Today, we are bringing you the eighth edition of the Investment Talk Guest Interview series, whereby I bring you some discussion with a selection of my favourite investors in the Fintwit environment.
Today’s guest interview features Richard Chu, otherwise known as Mr Teladoc, who currently operates as an analyst at Luca Capital and Saga Partners. Richard is a self-proclaimed growth investor, with a focus on SaaS, and healthcare tech.
I love getting the opportunity to showcase some of the excellent young investors here, and Richard is certainly an excellent young analyst.
So, we have Richard with us today, and this has allowed us the opportunity to pick his brain on the healthcare tech sector, which I was excited about as this is an area I like to follow.
After a stint at Queen’s University, in Canada, where Richard studied commerce, he began investing in 2018, during his third year as a student. After roles at Playstation, and EY, Richard landed himself a role as an investment analyst at Saga Partners and Luca Capital (the parent of Saga Capital).
In addition to his work at Saga, Richard also frequents the Fintwit universe under the handle @Richard_Chu97, where he has amassed an impressive following due to his insights.
You can also find a selection of Richard’s work on his Substack where he shares his analysis of companies in the healthcare space, as well as insights in to his own PA.
I will leave a selection of his work below for those interested, I strongly suggest signing up:
• Teladoc and Livongo - A Merger That Will Reshape The Healthcare Industry
• Agora: Democratizing Real-Time Engagement
• Teladoc Health: Reshaping Healthcare
• GoodRx: The Frontdoor to Healthcare
“Everyone only has 24 hours in a day. Hence, there is only a finite amount of time that I can trade for money. And what if I lose my job? Well as Mark Zuckerberg put it, “the biggest risk is not taking any risk”. I’ve seen my parents and my friends work themselves to the core for that next promotion, to get a slightly bigger bonus, or in some cases just to keep their job. Yet much less frequently do I see people spending the time to learn how to compound that money.” - Richard Chu
Introductions over, lets get into it.
Welcome Richard, I would like to start of by saying thank you for agreeing to partake in today’s interview, and allocating some time to do so, I am sure the readers are excited about this one. I typically start these things off by asking the guest to share with the readers a little bit of historic backdrop.
So, if you could introduce yourself, and take us through the sequence of events that led to you where you are today, and perhaps some flavour on the kind of work that you are up to now at Saga Partners.
Thanks for the introduction! I’m an analyst at Luca Capital, an investment firm that manages separate accounts for clients and the parent company of Saga Partners.
I started my investing journey not too long ago in 2018. I had a very generic start, I was doing my summer internship at PlayStation at the time and had some extra money laying around. I invested in some beginner personal finance books that really taught me the importance of compounding. I realised that there’s only three parts to the equation: the length of time you're invested, the amount you contribute and the returns you’re able to generate. I started immediately and the vast majority of my savings are in the market so that was the first two points solved, but the last part, maximising my returns, needed some work.
I didn’t have anyone to guide me when I started, so I made mistake after mistake and being a student at the time, I didn’t have much money to begin with. However, I pushed myself to improve and those mistakes eventually helped me develop the emotional discipline I needed to handle the inevitable volatility that comes with investing. I read whatever material I could find and kept an open mind throughout, eventually developing the confidence to share my own knowledge on Twitter (@richard_chu97). I also wrote deep dives on Seeking Alpha and eventually my own newsletter (Richardchu97.substack.com) and the one I wrote on Livongo Health at the start of the year really impressed the guys at Saga who also owned a position at the time, and after getting to know each other for a couple months, they invited me to be a part of the team in August.
I think it would be fair to say, that some know you as Mr Teladoc, largely based on your enthusiastic and insightful coverage of the company, as well as your knowledge of the previous embodiment of this, now merged, entity in both Livongo Health and Teladoc.
It appears you pay particular focus to the health and wellness sector, and all the tangents stemming from that umbrella. This is shown by your sizeable position in Teladoc, as well as holding companies like DarioHealth, GoodRx, Huami, and others.
I am wondering if you can share with us what attracts you to this sector most, and perhaps lay out the rationale for where you see the future of healthcare heading?
