Gaurav Kapadia - Everything Compounds

Great investor and a very valuable conversation. Would encourage you to read the full transcript on this one. This one should be really studied, in fact.

Key Takeaways

1. Culture of Kindness and Rigor: Gaurav emphasizes the importance of intertwining kindness with rigor in investment practices. Historically, rigorous investment organizations can often be perceived as unkind, while kinder organizations may be seen as lacking analytical depth. But you can have both. or instance, kindness sometimes means telling someone a difficult truth, which can be perceived as harsh in the short term but beneficial in the long run. Rigor, on the other hand, is not just about perfect analytical models, but about connecting different pieces of information in unique ways. Examples include the investment in the cable industry during 2011-14, where instead of focusing solely on TV viewership, they recognized the potential of broadband internet (the 2nd order play).
2. Investing in "Obvious in Retrospect" Ideas: Gaurav's investment philosophy revolves around identifying ideas that will seem obvious in hindsight. Looking for asymmetric opportunities, where the downside risk is limited compared to the potential upside. For example, when investing in software companies transitioning from a license to a subscription model, they looked beyond immediate cash flow concerns to the long-term value prop of such businesses. Gaurav believes in training the team through an apprenticeship model, fostering a culture where mistakes are allowed, enabling the freedom to think beyond the immediate horizon.
3. Constructive Interactions with Company Management: Instead of starting with an adversarial approach, leading with insight and thorough preparation sets a positive tone for discussions.
4. The Decline of Long-Term Rigor in Public Markets: Over time, there has been a noticeable shift in the rigor applied in public markets. While short-term analytical rigor has surged due to compensation based on short-term cycles, there has been a significant decline in medium and long-term rigor. This shift in focus has increased opportunities for entities like XN. Additionally, fewer talented individuals are entering the investing domain directly, often opting for other lucrative and intellectually stimulating roles in startups. The risk-reward balance in public markets, especially given the efficiency of indexing options, may deter potential entrants.
5. The Joy and Purity of Investing: Establishing XN as an unconstrained family office allowed for a return to the fundamental love of investing without external pressures. A key differentiation was the focus on IRR rather than assets under management AUM. For instance, having only one limited partner (LP) - oneself - removes many constraints and distractions, allowing a focus on the true essence of investing.
6. Depth over Breadth & Avoiding Dilettantism: By narrowing focus areas and deliberately excluding sectors like healthcare or balance sheet-heavy financials, the firm ensures depth of expertise in chosen domains. Instead of trying to outperform experts in biotech, XN focuses on verticals where it can achieve best-in-class status.
7. Business Fragility & Valuation (2018-2021): The inherent fragility of many internet businesses became apparent, with many lacking control over essential aspects such as customer funnels and margins. The post-COVID period revealed that many high multiple businesses were overvalued and not as robust as their valuations suggested.
8. Attributes of Great Businesses: Successful businesses often carve out niche monopolies. These businesses have unique characteristics that give them pricing power and volume growth that's protected from competition.
9. Principal-Agent Issues in Investment Organizations: The investment industry faces significant principal-agent problems, which can corrode an investment organization. These issues arise when the interests of the principal (e.g., the investor) and the agent (e.g., the fund manager or analyst) do not align perfectly.
10. The Power of Mentorship in Investing: Investing is a challenging profession that benefits immensely from mentorship. Gaurav highlights the significance of both direct and indirect mentors in shaping his career. The act of believing in someone, especially during their moments of self-doubt, can have a profound impact on their trajectory and success.

Transcript