Why do you like DoorDash, Jackson Zhu (Square Street Capital)?

Jackson Zhu is the Emerging Manager behind Square Street Capital. He joined us to discuss his investment philosophy and his DoorDash case.

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[00:00:00] Jackson Zhu: My style is I look for the kind of opportunity that has great fundamentals, attractive valuation and also comes with high certainty. How do I think about portfolio composition? I think it is critical that we mentally separate two concepts. One is the payoffs. One is odds, O-D-D-S, odds. The younger generation, I think across the world there are a lot of surveys coming out. People just don’t like to cook. People like convenience, people like just ordering in, and people like going to restaurants. Cooking is increasingly becoming a special habit that certain people enjoy. But it’s a special habit. It’s becoming become. It’s increasingly become that.

Introducing Jackson Zhu

[00:01:00] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back on the podcast. It is great to welcome Jackson Zhu from New York. He’s an emerging manager and an investor with Square Street Capital. Great to have you here, Jackson.

[00:01:16] Jackson Zhu: Tilman, good to see you again

Jackson’s oil investment in 2020

[00:01:19] Tilman Versch: Jackson, there’s one interesting story around you that it’s fun to listen to. It’s about the oil and the negative oil price in 2020 and maybe you can share it also with this audience to learn a bit more about what you did at this time.

[00:01:37] Jackson Zhu: Oh yeah, so it was an investment opportunity. I predicted in early 2020, many of you probably remember the oil price collapse during the beginning of the pandemic and at that time I was able to predict in advance. Oil prices become negative. It was an unusual opportunity and it was just too good to let go and I was. I’m still very glad that I was able to see an unusual opportunity and I think it’s probably the first time in history that a major physical asset trades into the negative zone. So it’s quite unusual.

[00:02:23] Tilman Versch: How did you see it? What led you to see this opportunity?

[00:02:27] Jackson Zhu: Actually, to be frank, in the beginning, I was thinking about buying oil because it’s too cheap. But I was moving it over and over again, just like I do, like, that’s my thinking process. I suddenly realised an asset sometimes can flip to become a liability, and in this case, I think I was in between sleep and awake of being on bed and suddenly the idea came to me that if there is a negative sign attached to the price it becomes negative and I did some quick research and I realised the supply and demand relationship during that time with the physical relationship we were running out, the world was running out of storage for oil and that piece of fact, physical fact was almost certainly going to drive oil price into negative, so that’s what drove me, enlightened me to that idea.

[00:03:27] Tilman Versch: At this time you were an analyst, if I’m right, working as an analyst?

[00:03:33] Jackson Zhu: Yeah, I was in my prior career. So do you want me to give you a quick introduction on my background or do you want me to talk about that specific?

[00:03:42] Tilman Versch: No, I’m just curious here. Did this kind of oil trade help you to start out as an emerging manager?

[00:03:53] Jackson Zhu: Oh yeah. So at that time, to your question, I was working as an institutional advocator. I was on the other side of the table, my full-time job was interviewing and researching hedge fund managers. Now, I run an investment business myself as an investor and to your question, I think the oil negative oil experience did help me, it helped me on more of a philosophical level because I’ve been investing since high school, but I always had an idea that most institutions and investors have so much resources available to them that for small investors there is almost no way to compete.

I think the oil negative oil experience did help me, it helped me on more of a philosophical level because I’ve been investing since high school, but I always had an idea that most institutions and investors have so many resources available to them that for small investors there is almost no way to compete.

But a negative oil experience told me, it’s actually not that clear-cut picture. I don’t have any oil experience. I don’t have any energy experience and I am able to see, in advanced, negative oil, because exactly I don’t have any background, I was able to think out-of-the-box. After the negative oil prediction, there was actually an investor called me up on the phone and if I remember correctly, he told me, Jackson, listen, if you have ever worked for an oil and gas hedge fund or if you have consulted industry expert, you would never come to this prediction of negative oil. That brought me to a higher level of understanding of what’s important and what drives great investment ideas. So to your question, it does help.

Experiences from being an allocator

[00:05:38] Tilman Versch: And does this background as an allocator also make you different as an investor, and if so, how compared to other investors you see?

[00:05:48] Jackson Zhu: That’s a very good question. Tilman, do you want a long answer, or do you want a short answer?

[00:05:53] Tilman Versch: Start with the short and if it’s more interesting, I dive deeper.

[00:05:58] Jackson Zhu: All right. So I’ll give you a short answer. So the short answer is, in the beginning, I thought it was not going to be helpful because I do not have formal full-time work experience with any direct investment institutions such as any active direct managers. I do not. So in the beginning, I thought it was going to be a handicap for me.