My passion for the digital health sector really began with my investment in Livongo. Healthcare is this massive $4 trillion industry that has been one of the last ones to innovate. Now, there are many reasons for that but essentially, the incentives were all misaligned and even though many wanted to do something, large scale disruption wasn’t really happening until COVID. Hemant Taneja, a VC at General Catalyst, said that COVID is the industry’s “iPhone moment”, meaning that it really now opens up a universe of possibilities. I think that Teladoc is best positioned to reshape healthcare but there is ample opportunity for the others you mentioned to do very well too.
My top two picks in healthcare, which are also my top two picks this year are GoodRx and Teladoc, both of which I felt were at very reasonable valuations compared to SaaS (with very similar traits) and underappreciated by the market.
From a high level, I see Teladoc as the company best positioned to be the infrastructure enabling the necessary evolution of the healthcare system from one that is volume-based, reactive, and inaccessible to a virtual-first paradigm that is patient-focused, preventative, and always accessible.
And GoodRx as the leading consumer brand in healthcare that patients trust to help them navigate the complex, expensive, and opaque US healthcare system. Restoring the same, consumer-directed experience that they’ve come to expect in any other industry.
So we have discussed the early beginnings of your journey, as well as why you are so passionate about the health space. I often think that if you struggle to sum up your investing process in a few short sentences, then you are not so sure of it yourself. So, if you could first detail your approach, and what you are looking for your portfolio to contain in a few short sentences.
Then, if you could expand on that and describe your own investing approach and why/if you feel this pairs well with your personality?
My investing approach is quite simple. I look for exceptional companies with durable and expanding moats, great management, and large addressable markets. Only after studying the company, competition, and industry to the point where I feel comfortable enough with having a reasonable picture of where it will be in 5-10 years, do I then move on quantitative analysis and determining how much is already priced in and what my future returns could be from today.
To aid in identifying these businesses, I’ve created a checklist of 16 criteria:
1. Category leader (dominates a niche, see Gartner/Forrester)
2. Recurring revenue (high visibility)
3. Defensible moat (network effects, branding, IP, process/organisation, counter-positioning, switching costs, economies of scale, talent, etc., what is their flywheel?)
4. High organic revenue growth (>30%, preferably w/potential to accelerate)
5. High DBNER (>120%) and gross retention rate (>90%), >60 NPS score.
6. Large and growing TAM vs market share (potential to 2-3x market cap over the next 3 years?) 7. Progress towards profitability (improving/stable gross and operating margins and cash flows)
8. Strong, mission-driven company culture (4/5+ Glassdoor rating)
9. Founder CEO, experienced management and high insider ownership (insider buying?)
10. Rapid customer growth with fast sales cycles (preferably bottom-up/land and expand model, great unit economics >3x LTV/CAC and short payback period)
11. Diversified customer base (strong pricing power, few dependencies)
12. Optionality and rapid product development (creating a platform, sustainable R&D spend?)
13. User satisfaction / developer mind-share (external job postings, reviews, conferences)
14. Valuation (sustainable multiple w/opportunity for expansion?)
15. Geographic/industry familiarity (US/Canada-based? Can I easily explain what they do?)
16. Technical indicators (relative strength, volume, accumulation/distribution, etc.)
A company does not have to meet all of these criteria in order to earn a place in my portfolio, but exceptional companies tend to check many of these boxes.
I gather than you have been investing since 2018. Whilst a short duration of time, I feel that some of the largest lessons come only in the first few months or years of investing. We all have the same 24 hours, but some will utilise those hours to the maximum potential and extrapolate the richest outcome. Thinking back to when you first started investing, has your approach changed over time?
Certainly, I’ve made a lot of mistakes starting out. Penny stocks, value traps, options, hype stocks, you name it. Each lesson was painful but that was the only way I was going to develop the discipline I needed. In the end, it really comes down to your mindset. Willingness to learn from past mistakes is critical to success because no matter what it may seem like, everyone makes mistakes. What sets some investors apart is their intense desire to recognise, analyse, and learn from their own mistakes rather than simply repressing them. And boy was I desperate to learn.
It wasn’t too long before I discovered there was a community of experienced investors on Motley Fool that had incredible performance and discussed hyper-growth companies in extreme detail. I was immediately drawn to the quality of the discussions and their very particular investment philosophies. SaaS companies were mostly foreign to me, I had invested in Okta as it was a Fool Recommendation and I had loved using it during my internship at PlayStation but besides that, I obviously didn’t have much exposure or understanding of what these companies did.
