12 | Graham Rhodes, Investing, Emotional Resiliency and Gaming in Asia

My guest today is Graham Rhodes (@longriver_hk). Graham is Head of Research at Capital For Business Ltd., a Hong Kong-based family office.  He writes through his blog Longriver and is also an organiser of ValueAsia, a non-profit community for students of value investing.

In this conversation, we cover Graham’s background growing up between Hong Kong and New Zealand; his journey as an investor; building a more resilient investment practice; the reasons not to invest in China; why he thinks Asian gaming companies are best positioned for the future; and his experiences working at a family office.  

I had a blast with this one so please enjoy my conversation with Graham Rhodes.

Show Notes:

[00:00:37] – [First question] – Background growing up between HK and NZ
[00:03:26] – Was investing always Graham’s passion?
[00:04:43] – A lowest low in Graham’s investing journey?
[00:06:56] – Idea generation?
[00:09:45] – How does a community help in investing
[00:12:36] – Reasons not to invest in China
[00:17:36] – What does ambitious management look like
[00:19:27] – Gaming in Asia
[00:23:04] – Are the business models of gaming changing?
[00:27:20] – Regulation of gaming companies
[00:29:10] – Macro thoughts going forward
[00:31:54] – Longriver and working at a multi-family office
[00:33:44] – What’s a typical day look like?
[00:35:20] – Any misconceptions or misunderstandings about family offices?
[00:39:44] – Undervalued life experience?
[00:42:21] – What’s been influential in shaping Graham’s worldview?
[00:44:25] – If Graham was 18 again?
[00:46:07] – Plans for the future and wrapping up

Connect with Graham:

Mentioned/Recommended Content:

Listen to this episode on Apple Podcasts, Spotify, Stitcher, Castbox, Google Podcasts, or on your favourite podcast platform.

Transcript:

Kalani Scarrott (00:37): My guest today is Graham Rhodes. Graham is the head of research at Capital For Business Limited, which is a Hong Kong based family office. He writes through his blog Long River and is also an organizer of ValueAsia, a nonprofit community for students of value investing. In this conversation, we cover Graham’s background growing up between Hong Kong and New Zealand, his journey as an investor, building a more resilient investment practice, the reasons not to invest in China and why he thinks Asian gaming companies are best positioned for the future and his experiences working at a family office.

So I had a blast with this one. So please enjoy my conversation with Graham Rhodes. Graham, thanks so much for being here. I’d love to start with just how your early life was growing up between New Zealand and Hong Kong. I guess it’s not quite the typical adolescents, I guess if you call it, but how did you find that? And I guess, how has it shaped you and where it’s led to you to today?

Graham Rhodes (01:23): Yeah. Hey Kalani. It’s such a delight to be on your podcast and I’m really honored to be your guest. I have to say actually it was quite a typical Hong Kong, at least in my group of friends because before 1997, so many people left Hong Kong and migrated elsewhere, be it to New Zealand or Canada or Australia. I was really part of this movement. I don’t think my parents left for that reason though, because my dad is Eurasian, he’s half Chinese and half British. And when he was growing up in Hong Kong in the ’50s a family friend who was a Kiwi came along and said, “Your boy really should be growing up with green fields and blue skies. That’s the best thing for him.” So his parents sent him to boy morning school in Auckland, and I think he really wanted me to enjoy the same experience and healthy living environment.

So that was the decision behind it. And in terms of how it shaped me, I think I’m quite lucky to have had all that international exposure. It really helped me to see the world beyond my town, my city, and to see, I guess, some of these global trends, particularly in China. And I think in terms of my own identity, I really wanted to know more about who I was and just what my family had been doing in Hong Kong, the British side anyway. So it really, from an early age, got me quite interested in the politics and history of China. And this was back before China was a front page story in the news. And I did a lot of reading about history, a lot of reading about politics, just to try to build up my knowledge there.

And I think that looking forward to today that really prepared me well to understand China’s role in the 21st century. But it also gave me the skill to be able to look outside back into myself, to try to understand where I’d come from. And I think that’s actually really valuable in what I do today as an investor, just trying to stay detached and trying to have a range of multiple different perspectives anyway, on any given issue.

Kalani Scarrott (03:26): Yeah. And I love that story and I’ll be honest, I’m pretty jealous because it’s something I wish I had the bit of change, but in terms of investing, how did you get started? Was it always a passion early on? Was there any early influences and yeah, just take it where you want.