Now, as I ventured out for several years on my own, I increasingly realise my experience working as an allocator is a tremendous asset for me because I was interviewing, evaluating, and asking questions to hundreds and hundreds of probably the smallest and most hardworking investors on this planet. I was able to see how each talented investor thinks, how they strategize, how they make mistakes, how they recover from mistakes, and how they try to beat the market, even though it’s a very difficult game. So it was a very high-level experience for me evaluating many other managers and I was able to distil some important lessons from the allocator experience and apply those lessons to what I’m doing now.

Learnings

[00:07:21] Tilman Versch: Maybe add another one of your learnings that might be a bit more surprising to listeners who are passionate investors and already run a fund. Maybe it’s more one of the sophisticated insights you took away from the allocator’s perspective.

[00:07:39] Jackson Zhu: You want a sophisticated one. Let me put one here. It may be a little bit debatable and many of the audience listening now, you may strongly disagree. OK. But when you put it out there. I might be wrong but let me just make a template. It has become increasingly obvious to me that successful active investing cannot be systematically taught. That’s it. Piece of insight. And why do I think so? I’m not saying this to discourage anybody from investing. It’s an empirical observation I’ve made and the reason behind this observation is the following.

One, if successful active investing can be systematically taught then why don’t we see any specific educational institution that has a long-term great track record of continuously and consistently producing superior investors that can outperform the index? We have great institutions with great names, but in terms of producing investors track record. I think this is debatable.

The second is if successful investing can be systematically taught, why do we have so many investment books being published year after year or one book should be enough?

The third is if successful investing can be systematically taught, then in the investment industry, why do we not see any family dynasty? This means the father and mother passed down the generations to the children and grandchildren. For example, in politics, we have the Kennedy family. In Madison, we have the Mayo Clinic, Mayo family. In music, we have the Bach family, classic music. But in investing, we don’t have.

You can think about it. Do you know any successful investors who have a long-term successful investment track record? Their children also have a long-term successful investment track record and their grandchildren. So between parents and children, they share similar genetics. And if parents cannot pass anything to their children and produce a family dynasty.

I’m not sure successful investing can be systematically taught, so I think that is a piece of deeper insight I’d like to share. I understand it may trigger some feelings in some audiences. I understand it’s probably debatable. I’m also fully open-minded in that probably in the future I realise this is totally a wrong assessment and I will acknowledge I’m wrong.

[00:10:55] Tilman Versch: Let’s take the learnings to another step. How have they helped you to make your firm different?

[00:11:04] Jackson Zhu: That’s a very good question. What I realise is that the industry is highly competitive because very few investors have a truly long-term track record. One of the realisations I realised is those conventional elements that people call an edge probably don’t matter as much as we think they do. For example, we see investors competing for corporate access.

We see investors competing to have the most amount of alternative data like credit card receipts, et cetera. We see investors competing on many other metrics. I relatively do not matter that much at all, because otherwise, those who pursue on those dimensions should have consistently outperformed others, but we don’t see this kind of pattern.

So to me, back to your question, in my own investment journey, my own investment process, I try to do things that make sense that can generate great returns and I’ll give you some more narrowly defined examples.

When I look at investment opportunities. I like to think about whether an investment opportunity is actually researchable or not because there can be a lot of companies or ideas that no matter, for example, whether a smaller shop or a large shop, no matter how much time and resources you put on, we still can’t understand it or we still can’t predict its future trajectory with high certainty. So that’s one example I’m trying to give you the industry’s competitive people have a lot of resources, a lot of people are doing something very similar or working very hard. But we have to take one step back and do things that only make sense in order to have a fair chance to generate a strong investment result.

The goal of his fund

[00:13:21] Tilman Versch: What kind of goal are you trying to achieve?

[00:13:25] Jackson Zhu: So I interpreted your question as the kind of goals I’m trying to achieve while I ventured out on my own. I think the very important goal is generating investment returns and I expanded a little bit here. Let me do it. I think in investing as a business it has two phases.

One is investing for investment performance on the other side of the face is investing as a business. When we look at different people in the industry, some put more emphasis on running investing as a business meaning they have the fees to generate income, there’s a client relationship to be maintained, and there is an overarching brand and all the things attached to it.

On the other hand, pure investing is a craft that tries to generate superior returns. I see that distinction from very early on and my goal, to your question, venturing out on my own is to focus as much as I can on the pure investing side, meaning aim for great investment results.

Jackson Zhu’s investing style

[00:14:58] Tilman Versch: It already touched base on some elements of your investing style, but maybe how would you describe your current style of investing? Is it a value investing influence style or how would you describe it?

[00:15:16] Jackson Zhu: I understand the conventional definition of value versus growth and there are many different dimensions people use to categorise themselves. Let me give you this short definition that I find describes my style the best at this moment.

