Avoid Disruption. Hi everyone. On top of covering technology, I love learning from great investors. The big news last weekend was that Warren Buffett said he was stepping down as Berkshire Hathaway CEO at the end of the year, following his stellar 60-year run.
No one will match Buffett for tenure and prescience anytime soon, but there are still other investors out there worth watching. One investor I would put in Buffett’s rarefied air is TCI Fund Management founder Christopher Hohn. In fact, Hohn has soundly outperformed the Oracle of Omaha over the last two decades.
Not well-known among retail investors, Hohn’s fund has beaten the market by nine percentage points a year on average. LCH Investments, a fund of funds, estimates that TCI has generated $49.5 billion in total profit, since its inception in 2004. That performance ranks No. 6 all time in the hedge fund industry. Citadel is No. 1 with $83 billion in gains, but it was started in 1990, 14 years before TCI.
Hohn rarely talks to the media, so it was a treat to listen to him at the Norges Bank Investment Management annual conference on April 29. The event was streamed via a little-noticed YouTube video. Norges Bank Investment Management manages Norway’s sovereign-wealth fund.
Hohn laid out the basics of his investment philosophy for high returns: find great companies, be concentrated—his fund sizes positions at 10% to 15%, sometimes even 25%—and have a long-term horizon. He said the average holding period for his fund is eight years, while noting that U.S. investors, on average, sell within one year.
The key to identifying great companies isn’t to focus on growth, he said, but rather to find businesses with true competitive advantages. “A lot of investors get confused that the thing that you want is growth,” Hohn said. “Growth by itself is not a guarantee of making money. You need, critically, barriers to entry, to competition, and sustainable value add.”
The hedge fund manager looks for companies with vital intellectual property, a large installed base of customers, and those that provide an irreplaceable service or product with high switching costs. “Most investors underestimate the forces of competition and disruption,” he said. “The real thing is sustainability of moats.”
One large competitive advantage is size, or what Hohn calls “scale and scope.” He cited the example of Microsoft leveraging its distribution, extensive customer relationships, and bundling power to beat videoconferencing pioneer Zoom Video, even though its Microsoft Teams was arguably the inferior conferencing product.
Hohn said investors can’t get complacent and have to stay on top of their companies, tracking the latest technology developments. The best definition of risk, he says, is “not knowing what you are doing.”
Hohn is paranoid about the potential for disruption, which he has seen time and time again with his former investments. He saw one investment in the Yellow Pages market go from $50 billion in market value to zero after being disrupted by the internet. He also watched the cable industry’s robust economics quickly deteriorate from overbuild and rising competition.
TCI’s latest 13F securities filing shows large equity positions in Microsoft, Visa, and Alphabet. Each of them have dealt with disruption at different times in their corporate journeys.
As I write this, Alphabet shares are tumbling on news that Google search volume through Apple’s Safari browser fell for the first time ever last month as consumers
flocked to AI search providers. It fuels concerns that Google search itself may be getting disrupted. I’m not ready to declare Google’s demise, though I will note that nearly all my search queries have moved to ChatGPT, Gemini, and Grok, away from Google.
As Hohn advises, investors will need to keep a close watch on any search-related news.
Hohn's general framework fits two companies I've written about frequently for Barron's: Nvidia and Nintendo.
I’d argue that both companies are irreplaceable. Nvidia’s moat is CUDA, which provides AI start-ups and enterprises unrivaled stability as customers have spent over a decade ironing out software issues. The chip maker’s other advantage is scale and scope. The numbers have become so large that it’s difficult for rivals to compete. On Tuesday, Nvidia CEO Jensen
Huang said the company’s latest AI server weighs 1.5 tons and uses 200 suppliers. Each generation of Nvidia chip now costs $20 billion to $30 billion in R&D, Huang said. “This is a giant game.”
For Nintendo, its console platform is the only place gamers can purchase franchise sequels for Mario, Zelda, Metroid, and Animal
Crossing. Fans will buy those games console cycle after cycle. The new Switch 2 console, due out on June 5, is sure to drive a new wave of game purchases.
I don’t see imminent disruption risk for either company on the horizon. But, as always, investors should be utterly vigilant.
Write to me at tae.kim@barrons.com or follow me on X at @firstadopter.
.jpg)