Graham Rhodes (03:39): Actually I did a BCom degree in finance at university and in terms of investing that might have been one of the worst mistakes I’ve ever made. Simply because the whole curriculum was designed around the efficient market hypothesis and this notion that you as an individual had no hope at all of beating the market, so why bother? And frankly even though I was working in investment banking in my early career and spent a lot of time looking at businesses, I never joined the dots and thought about how I could use my meager savings at the time to try to invest and build my wealth. And it really wasn’t until much later. I think it was 2014 when just purely by chance. Amazon recommended to me a collection of Warren Buffett’s shareholder letters and that gave me everything that I’d always been looking for, the framework tying together business and investing and wealth creation. And even better than that, Warren Buffett just did it with such class. He’s such a nice guy and that’s really what got me started.

Kalani Scarrott (04:43): Has there ever been a lowest low on your investment journey? An experience or a time where you really questioned what you’re doing? Has it ever been just one of those experiences for you?

Graham Rhodes (04:52): A lowest low? Yeah, I think, let me just teach it more or share something more in a positive light anyway. And I know last year was a record year in the stock market and this is 2020. A lot of people made a lot of money and they did very well. I have to admit, for me it was pretty scary actually. Perhaps it was just living here in Hong Kong and seeing the virus spreading so quickly just next door. And then the market’s falling so much. I really felt that viscerally in my stomach. And I think this happens maybe in 2008 in other major crisis, there’s no diversification, everything’s falling at the same time. So even though I thought I had a fairly well diversified portfolio, these quality companies, everything was tanking and that was really hard psychologically actually. And I won’t deny that.

And the biggest takeaway from me from that experience was about how to build a more resilient investment practice. And I thought to myself that you start off with your analysis looking at the income statement, the balance sheet and the cash flows, trying to find good businesses, you try to buy these companies cheap, but really being a successful investor requires you to get through those difficult periods and it takes so much more. So I realized that actually you need to zoom out a little bit. You need to have a healthy life. You need to be sleeping well, you need to be exercising well. And if you’re doing this professionally, you need to have the kind of relationship with your clients where they trust you.

Because if they’re asking for liquidity or if they’re breathing down your neck or if they’re panicking, then of course that’s going to add to your emotional duress. So I think it made me realize actually that being a good investor also means having all these healthy habits. And that was, I think, one of the most important takeaways I took through that period. I wasn’t, not sure if I’d describe it as a lowest low, but there was certainly a valuable lesson to learn there.

Kalani Scarrott (06:56): No, I love that. And I love, especially early on, you touched on knowing your identity. So I think, yeah, if you’re going to be any half decent investor you’re probably going to know yourself what to expect, how you are going to handle things. In terms of idea generation, what does that look like for you? Especially you can read Cantonese or Mandarin as well?

Graham Rhodes (07:11): I can read Mandarin, Cantonese written is very different. So I have to admit that I can’t do that. But I guess my idea generation is quite random. First of all, and this goes back to what I was saying earlier about learning how to construct an investment practice which works for you, gives you some resiliency. One of the things that I realized as part of that was as just one person working alone, it doesn’t work for me to go chasing a new every week or every month. I’m really looking for these ideas with long shelf lives. And so that’s really my first filter. Is it something that I can own for five to 10 years? And the way that I think about that there has to be some kind of competitive advantage, which allows me to predict what the business is going to look like in five or 10 years time, because most businesses don’t do very well over that tenure.

And I also look for management who can help me navigate the uncertainty of the world, but who also have the ambition to take the profits that they’ve earned and reinvest them into new projects. And then I think as part of the margin and safety for me, again, I like to have tailwinds and that can be in the form of an industry undergoing some kind of positive change. Like for me the world’s digital transformation is one or in a country with a higher rate of growth than the global average. So that can be another. And if I find something like that, I can really just sit with it for a very long time. So those are the filters that I use when I’m sifting through ideas. Then in terms of where do these things come from, it could be as random as something that a friend suggests, something that I see on Twitter, a podcast that I’ve listened to, or I think another really valuable resource that I’ve built over the years with my friends is a group we have here called ValueAsia.

And this was formed in, I think, 2014 or ’15 as a way for people who are curious about value investing to get together and to learn from each other. And we’ve always had this ethos that it’s not about networking, it’s not about showing off who’s got the biggest ego or the biggest bank account, but about supporting each other on this journey as investors and practically what we do every month. We have two idea nights and that’s just been a fantastic way to learn about new companies and to share. And the whole model is based on reciprocity. So the more you get to this group, the more you get back. And I think over five or six years, that’s been a really valuable source of learning and ideas for me.

Kalani Scarrott (09:45): Specifically how do you think maybe social investing, or at least having ideas to bounce off, how do you think that helps you? Whether it’s just forces you, I guess, to know your ideas inside out? How do you view the positive of it?