Obviously, I put a big caveat. I want to be an investor who continues to learn, so my style may evolve. But to answer your question, at this moment, my style is I look for the kind of opportunity that has great fundamentals, attractive valuation, and also comes with high certainty.

I want to be an investor who continues to learn, so my style may evolve. But to answer your question, at this moment, my style is I look for the kind of opportunity that has great fundamentals, attractive valuation, and also comes with high certainty.

That’s a big three and I have two small ones to attach to it. The most ideal opportunity, I can’t ask for it because most opportunities cannot, the most ideal opportunity has two additional to it. They can be independently verified and independently tracked. So big three and plus two small ones. That’s how I would like to currently describe my approach.

“Certainty”

[00:16:34] Tilman Versch: Let’s go into one of these big freezes. How do you get to certainty?

[00:16:39] Jackson Zhu: Yeah. So I understand certainty describes a concept that doesn’t have a very certain definition. I think there are two English words that probably describe certainly better than others. The first one I would say is visibility. Just like if you are driving in bad weather, we can’t see too far out. That’s low visibility.

If you are driving on a sunny day, it’s much easier for you to drive because you can see that describes one aspect of certainty. In real life, I think empirically, for example, trying to predict a company turnaround story is very hard.

Company get into some troubles. The product gets into some trouble. They try to engage a new management team. They try to do different creative things and then we try, as investors, they will try to predict those turnarounds. Generally, we can say it’s not absolute, for sure. Generally, we can say those are low visibility, but in some cases, either the investor himself has a special background or special knowledge, or the case itself is presented in a certain way that has high visibility. So to your question, the first one is visibility.

The second word I’d like to use, and I don’t think they are, they’re pretty similar to visibility, the word predictability. It’s something highly predictable and I give you an obvious example of what is predictability. For example, Tilman, you and I, we’re going to have a bet on whether 60 days from now is going to rain in Berlin.

Oh, we make another bet 60 days from now, the exact temperature, is 2:00 PM, in the afternoon, in Berlin. Those would be extremely unpredictable. I think even today, with all the modern technology, maybe with AI already resolved, I don’t know. Short-term weather is extremely unpredictable. However, if Tilman and I have a different kind of bet, I’m going to bet you over the next three years, summer is going to be warmer than winter in Berlin.

This kind of bet I can make a very, very large bet on it because it’s highly predictable. So this is what I mean by predictability. Even the same subject matter, weather, climate, if you see it differently, it has different predictability. So to your question, wrap it up with high certainty, my current thinking and my current answer is it is highly visible and highly predictable.

[00:19:46] Tilman Versch: Can you maybe give a bit of an elaboration based on a case of a company? So we will talk later about DoorDash. Feel free to use this on DoorDash but another company where your work did to get visibility and certainty.

[00:20:06] Jackson Zhu: Sure. I’ll give you a quick one. It was before I ventured out on my own while I was still personally investing is Airbus. The European company Airbus and again, I’m just recalling from my memory. Some of the numbers may be wrong, but it should be roughly in this shape.

So it was also during the pandemic that Airbus stock collapsed like many other travel companies or many other businesses, in general. I would recall Airbus’s stock price collapsed probably from 90 or 100 to 49 euros a share within a very short period of time. I’m recording this from memory. The number could be slightly off. And to me, Airbus is a high-certainty investment candidate and where does that certainly come from? Several bits of common sense.

One, we know Civil Aviation is a high certainty, a high-growth industry. No matter which country you come from, no matter where you come from, as people get wealthier, they want to jump on an aeroplane and see the world. In professional terms, the growth curve of Civil Aviation resembles the global GDP curve with probably a little bit of faster speed. That’s in professional terms, in layman’s terms I just explained.

Second, I always think that when I was younger, it’s also another intuitive common sense is there are a number of companies, not that many, that are critically important for human civilization. One of them is Airbus. If we remove Airbus, so let’s say we wake up tomorrow, Airbus will disappear from this planet.

We will get into some issues as a human civilisation, meaning, we won’t have enough planes being produced. We still have Boeing, as we all know. Boeing has been in trouble for quite a long period of time in terms of manufacturing, et cetera. We will have not enough supply for new aeroplanes to replenish the fleet around the world and human travel will get into trouble. I think if you and I jump on a boat trying to meet each other, I think no one will look for the option.

So Airbus is a critical infrastructure for human civilisation and that is where certainty comes from. And that can dive into the specific financials, for example, in terms of the price, earnings, in terms of the size of all the books they have, this company was cheaply valued. With huge visibility into their future revenue and extremely high certainty. So that is my answer to your question.

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Jackson Zhu’s Research process

[00:23:41] Tilman Versch: Another question I want to raise is like you already mentioned these three components plus the two reflected in your research process. What are like most important aspects of this? Why do you spend most time off in your research process when an interesting idea gets so good that it might turn into an investment for you? Your allocation of time and research depth, where would you say this is the strongest part that you want to research?

