Our inaugural investor letter
This week we have decided to share with you our inaugural investor letter, which we are sending to investors. It’s an exciting moment for us and we want to share it with our entire community.
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Dear investor,
We begin our first letter to you with a quote from Chinese author, Liu Cixin’s The Three Body Problem – the first book in the spectacular science fiction trilogy that inspired the name of our business.
“干我们这行的，其实就是把好多看上去不相关的事情串联起来，串对了，真相就出来了。”
“In my line of work, it’s all about putting together many apparently unconnected things. When you piece them together the right way, you get the truth."
This is the answer of police detective, Shi Qiang, to a question from nanotech professor, Wang Miao, desperate to ascertain what was going on in a tumultuous world. Shi Qiang is one of our favourite characters from the book as he is direct and methodical. He isn’t an intellectual, but he is extremely street smart and sharp as a razor.
We wholeheartedly believe that this quote applies to the craft of investing. Our ultimate success is a function of our personalities, which have been defined by nature and personal history, and which draw us to an incredibly wide variety of interests and curiosities – many utterly unrelated to financial markets. From these interests come our ideas, and these ideas, put through our rigorous investment process, produce our portfolio. We have no preconceptions. Price action is our truth.
We have often written in our newsletters that we invest in stocks and not companies and as many around us gaze in bewilderment at the rapid rally back in the markets, we do not question the price action: we simply look for clues and act according to our process.
In our industry, there are a lot of voices prescribing where markets will or should head to, but in truth, the market doesn't care what anyone thinks. There is an enormous human brain sized gap between the fundamentals of a company and the price of its stock. Call it the market rating or P/E, but it is essentially a ratio expressing a collective human imagination's view on a stock. And what’s more, the factors driving this imagination are without number, never precise and ultimately can only be subject to speculation. They are beyond anything resembling science.
We prefer to watch and follow the price that the market prescribes to us and take our lead from there. In a market structured as it is today, it’s delusional and dangerous to think that one could specify what will happen next.
As the dust settles on our first week of trading, we have done our bottom-up work and set all of our sizing and maximum loss parameters, waiting for our trading levels to be hit in many positions in both directions. So we wait, and spend our time doing further research, reading, watching, listening and learning.
Many readers would expect that as we sat down to write this letter, we would naturally pack it full of all of our best multi-year, bottom-up ideas. Let us be clear: we have bucket loads of ideas which we research deeply and thoughtfully everyday. However, what has led us to design our investment process and launch this fund is our firm belief that ideas are only the first step on a very challenging path. What’s equally (if not more) important is according to which triggers we enter our positions and exit them. It's also important to size them appropriately and of course, most critically, to define the maximum loss we are willing to endure in each position and for our portfolio in aggregate. Everyone (and every machine) in the market has a different style, yet we all trade the same stocks. The age of identifying the best ideas and riding them forever into the sunset is mostly gone – the market doesn't give you that luxury anymore.
That is why we have worked incredibly hard to hone our investment process over the past 13 years. As you will know, we believe the behavioural aspects of managing money are of critical importance, not just to know and understand. The GI Joe Fallacy "Now you know. And knowing is half the battle" is just that – a fallacy. Knowing is not near half the battle because our human, fallible natures mean we will continue to go against what we know we should be doing. So we have embedded in our investment process many steps and controls to stop us from straying from the path.
We have many ideas, yet framed incorrectly (in our view) as a "buy and hold for five years", these are not of much use. Of course, we have a base path for each idea, but we are aware that in this world there are many, many paths an investment can take, and if our base case should turn out to be correct it is only because the price action of our chosen instrument proves it. And that is why for us, price is king.
Furthermore, we have decided from the start to operate without the constant bombardment of a Bloomberg terminal or a deluge of sell-side research. We do our own research and use our global network of friends and associates to help us arrive at our conclusions. It frees up our days to think clearly about our ideas and their implementation.
So what about those ideas? Well, for a start, you can have a look at this piece we wrote on what we believe to be a number of emerging opportunities. These are some of the structural themes that we see evolving and providing us with fertile ground to look for bottom-up ideas.
We must, of course, frame our current view in the context of what is happening globally right now. Our current base path (which like all other themes, is open to changing) is that, as a result of this global maelstrom, the US dollar continues to rise versus other currencies (while at the same time losing true value). The dollar’s reserve status, in particular as well as a potential period of de-globalisation, means it’s increasingly possible that US markets stretch their lead over the rest of the world yet again. Additionally our view emerges partly as a function of the (current) structure of the US market (refer to this piece regarding the dominance of passive money) and leads us to believe that this shift has only been briefly interrupted by the COVID-19 selloff we saw a month or so ago.
We look to leading stocks in our identified themes to drive this growth. From Amazon and Netflix in the US, to CD Projekt in Poland and Mercadolibre in Latam (listed in the USA). Equities in the former emerging markets (in our minds anyway) like Turkey and South Africa may perform reasonably well in domestic currency terms, but in dollars, our base case is that they continue to do poorly. Companies listed in many of these former emerging geographies which are global and not reliant on the domestic economies may boom as domestic investors seek relative refuge in these names. We have seen this many times before, and we will likely see it again.
We take this opportunity once again to thank you for your trust. We go to sleep each night and wake up every day determined to prove you right for entrusting us with your capital, right there alongside our own.
Kind regards,
The Three Body Capital team
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. PLEASE SEE THIS LINK FOR FULL DISCLAIMER: https://threebody.capital/disclaimer
Three Body Capital Management LLP is registered in England and Wales under Company Number OC428810 and is an Appointed Representative of Finex LLP which is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”) with firm reference number 507537 and in the US by the National Futures Association (“NFA”) with firm ID number 0461979. This Investor Letter is for informational purposes only. It is not intended as and should not be construed as financial, investment, tax, legal, regulatory or other advice. None of the contents of this Investor Letter is an offer to sell or the solicitation of any offer to buy securities. It is not an offer or sale of securities in the United States or to, or for the account or benefit of, any US person (as defined in relevant US securities laws, including residents of the United States or partnerships or corporations organised there).
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