Graham Rhodes (09:56): Absolutely. I mean, the caveat of course, is that at the end of the day no one’s going to bail you out. If your investments go wrong, you have to own the decisions, you have to be independent minded. But that said, I find it’s a great way to break out of the loneliness of investing because so often we’re barred doing reading on our own. And I think having friends to join you on that journey is really quite nice actually. So again, building emotional resiliency, just having some companionship I find quite good. And then specifically, I think the rigor that we all ask of ourselves really is helpful to find blind spots. When we present investment cases, for example, we have written Q and A, and so people will read your written write up and really grill you. And it’s obvious when you don’t know what you’re talking about which leads me to the second point about this group or having good friends anyway.

You need to have people who aren’t afraid to tell you the truth, and that’s so rare in life. Because we’re also worried about preserving friendships and I guess asymmetric payoffs of being honest and being able to cultivate a group of people who can be candid with you is super valuable. I’ve found.

Kalani Scarrott (11:16): Pretty broad question, but is there a general or trend of investors in Hong Kong and what they look for do you think? Is there certain styles that they’re more biased to obviously, maybe mainly in China or?

Graham Rhodes (11:24): Yeah, first of all, I just remind your listeners that Hong Kong is probably one of the world’s most important financial centers, if only because we’re the only place in China where companies can raise U.S. dollar finance and hence, we’re kind of the gateway for this incredibly important economy to connect with global financial markets and comment on with that, we’ve got a very large and vibrant financial industry. So there’s people here of all different shapes and sizes, stripes and colors. And I think what ValuAsia has done and my group of friends anyway, we’ve asked people to self-select based on this interest or this passion and value investing. Of course, that’s a very broad church. We have people who go for deep value, we have people who go for growth. But really it’s just more about the attitude and being open-minded, interested in learning and believing in reciprocity. So that’s just my friendship circle. And then within Hong Kong itself, yeah, I’d have to say the overwhelming focus here is on investment into Mainland China. So most funds will be looking at stocks over there.

Kalani Scarrott (12:36): So maybe foreign investors looking and investing in Hong Kong, do you have any advice for them? Maybe just very generally of course, or maybe things that they should look out for?

Graham Rhodes (12:46): I thought about this question before you asked me it and I’d want to say it would be easier for me to invert it actually. And perhaps I tell you all the reasons you shouldn’t invest in China. I hope your listener can appreciate that. So there’s this idea, I think there was an academic who observed something he called home country bias where most people tend to invest most of their money in their home country. And I think his argument was from portfolio construction point of view, that wasn’t necessarily efficient because maybe you could first of all, gain some diversification from investing abroad. But also you might be able to earn higher rates of return too, which sounds great. But if you’re truly being honest with yourself and you agree with this principle of your circle of competency, then in some ways you have no right to invest abroad because maybe you have no idea what you’re buying.

And so I’d argue that for the majority of people investing overseas is not a good idea. It’s far better to find a good company that you know well, and you could hold and own through all the turbulence than it is to just buy something simply because it’s in a different country. So that’s kind of like the framework. And then why you shouldn’t invest specifically in China. And I think there’s so many reasons for this. Yeah, sure. It’s like an economy, which has been growing faster than global GDP, but let me assure you demand isn’t important when it comes to equity returns. Supply is a far more important thing to consider. And in China, in so many different industries barriers to entry have been very low, access to capital has been quite easy, et cetera.

And so supply expands massively in response to demand and you end up in situations of overcapacity and equity investors just get crushed. So in my opinion, that’s the best reason not to invest in China. And you can see this in the numbers, if you think over the last 30 years I think, China’s GDP real GDP per capita has compounded at something like an eight or 9% per anum CAGR. But if you look at the Hong Kong market as a proxy for the return on to equity of that growth, it’s been really bad. You’re probably talking single digit CAGR over like 20 or 30 years, which is horrible.

Kalani Scarrott (15:09): So what doesn’t line up, yeah.

Graham Rhodes (15:11): Yeah, exactly. So there’s another reason not to invest in China. And then a third one would be this is an incredibly dynamic and diverse and competitive market. And unless you have the language skills, unless you really know what you’re getting yourself into, you simply don’t have any competitive advantage at all. So don’t fool yourself.

Kalani Scarrott (15:33): Yeah. I totally agree, because yeah, especially for me, I find it hard enough investing in the U.S. because I don’t know what exactly is going and the materials all in English, let alone trying to invest abroad in something I can’t read.