[00:24:24] Jackson Zhu: Got it, got it. I think there’s– I want to answer your question. It’s an abstract question and I want to answer it two ways. The first is I want to comment a little bit on my own research process is writing heavy and second, I want to talk about the importance of coming to an AHA moment in investing.

So one, my research process is writing heavy. I truly enjoy writing. As I mentioned a bit earlier in this interview. I don’t know if I did. Since I was in Graduate School. I’ve been writing personal blogs. I have a passion for writing. I took a history class I enjoy and reading is basically a part of the writing process. I enjoy reading. I enjoy writing.

So my research process is writing hobby. I read, for example, for the major company I invest in, I read everything I can find about the company. Thank you. Thank you for sure. Different announcements. I watch all the podcasts and interviews of the founding team and key management members. I write summaries and try to distil what’s said and what’s not said, what’s seemingly important and what’s certain, what’s not important.

So the writing process I think has several benefits. One, a large quantum of writing activity is an effective discipline mechanism to discipline my thinking. Without writing, sometimes, the thinking process is not disciplined and is not analytical. Writing has a certain feature, just like geometry, actually. Things have to square up.

When we make our voice thinking process. When we just talk, sometimes things don’t necessarily square up. But if you write it down, it has a certain geometry and mathematical relationship to it. You have to establish your case, make an analytical argument and things have to close up on themselves.

So the writing process I think has several benefits. One, a large quantum of writing activity is an effective discipline mechanism to discipline my thinking. Without writing, sometimes, the thinking process is not disciplined and is not analytical. Writing has a certain feature, just like geometry, actually. Things have to square up. When we make our voice thinking process. When we just talk, sometimes things don’t necessarily square up. But if you write it down, it has a certain geometry and mathematical relationship to it. You have to establish your case, make an analytical argument and things have to close up on themselves.

So that’s the importance of writing. One more is writing is basically an effective tool to philtre out noise from signals because when I write, I don’t know if other people experience like this, when I was writing, I was able to see what is noise, meaning doesn’t really matter and what is signal, so that’s important of writing.

The second parts are aha moments or you call the epiphany, or you call it the moment of transcendence, the moment of enlightenment. I find it to be hugely important in investing. Back to what I said before, maybe a little bit repetitive, but I think it’s definitely true.

The investing industry has attracted some of the most hardworking and most talented people to work on the same problem, meaning try to find investment opportunities and try to generate returns. Everybody’s working hard on how to constantly get ahead. It’s very hard. Therefore, I think any kind of book knowledge, standard mechanical way of repetitive execution may not perfectly work being a human-to-human, highly competitive environment.

The investing industry has attracted some of the most hardworking and most talented people to work on the same problem, meaning try to find investment opportunities and try to generate returns. Everybody’s working hard on how to constantly get ahead. It’s very hard. Therefore, I think any kind of book knowledge, standard mechanical way of repetitive execution may not perfectly work being a human-to-human, highly competitive environment.

In this kind of thinking game, competitive thinking game, it is the moment of transcendence, the moment of the aha moments, the epiphanies that really make a difference and I just share with you the negative oil experience, which I was laying on the bed in between sleep and the awake. This idea came to me. I remember it was a visual image when I was closing my eyes.

Asset and a liability switch and I realise you can add a negative sign to a price, so I saw that vision first in my head when I was closing my eyes, I jumped out of bed and went to research right here and saw that picture and validate that picture. So those moments are very, very real. I don’t think, maybe somebody can, but I can’t get this kind of realisation every single day. It is grounded, I think on a high volume, a large volume of reading.

A large volume of writing and a lot of life experiences as well. Experiencing life, for example, researching consumer companies going out onto the street, doing some window shopping, doing some real shopping and interacting with life and sometimes those moments will come.

The difference between being a private and a professional investor

[00:29:59] Tilman Versch: Let’s maybe go back to 2020-2021 when we still like the private investor Jackson and now you’re the professional investor, Jackson. What is changing the research process since then and where have you put way more effort into?

[00:30:19] Jackson Zhu: I think versus the prior me, today’s me, and first of all today’s me, not a fixed me and I will try very hard to prevent my mind and my process become ossified into a fixed state and I can’t develop. I’ll make sure very hard. I’ll make sure that I don’t get stuck in a defined process. I think that’s really important because there is one investment philosophy for time. But there’s no one philosophy for all time, since I think has to evolve and has to change.

There is one investment philosophy for time. But there’s no one philosophy for all time, since I think has to evolve and has to change.

So that’s the opening remark to your question. And versus old me, I would say today’s me relies a bit more on a certain structure and framework to guide my thinking process and today’s me also understand better about how my own mind works.