I dove deeper. I hopped on Seeking Alpha and consumed Bert Hochfield’s wonderful articles on SaaS and around the same time, I had discovered FinTwit and subscribed to Ophir’s CML Pro service as well as Beth Kindig’s premium blog. I also loved Alex Clayton’s S1 breakdowns on Medium. I was enlightened. The strategy made sense, the companies were killing it, and their performance spoke for itself. I sold off many of my existing positions and bought a basket of high-growth SaaS companies after doing hours upon hours of research.
I like to ask all guests this question. Moreover, it can be interesting for the reader to gauge different perspectives from a range of intelligent investors around an identical topic. Concentration in high conviction positions is one of the most efficient ways to earn outsides returns. However, it can also be an excellent way to blow up your returns. As someone who has a weighting as high as ~40% in their single highest conviction holding, what is your take on position sizing, or allocation in general?
I tend to run a very concentrated portfolio given my belief that there are very few exceptional companies trading at fair prices. The Pareto Principle can be applied to many things in life, but there are few places where it is more pronounced than in investing. Most investors may note that a minority of their stocks contribute to the majority of their gains. Arizona State University finance professor Hendrik Bessembinder put this to the test in a study of ~26,000 stocks from 1926 to 2016 and found that only ~4% of stocks accounted for all of the $35 trillion in wealth creation. In fact, over half of stocks had negative lifetime returns and the most common outcome when returns are rounded to the nearest 5% is a 100% loss. In investing in individual stocks, investors really have the odds stacked against them but for skilled investors confident that they can find the 4% of companies that outperform, concentration and a ruthless approach to filtering out all but the most exceptional businesses makes sense. I would rather own a 40% position in a company that I understand like the back of my hand and have high conviction in than 1% positions in 40 companies that I can barely keep track of.
Circling back to the theme of question 4 for a moment. When I first started investing, I made countless mistakes. Buying companies without reading so much as the ticker, having no idea about position sizing, panic selling, the list goes on.
What, if any, are some of the most valuable mistakes you have made so far, and what did they teach you about your desired process, or even yourself as an investor?
My worst mistake was selling out of Tesla during the 2019 crash. It was my top conviction position at the time, but I let the price action and bears get to me. My thesis largely relied on its potential in self-driving but it was hard for me to get a deep understanding of the technology itself so I had no idea when it would materialise. I realised the importance of conviction. One helpful exercise I like to do is asking myself if I would feel comfortable holding or add more if the stock dropped 20% after a bad earnings report. After all, if one quarter makes or breaks my thesis, then it was probably flawed to begin with.
Another question that I like to ask every guest now. If you had to choose three books, of any genre, that you found either; changed your outlook, or were just fun reads, which would you chose and why?
UnHealthcare – Opened my eyes to why digital health has so much potential over the next decade.
7 Powers – Identifying companies with durable competitive advantages is central to my process and this book helps a lot with that.
Homo Deus – I’m a big history buff and the entire series was very insightful but it was especially fun to connect the dots and imagine what the future could potentially look like.
I asked Brian Feroldi this question and I would like to ask you this question as well. I personally feel that once I started journaling my investment decisions, and generally documenting the entire process from investing policy statements to scribing my thesis for buying a position, I accelerated my understanding of this field.
Writing, once infused into the fabric of your routine, can be hard to stop. I am fairly certain everyone has read at least one of your excellent pieces of Substack, which we referred to in the introduction.
What are your thoughts on documenting one’s investing journey, and do you see this is a beneficial exercise, regardless of the amount of capital you are investing with?
I enjoy writing, it helps build my conviction because it forces you to think through your thesis from every angle, competition, industry, business, risks, financials, etc. It takes a long time to gather research, and if you’re already doing that work then why not share it with everyone.
Outside of Substack, thinking of Twitter content forces me to always keep at the top of my game. Sometimes it’s tiring, I had a few people asking me why do spend so much time putting out this content, but it forces me to be a better investor, and helping people help themselves be better off financially is very rewarding. I don’t give investment advice, because what do I know? But I offer my research and let people decide for themselves after reading it.
I share my portfolio, so it forces me to reflect on my decisions. Like you have to have thick skin to share on Seeking Alpha or Twitter or SumZero, you’re putting your calls out there and people will criticise you for it. Most of the time they’re nice about it but sometimes they’re not. It gives you a chance to reflect on your own decisions and if you’re showing some bias or missing something then people will call you out for it.