Graham Rhodes (15:44): Oh, and here’s another thing which I think is really important, in the U.S. after the dotcom crash, they introduce something called Reg FD. So any time a company communicates with investors, it all has to be documented and made public. So I’m talking about earnings calls, I’m talking about conference presentations, et cetera, et cetera. We don’t have that in Hong Kong. And as far as I’m aware, actually it might be better in Mainland China. I think companies do have to disclose their investor relations activity. So what I want to say is unless you’re an institutional investor with a billion dollar balance sheet, getting the best treatment from a bulge bracket investment bank you’re going to be behind in terms of what management’s saying in private. So that’s another really important disadvantage you should bear in mind.

Oh, but hey, Kalani, before I rain on the parade completely, let me remind your of good listeners, why you should invest in China. Because it wouldn’t really be much of a podcast if I didn’t give you something nice to think about. And in my opinion, the best reason to invest in China is the quality of the entrepreneurs here. You see some people coming from the most humble backgrounds, like village which have just existed in poverty. And these guys have done well at school and risen up. And I think what puts them on another plane is the ambition that they have and the vision that they have, not just to build great companies in ch China, but to build great companies across the world. And really the only other place that I see ambition of that size is the West Coast of the United States. So for me if I can find someone who I trust, who has a good track record, who’s in an industry with like a high barriers to entry and who has that kind of ambition in China, I get really excited.

Kalani Scarrott (17:36): Yeah. Love to hear it. And I’ve heard you mention on a previous podcast, you often look for ambitious management, but what does that look like for you in terms of specifics?

Graham Rhodes (17:43): Yeah. I mentioned earlier that one of the things I look for are ambitious management and that’s simply people who have the vision to reinvest the cash flows that a business is earning. You think about a company, an investment. If it’s successful, maybe you get a 20%, CAGR over 10 years. It’s not a straight line in terms of the way that business develops to generate that kind of return. They to think about how to reinvest. And so they need to have some kind of vision. They need to have some kind of boldness and it’s hard to pin down exactly what that looks like, but you’ll know it when you see it. So I found that in a number of different places, a number of different industries, and maybe I could just illustrate with a couple of examples.

So in China for example, we could talk about Tencent, which now has a vision to become, I think not just China’s, but the world’s best and greatest gaming company. And they’ve invested heavily to pursue that ambition. And I really like that. And I think they have a very good chance of doing it. Another one which might be closer to home for Yukulani is a company called Domino’s Pizza Enterprises, which is just a humble little operation operating out of Brisbane. But which now is the master franchisee for dominoes, not just in Australia, but also in New Zealand, Holland, Germany, France, Denmark, Japan, and Taiwan. And I probably left off a one or two countries truth as well. So these guys are just very ambitious and they found ways to reinvest the cash flows from the business into high returning projects. And that’s what drives good equity returns over the long term. So I think that’s critical and I think that’s really important to look for.

Kalani Scarrott (19:27): Yeah. Domino’s has just been an obscene growth story, but yeah, it’s like from the start you just mentioned, it’s always had that vision, I think. So you touched on Tencent, what’s so interesting about gaming in Asia for you?

Graham Rhodes (19:39): I first got interested in gaming in my old job when my previous boss was kind enough to give me responsibility for our investments in South Korea. And I was looking for what are these stable, durable companies that I could use in the portfolio just to give me some kind of a bedrock? And ordinarily those might be like consumer staple companies. Things with brands, high barriers to entry and pretty predictable recurring cash flows. Unfortunately as far as I could tell in Korea, those didn’t really exist, or if they did, they were facing very, very challenging headwinds. But instead I found gaming companies, companies like NCsoft for example. And just to give your listeners a bit of history, South Korea was one of the first countries to develop high speed broadband. I think back in the 1990s, they invested massively into fiber networks.

And so everyone jumped on the internet and really were living on the internet over there. And they were one of the first countries to, if not the very first to pioneer, what are called Massive Multiplayer Online Role-Playing Games, MMORPGs. The very first one was from a company called Nexxon called Kingdom of the Winds. And you talk about Mediverse now as being constantly plugged into the internet and having like a life online. Well, MMORPGs were kind of like the proto version of that, where people would form an identity online, they would form communities online and it was about so much more than just like bashing monsters and upgrading your armor to the next level. It was really about who you were as a person. And going back to the business point of view again, once people had made that kind of investment, they were very unlikely just to walk away when a new game came along, which made the earnings of these companies much more predictable than the average business.

