resonated as a crucial yet often overlooked aspect of investing. He shared 3 key situations where you should consider selling your investment.
You were projecting a 30% increase in revenue every year for the next three years, but it turns out to be only 5-10% for the next 2 years. It might be time to cut your losses.
The company grows phenomenally as you expected. It might be time to sell as beyond this it might be difficult for the company to offer significant returns simply due to the sheer size of the company.
The stock races far beyond the company itself. It might be time to trim your holdings in preparation for a retracement.
Personally i felt like this advice while valuable would only really sink in when I actually put it to practice. This leads to another piece of strong advice from Dennis: Get a brokerage account and actually trade. Feel the pain of losses and the joy of winnings.
Ecosystem Control and Marketplaces: Understanding Dynamics
Dennis provided a glimpse into one of the frameworks of his investment philosophy. The concept of ecosystem control, understanding marketplaces, and recognizing dominant businesses left me pondering the intricate relationships between stakeholders. We should be looking out for companies with strong lockins from their stakeholders as this establishes their moat. He shared the metric of Net Promoter Score (NPS), which is used to measure loyalty and satisfaction, and how this can be used both from the perspectives of customers as well as employees.
Building Mental Models
These are just a few of the advice Dennis shared for young investors but it was already quite a lot for me. There is so much more to investing, so how can we possibly get the hang of all that and actually get those hall of fame returns one day? Dennis recommends exposing yourself to as many companies as possible from today, building your pattern recognition and practising so you know what exactly to look out for. He shared the 3 dimensions that exist to investing analytical talent:
Understanding how exactly the business works
Valuation work. What you learn in class is sufficient, but what you really need is to practice.
Market Intuition, having a sense of the market and getting the trade right.
Lester's Advice: Write a Blog and Share Your Passion
The gem of advice from Lester, one of Dennis's analysts, was particularly noteworthy. Encouraging young investors to write blogs and showcase their passion emerged as a powerful call to action. In Lester's words, sharing your journey and insights not only solidifies your understanding but also contributes to the collective learning of the investment community. It fosters a positive-sum mentality, aligning with Dennis's emphasis on collaboration over competition.
Conclusion: Thoughtfully Engineering Our Lives
In concluding my reflections on Dennis Hong's sharing session, the overarching theme became clear—thoughtfully engineer your life. From the intricate world of investments to the broader spectrum of life, Dennis's insights transcended finance. The encouragement to live our best lives, embrace challenges, and continuously learn resonated as a universal call to action.
As young investors, the journey ahead is both exciting and daunting. Learning from seasoned professionals like Dennis Hong provides valuable signposts along the way. So, armed with passion, resilience, and a commitment to balance, let's embark on this journey, thoughtfully engineering our lives and careers, one step at a time together. That’s right. We got this.