So the structure and framework. My undergrad is accounting and I later self-trained myself to become a coder, so I’m very familiar at least with spreadsheets and also with processing big data and writing some codes to speed up the process. So that gives me a set of skills that I can easily build tools and speed up my own investment process.

So for example, this year, we are talking already late into 2024. This year I can recall that I have refreshed several templates, a built new template and also wrote some, I no longer write very long software codes. No, I don’t. I used to do that. But this year, I also wrote some pretty short snippets of codes to do some repetitive work for me. Basically having the semiconductor and computer do the work for me. So I rely on that a bit more than I was in my prior state.

Second point I developed a deeper understanding of myself and like I said, investing is a thinking game. To some degree in some sense is highly abstract. It’s highly abstract. You can even say it’s basically just making a decision about what to buy, and what to sell.

So the state of a person’s mind and a person’s understanding of how his or her mind works is critical. I’ll give you some examples, and this is something I learned when I was an allocator. People are smart, people are hardworking. Why have few investors had great long-term track records?

There are many answers to it but from a mental perspective, from how my mind works, I realise an interesting insight. In investing, the output of investment performance and the input of a person’s mind is not linear. As is, it is in other industries. For example, Tilman, you and I, go and open the bakery shop. We make bread and we sell bread.

[00:34:15] Tilman Versch: Don’t compete against the Germans in this. Don’t compete against the Germans.

[00:34:15] Jackson Zhu: So I partner with you. It’s our bakery shop. So let’s say we run a bakery shop. We have partners and one day Jackson me. I come in feeling sad, grumpy and spacey. OK, I’m just not focused. I can still work. I can still go into the kitchen. I can do the bread. OK, I can press the ovens, the electric oven.

So in most industries, a person’s mental state doesn’t have a tremendous amount of relationship to the final output. You’re putting in the hours, you get some outcome. I just use a bakery as one obvious example. The bread going to taste more or less the same. In investing, there’s a very unusual relationship between a person’s mental state and the final investment outcome. Let’s say, you and I, run a partnership to invest money hypothetically just for.

[00:35:28] Tilman Versch: Don’t do it with me. That’s not a good idea. Pick another person.

[00:35:33] Jackson Zhu: OK, let’s say somebody partners up to run an investment business. They invest money. If a person comes to the office one day feeling not right, feeling sad, feeling not focused. Are you going to trust his or her judgement and investment decision during that day?

If he’s still or she still puts a trigger of making buy and sell decisions, we all understand it’s not going to be good. While a person is not feeling right, the investment is not good and investing not good means losing money. Not only are you not making progress, actually losing money, backtracking not only not producing bread, you are deleting bread. You are losing money. So that’s terrible then.

[00:36:24] Tilman Versch: And negative bread price.

[00:36:26] Jackson Zhu: A negative bread. Let’s say, in investing, making an investment mistake is basically negative. It pulls back from, making further progress. Then how about if you have a partner coming to the office that day feeling just normal, just normal? Then that is basically the normal state of almost all other hardworking investor analysts and as we have already talked about before, very few investors can produce consistent outperformance results.

So if a person is feeling normal, it’s just the par and with all the different fees and expenses involved, it’s probably a little bit subpar. Then the final point I’m trying to say is, let’s have this hypothetical example, we have analysts or a partner who can consistently execute at a very heightened mental state, with very high self-awareness, very high mental clarity, understand all the companies, all the news, all the texts he’s reading, all the phone calls, or he or she is participating in those phone calls, understand what’s important, what’s not important, what’s common sense, what’s not common sense, what is apparently funny but deeply insightful, being able to tell A from B, then create investment insights can be generated and hopefully great investment decisions can be made.

So that is the unusual relationship between the mental state and outcome. Investing is very unusual, in many other industries, not all, I would say, don’t use the absolute word, but in many industries, it is not that kind of relationship in existence.

DoorDash

[00:38:29] Tilman Versch: I already talked about the stock we want to discuss here in this programme and it’s DoorDash. So what is your investment thesis on DoorDash? Are you currently still invested in the company?

[00:38:44] Jackson Zhu: Yeah. I am currently invested in the stock, DoorDash. It’s a long position.

[00:38:55] Tilman Versch: But you could change your mind at any time if there’s aha moment?

[00:38:59] Jackson Zhu: Yes, and I want to make sure I make it very clear this is not financial advice for anybody, I’m not giving financial advice and I may change my idea at any moment. Going forward. So DoorDash as a business? I mean, there’s a distinction between stock and a business. People can invest in great businesses at extreme valuations.

That’s a stock and can end up either not making money for a very long time or losing money. The valuation piece, the stock price comes in two separate a business from a stock. So let’s first talk about a business. So DoorDash is a great business and I’ve been following this company for quite a few years. I mean, let me know if any aspect you want me to talk about very quickly when I looked at DoorDash many years ago, it’s a great business.