We all search for different things when we are first analysing a company. Some focus on company culture first, some prefer capital allocation, some like to observe management’s track record, some are accounting buffs, and some like narrative.
If you had to choose three things that a company must have before you even consider investing, what are those three things, and why?
1. Durable and growing competitive advantage – A company that earns a high ROIC today but as a result attracts significant competition that competes it down to average over time is not comparable to a company that is able to sustain a high ROIC due to having durable moats. This is a key reason why many companies that are overvalued on traditional valuation metrics continue to stay overvalued and form the 4% of stocks that drag the market up. Since the market expects ROIC to trend towards average over time, it tends to undervalue companies with durable moats. Companies that lack any moats can be overvalued even at seemingly very low multiples (value traps).
2. Exceptional management – Not as important as a durable moat but I think a lot of people underestimate the power of a visionary founder with aligned incentives.
3. Large and growing addressable market – I often pass on many companies because they are too niche or in markets that are not attractive. I think getting the category right is just as important as the company.
Lastly, I like to round-off this segment with my favourite quote, that comes from Graham. The one concerning the short-term voting machine and the long-term weighing machine. I find it helps me reconcile the irrational price action in the near-term. I do not know who first coined it, but another of my favourite quotes is “If you don’t laugh, you’ll cry”. I find this quote helps me appreciate the randomness of life and the lack of control we have over external factors.
What is your favourite quote, and why?
“The important thing is not to stop questioning. Curiosity has its own reason for existing.”- Einstein.
The essence of investing is in the quality of your fundamental analysis, figuring out what's been priced in, and then not overpaying. As Michael Mauboussin once said, “one of the biggest mistakes in investing is people fail to distinguish between what’s priced in and what’s going to happen fundamentally. These are two different mindsets. It’s the difference between the odds at the horse race and how fast you expect the horse to run.”. The key insight is that alpha comes from the extent to which we are able to develop “variant perception”, a term coined by Michael Steinhardt. He describes it as “the effort to become sufficiently knowledgeable about whatever the subject is, that at a time to be at variance from consensus, because one of the few sure ways to make money in the market is to have a view that is off consensus and have that view turned out to be right”. My mission to understand the world better drives my passion for investing.
Questions from Twitter
In this segment, we collected questions from the Twittersphere, and present them to Richard.
@nanduanilal: “How he thinks about spending time finding the right categories vs evaluating specific companies (ie topdown vs bottoms up research)”
My research is top-down focused, I have certain categories that I have developed a good understanding of and therefore more likely to form a variant perception. I also believe that it can be very difficult to find the high-quality compounders that I look for in certain categories, so I avoid them altogether. Only then do I focus on identifying the companies best positioned within those categories.
@max_tork: “If Amazon Care emerges as a strong competitor, what are the key differentiating aspects for TDOC and how can TDOC compete against a giant?”
Teladoc is already in 40% of the F500 and LVGO was in 30%, together they’ve cornered the employer market. 51.5M patients Amazon currently only contracts with Care Medical, TDOC has over 55k physicians. It also doesn’t have remote monitoring, which boosts TDOC’s value prop massively. More competition is always a bad thing and sure, Amazon can invest a ton and build out their platform but it’s super hard to do, not from a technical standpoint but in terms of building all those relationships when everyone is against you. Acquiring is also hard for them.
@Jon__air: “Why only chainlink from the crypto market?”
I’m more comfortable with the LT thesis for it and see more upside. With Bitcoin there a couple adoption hurdles, especially if it is to be used for everyday transactions. With ETH, it’s hard to see smart contracts gaining widespread adoption without the success of LINK.
@investnwellness asked about your top pick for 2021, which I think we all had an idea which company it would be! Below is a link for Richard’s top pick for the year.
You can find Richard’s Top Pick for 2021 below :)
That wraps up today’s guest newsletter, which marks the eighth edition of this series. I want to thank Richard for taking the time to answer these questions today, I know he is a busy gentleman. I really enjoyed this one. Be sure to follow Richard’s work on his Twitter and Substack, he is an analyst I enjoy reading.
Stay tuned, as we have some excellent calibre guests lined up for you in the coming weeks.
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital
$LVGO team trying to run it back with $HAAC, worth checking out