Prompt Cast
NZS Capital's Investing Philosophy: Resilience, Adaptability, and Optionality
TLDR NZS Capital focuses on investing in companies that prioritize resilience and adaptability, aiming to create a portfolio that combines durable growth with potential asymmetric upside. They value slow, methodical, governed growth and prioritize win-win outcomes for all stakeholders in the value chain.
Timestamped Summary
00:00
Complexity theory is the foundation of NZS Capital's investing philosophy, which acknowledges that the future is unpredictable due to the interactions of complex adaptive systems and emergent behavior.
06:56
The Santa Fe Institute sparked NZS Capital's interest in complexity theory and the study of biological systems, leading them to take courses and publish a paper on the concept of resilience and adaptability in companies, which they believe is more important than short-term productivity and hyper growth.
12:52
NZS Capital looks for companies that can provide durable growth and compound at a healthy rate for a very long time, focusing on companies that are further along in their growth trajectory, have mission criticality and switching costs, exhibit scale and network effects, and prioritize win-win outcomes for all stakeholders in the value chain.
18:20
NZS Capital aims to create a portfolio that combines resilient companies with out-of-the-money optionality, allowing for both durable growth and potential asymmetric upside.
24:33
All risk models are based on normal distributions, but the world actually operates on power law distributions, leading to a few massive winners and many losers.
30:32
The goal of the optionality half of the portfolio is to have a high slugging percentage, even if only one out of three bets work, because those winners can create a lot of value over time.
36:20
The internal culture at NZS Capital rewards non-conviction and encourages team members to call out bias in each other, creating a culture where it's okay to be wrong and fail quickly, which allows them to take more risks and admit when they're wrong.
41:43
NZS Capital has learned from experience that it's important to avoid having large positions in stocks with high potential drawdowns, and they focus on investing in semiconductor companies that have a broad catalog and long product lifecycles for resilience in their portfolio.
47:38
NZS Capital owns optional positions in semiconductor companies like Cree, which is early in silicon carbide, a technology used in electric vehicles, and they see it as a classic example of optionality where the market could grow significantly, but the outcome is uncertain.
53:58
NZS Capital has had strong dialogue with CEOs of companies they invest in, but they believe that they can get everything they need without meeting with them, as there is a lot of publicly available information and resources like industry conferences and presentations.
59:53
Samsung is a major player in the DRAM and NAND markets, with over 50% market share in DRAM and a third of the market share in NAND, while also having a decent foundry business, but logic is still the hardest to make and TSMC specializes in making system-on-chips.
01:06:06
The geopolitical risk surrounding TSMC is significant, as its shutdown would have a major impact on the global economy and technology progress, making it crucial for the US and the West to protect the company at all costs.
01:11:52
The current state of Moore's Law is still holding up in terms of the spirit of driving down transistor size and increasing performance, with innovations such as EUV systems and chiplets allowing for continued progress in the semiconductor industry.
01:17:47
The semiconductor industry is shifting towards a system-on-a-chip model, with companies like Apple becoming aggregators of various chips and components, and the value chain of aggregation is likely to continue evolving over time.
01:23:46
ASML, the company that produces the laser and lenses for EUV systems, has gone through a decade of R&D and learning cycles, making it highly unlikely for any other company, including Trump, to vertically integrate and replicate their technology.
01:29:48
TSMC's ability to create value for its customers and partners, while leaving money on the table, has allowed it to become a highly successful company with flat, sustained growth over time.
01:36:07
The hosts discuss the benefits of slow, methodical, governed growth for investors and how it allows for more time and opportunity to find valuable insights and investment ideas.
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