Why it’s great? Food. Eating. Is probably the single most frequent consumption activity for human beings. You think about it. What other activities in our daily lives are more frequent? I would say there are two. Breathing. We breathe here in and out and go to the bathrooms. I don’t think breathing so far has been commercialised into a product that you have to pay and swipe your credit card every time you breathe. No, I don’t think it has to go into the bathroom. I think in some countries there are some bathroom businesses, but at large, in general, going to bathrooms has not been made into a business at large.

Eating then likely to be the most frequent human activity. That’s actually a business. So that is a big aha moment for me. We eat three times or some people eat two times a day and some people on a special diet eat one time a day but people eat. Let’s say three times a day. You don’t order a taxi most time. I don’t think anybody ordered a taxi three times a day.

No one ordered from an e-commerce website three times a day. Nothing else three times a day. So that is the aha moment. Let me realise this is a special business and to add to it, increasingly people don’t like cooking. I think our parental generation or our grandparent generation. Because of the lack of restaurant industry development and also of the conventional lifestyle, people generally cook.

The younger generation, I think across the world, there are a lot of surveys coming up, people just don’t like cooking. People like convenience. People like just ordering in. People like to go to restaurants.

Cooking is increasingly becoming a special habit that certain people enjoy, but it’s a special habit. It’s increasingly become a daily norm. Those human elements that are not on the income statement balance sheets, which are not on the 10K, 10Qs that constitute this aha moment. Let me realise, it’s a very special business.

Thus certain human behaviour elements strongly support it. So I think that’s what makes DoorDash great in business and attracts my attention in the first place. And regarding the other part of the stock I just do want to make sure I made it very clear, first, I’m not giving financial advice to anybody and also, I may change my mind anytime. DoorDash has been wildly successful as a business. It was under a lot of doubt in its early years and up until probably a year ago or two years ago.

Over the past year or two, the apparent and very obvious business success of DoorDash as a business has increasingly convinced a larger and larger group of investors that this is actually a good business, and as you can imagine, as more people get convinced, more people will comfortably invest in DoorDash stock and therefore push up the stock price. Today, I don’t think any sensible investor will make an absolute judgment call saying DoorDash is a cheap stock anymore. How expensive that is?

That’s a separate topic, and people can use different series or different future scenarios to assign a different valuation framework to it, but it’s no longer a cheap stock and the investor has to execute a much higher level of caution when they are dealing with the not cheap stock. So that’s what I want to say.

[00:44:39] Tilman Versch: What is your future scenario?

[00:44:43] Jackson Zhu: For DoorDash, the business? OK, so I’m not talking about DoorDash, the stock. Let’s talk about DoorDash, the business. The future scenario is the younger generation going to increasingly cook less and less.

The kind of people who still cook will increasingly see cooking as a special habit, and most people will have someone else to cook for them. So the demand for food delivery will continue to grow or in a professional term, the penetration has a high chance to keep increasing in this country and probably around the world as well. That is one.

On the adjacent new categories such as grocery delivery, convenience delivery, or even in general retail. There is a certain signal. There is some signal that there is some possibility. Those new verticals can grow into large businesses as well.

But it is, I think, still too early to make as convincing a prediction as those kinds of predictions for food delivery. Yes, we can remain hopeful on the verticals, but we need to see. Then the other area I think is notable is autonomous driving. Listen, for free delivery. I’m not talking about calling a taxi or ridesharing which obviously has been widely discussed.

Autonomous driving for food delivery. I think going to be, let me use the word, I think it’ll be potentially nuclear huge for food delivery. Why? The reason that the food delivery business has traditionally had a stigma as a low-margin business is because finding a human to spend 20-30 minutes of his or her time to drive to a restaurant, wait for the food, grab the food and drive to your doorway and drop off the food is very expensive. Paying somebody for his offer 20 minutes or 30 minutes of time. Doing that task I just described.

With autonomous driving, obviously, I’m not issuing an opinion on how likely or will have autonomous driving when we have it. But assuming we wake up tomorrow, Tilman, you and I will wake up. Autonomous driving is 100% completely fully resolved.

Then you can imagine a future where in the downtown area where all the restaurants cluster you’re going to have those robotic vehicles that’s parked there and say DoorDash or say some food delivery company’s name on it. You’ll have restaurants that are cooking food, receive those orders, and get food ready. The restaurant server will bring those bags of food and drop them into this vehicle and this vehicle is parked in front of good restaurants.

Then this vehicle every 10 minutes and there will be many of them. Every 10 minutes, one vehicle will leave or maybe every 5 minutes. I’m just saying, for example. They’re going to leave and drive towards a cluster of consumers who ordered the food that is now already cooked and in those vehicles. They’re going to drive to the collection point of where the customers are and then you will have a food delivery driver that waits for that vehicle to come. Grab.

I don’t know 5/10/20 or flip and then drop them in this building or in this neighbourhood. So this kind of delivery model as you can imagine is going to be economically, massively different from the kind of model that we currently have. Yes, we have some kind of order batch meaning, one food delivery driver now can pick up more than one bag of food for one trip, but it’s not at that kind of scale as the hypothetical scenario just described to you.

Once that happens, the entire economy will look very, very different for food delivery, meaning it is likely that the food delivery business will be massively more profitable than it is today, so that is the autonomous driving part.

[00:49:47] Tilman Versch: But right now, the company is still loss-making if I’m not wrong.

[00:49:52] Jackson Zhu: At this moment, DoorDash for its food delivery, part of the business, has been profitable for quite a long time. In other food delivery businesses, some are profitable, some are not so it’s a mixed picture. Yeah.

When to sell DoorDash

[00:50:16] Tilman Versch: When do you plan to sell DoorDash?

[00:50:21] Jackson Zhu: It’s a good question and it’s also a very hard question because in my own professional prior life as a professional allocator, and also since I have been investing after high school, it is very apparent I have experienced this, and other people have said it is very hard to buy the stock back once you sold it.

Other people have said it is very hard to buy the stock back once you sell it.

That is one, but on the other side, I also understand buying or holding on to your expensive stock can result in either no return or even lose money. So I have to basically hold 2 opposing ideas at the same time and then to fully answer your question, I think about the framework that I just described to you earlier.

Great fundamentals, attractive valuations, and high certainty. Either one of the three or a combination which means more than one, a combination of the three are missing from an investment that would be a very big signal for me to either trim or completely liquidate an entire investment. So I hope that is a full answer for you.

Portfolio construction

[00:51:52] Tilman Versch: It is. How does DoorDash fit in your portfolio and what is your portfolio framework? Portfolio construction framework do we have an algorithm that’s doing all the work for you based on the codes you’ve written or what do you think about your portfolio?

[00:52:13] Jackson Zhu: Yeah. I started my investing process or investment journey, this current, by trying to do what makes sense. And I realise that one of the many reasons that it’s very hard to consistently outperform is that I give you this example in order to answer your question, I just want to say that. I’ll give you an example that one of the many reasons very hard to outperform the index is how most people structure their portfolios.

Here is an example. Imagine we have an investor coming to us and saying, oh, I run a highly concentrated portfolio with 10 different stocks. Equal. Weighted 10% each 10 different stock. It sounds like a typical portfolio that people would call relatively concentrated and too many probably often know this the hitting ratio or hit rate of an average investor is actually not very high.

There is some empirical evidence and I hope some of have done some research, but I would say on average, a very good investor’s hit rate is probably only 55, somewhere between 50 and 60%, meaning you recommend 10 stocks, you probably get six stocks right.

For the legendary investor, the hit rate probably can be in the zone of 70, 80% and for a not-that-routing master, probably hitting a hit rate that’s materially under 50%, meaning all the stock recommendations he or she going to make you can assume almost all going to be wrong. So that is the reality we operate in and for a 10 stock before you imagine if you are a good investor.

Let’s say 60% cuts are cut in some slack, 60% hit rate, you’re going to get six stocks working for you and four stocks not working. All right and this is not going to rocket science. Four stocks not working, six stocks working. Four are losing, six are making money. The four losing stocks probably going to cancel out. For winning stock, your portfolio, this kind of portfolio is doing internal cancellation.

Four cancel out four, and you get two winning stocks left. 20% of the portfolio is left and you want to outperform the index. Beta. You need to have these two stocks have a beta of five in order for such a portfolio just to match index performance. Then the question is how likely for any investor first to have a hit rate of 60%, then in a 10-stock portfolio successfully hold onto?

Identify and then hold onto two stocks that can run at five times the speed of the index, then only to match the stock index. That is how difficult investing is, as that’s how I would say textbook knowledge or conventional structure portfolio is very, very hard to outperform the index.

And back to your question. Like how I think about portfolio composition, I think it is critical that we mentally separate two concepts. One is payoffs. One is odds. O-D-D-S, odds. What we’ve been taught in school is that we should structure our portfolio based on the payoff model. Imagine you have a very simple spreadsheet.

You have different investment ideas. You assign a likelihood, then the investment idea goes right. A likelihood investment idea goes wrong. You assign a payoff, right? Winning dollar. Losing dollar. You do the simple average percentage likelihood times the payoff. You get the expected return, quote-unquote. That’s what we’ve been taught at school and a lot of people use this framework to guide their investment decisions, I have seen that a lot in my prior life as well.

I argue this process has practical problems in actual execution. Let me extremize with one extreme example. Let’s say Tilman comes to you with a great investment idea, this idea is 50% of the chance is going to go up 10 times in the next year and the other 50% of the chance is going to go to zero for next year. And Tilman, you and I are trained by standard financial textbooks. We go home and build a spreadsheet 50% go 10X, 50% then go zero. Expect to return 5X. We follow textbook knowledge. Man, 5X expect return that’s better than anything I know.

Are you going to put all your money into such an idea? Because expectors are not so good. Of course not. Who going to bet all their portfolio, all their money on something 50% chance go to zero next year? However, if we blindly sleep, and follow the expected return framework, we’re going to get to those situations.

And in actual investing, I have seen some cases and I mean, I studied investing in my life, so I also have learned a lot of lessons. I paid the quote-unquote, tuition, early in my life is if we don’t think about those scenarios of massive, super large-scale loss is going to do extreme harm to a portfolio. Everybody knows on this programme, if your portfolio is down by a very large number, it will take a lot to recover.

So this is the draw down the problem of the expected return or the payoff framework and therefore in structuring my portfolio, I think about odds, O-D-D-S, a lot. What are the odds? Something goes wrong.

And let me give you also an extreme example, just to illustrate the point. So let’s say we have an investment opportunity that’s on weather. We already use weather in this programme. So we can make a bet on weather over the next three years, Berlin’s summer weather going to be hotter and warmer than Berlin’s winter weather and you can make, let’s say, 20% out of this investment if you get it right.

Meaning it’s hotter in the summer and you will lose say, 20% or you can even lose all your money if summer turns out to be colder than winter. We have this investment opportunity, OK? Betting summer is cold or warm in Berlin. In this kind of investment opportunity, I argue, we can make very, very large bets on those investment opportunities or if someone has the guts to do it. If you are 20% return in a year betting in summer weather, you should go and borrow money to make this better unless something catastrophic happens to this planet.

Summer weather going to be warmer than winter, especially if you average over three years. Make it even safer. So that is the odds framework. Sure. If the summer turned out to be colder than winter, we lost everything. What’s so odd that happens? It may happen saying when we’re recording this in 2024, it may happen, but the odds are very low.

From what we can sense and analytically, analytically understand. So I use this kind of framework to inform my portfolio construction. So in my portfolio, I tend to size up investments that have the kind of profile that I described to you and size down the investment with the other kind of profile that I described to you.

So in my portfolio, I tend to size up investments that have the kind of profile that I described to you and size down the investment with the other kind of profile that I described to you.

Meaning, that even investments had a very large chance to have a very large drawdown and have to be downsized as much as they should, put this way. It has to be– At least let me reframe it. It has to be sized very cautiously so that it doesn’t bring extreme harm to the portfolio.

[01:01:41] Tilman Versch: So did you reduce then DoorDash when it went up more and more because the odds were worse…?

[01:01:49] Jackson Zhu: Yes, I have.

Closing thoughts

[01:01:51] Tilman Versch: Thank you. Then thank you for your answers now. I’m done with my questions, but at the end of the interview, I always want to give you the chance to add anything we haven’t discussed.

[01:02:04] Jackson Zhu: Yeah. Tilman, I would like to share a little bit of my learning on risk management.

[01:02:11] Tilman Versch: Go ahead, please.

[01:02:12] Jackson Zhu: Yeah. Oh, thank you. So my current understanding of risk management. Obviously, my understanding will continue to evolve and I hope so as well. My current understanding of risk management is risk management investing is not about making fewer mistakes.

But it is about making fewer large mistakes. Losses on a very large scale of a permanent nature should be avoided at all times and at all costs as well. And losses in minuscule amounts, actually, I think should be welcomed because they are the results of a learning process.

My current understanding of risk management is risk management investing is not about making fewer mistakes. But it is about making fewer large mistakes. Losses on a very large scale of a permanent nature should be avoided at all times and at all costs as well. And losses in minuscule amounts, actually, I think should be welcomed because they are the results of a learning process.

And for active investors, by being active, making mistakes is basically inevitable. In this process, back to what I said now, it is really about making sure no extremely large-scale mistake takes place, but we should be very welcome, I argue, to continuously lose very small, minuscule amounts of money here and there, everywhere that help me learn, that I think help me understand how I’m not good at doing what I think I’m good at doing, how I’m not doing enough work while I thought I have done enough work and that small mistake is a very good part of a dynamic learning process. So that I think is currently how I see risk management.

Thank you

[01:04:02] Tilman Versch: Thank you. So to sum it up, we can only start a small bakery together. Otherwise, it might be too big a mistake if we go long. Thank you to the audience for staying till here and thank you for coming on Jackson. It was my pleasure and now it’s time to say bye-bye.

[01:04:24] Jackson Zhu: Take care.

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