So I got quite interested in that. And I think because of that background combined with another phenomenon here, which is that a lot of Asia is mobile first. I think you have this really interesting confluence. So these two trends, which is always being online, plus being online wherever you go. That’s seen Asian gaming companies develop in a different direction from ones in the West. And if I had to put my money on it, I’d say that’s going to be the direction for global gaming in the future. And you kind see a few data points confirming that thesis. So for example one of the most prized or legendary gaming companies in the West is a company called Activision and their shooter call of duty is celebrated. It’s like super famous. But when they wanted to go mobile, who do they turn to?

They turn to Tencent and Tencent Paul partner with them to take that game mobile. Similarly, you saw with Nintendo, I think they just released a new version of Pokémon Unite, which is MOBA, a massive online battle arena game. And who do they partner with to get that going? Tencent. Because Tencent has the experience there. So it’s an accident of history, which put them in this really, really favorable position for where I think the gaming industry is heading. But that’s just a fact, we’ve got that now. So sorry. That was kind of a long winded answer, but I hope it gives you some of the contexts of my thinking.

Kalani Scarrott (23:04): No. No, please I love that answer as well. And business models changing in the gaming industry, because I know for me, it’d certainly be noticeable. I played Call of Duty growing up and the Call of Duty I played is much different today with, it’s not pay to win exactly. But in terms of cosmetics wise, do you see gaming companies continuing going down that track? Or how can they innovate going forward, do you think?

Graham Rhodes (23:21): Yeah, I think what you just said pay to play is kind of a bit of a nasty word, actually, it definitely applies to some models, but maybe a nicer way to think about it is free to play. And so if I could just give you an example from another Tencent game, it started to harp on about Tencent, but I just really like them. They have a game similar to PUBG called oh, sorry, Peacekeeper Elite. And recently they had these skins that you could buy. It wasn’t a skin, but you know in PUBG you can get a car and you can zoom around with your mates shooting people. In Peacekeeper Elite, you could actually buy a Tesla. So, you pay a bit extra, you get this super cool car within the game, which is kind of more fun to drive. Maybe it’s a bit faster, but again, signals a bit of state status and being like a digital good, the margin on this is very, very high.

But it doesn’t really affect the gameplay itself. I don’t think anyone could have an absolute advantage over another player simply because they had Tesla, but it just looks cool. And there were certainly enough people who wanted that that, it made a difference to the bottom line as well.

Kalani Scarrott (24:33): Yeah, no, it’s interesting. You mentioned that it’s now become a status symbol. We still had status symbols back in the day, but it was more, you had to grow on to get a banner or a certain skin for your gun or something. Whereas now it’s yeah. Part of a battle pass or even just in an item store. Are there any other interesting gaming companies in Asia that really take notes for you, for certain reasons?

Graham Rhodes (24:50): Yeah, most of them, I think a lot of your listeners will be familiar with Nintendo and Nintendo’s truly legendary in terms of the quality of it’s intellectual property. I mean, who hasn’t heard of Mario or Zelda. And I think that’s one example of an Asian company which has gone global and done quite well. Where Nintendo might fall short though. Arguably is on the ambitious management side simply because they’re very reluctant to experiment with their business model and move away from integrated hardware and software to embrace mobile as a new form factor. And that has its pluses and minuses. I mean, the way that the games work on their consoles is just a thing of beauty. I mean, it’s basically art. But they’re obviously shutting themselves off from a market of billions of people by making it so expensive to get on board.

And then I think with Nintendo, a personal bug bear of mine is after you’ve invested so much time living in and breathing their worlds, for example, Zelda: Breath of the Wild you beat Ganon, and it just ends. You’re left there and oh yeah, sure, wait and like bash a few more monsters, but the story just ends. Whereas the games that I described to you earlier, these MMORPGs, just go on forever. They’re their own worlds, they’re their own stories. People can be creators within them. And you don’t have this kind of like A to Z linear narrative. But they’re always changing. And I think that’s an interesting business model or aspect of game philosophy that Nintendo might be missing out a on. So to invert that again, which of the companies doing this well and another one that I’d recommend your listeners to look at is a company called NetEase which was one of the first Chinese companies to really crack the MMORPG market.

Not only did they get all the hardware right to scale up and the content right. But they also figured out their in game mechanics. So you don’t get inflation in the game or anything like that. And it’s interesting to note that their game Fantasy Westward Journey despite being launched something like 20 years ago actually had its best over year, last year. So the longevity of products like that, of worlds like that really interests me as an investor because again, they’re just much more predictable than a kind of hit driven or console driven cycle that you see elsewhere.

Kalani Scarrott (27:20): Do you see any threats going forward, whether it’s through regulation, like either with loot boxes or what we’ve seen in China, I think with maybe kids in gaming, what do you think are the biggest threats going forward?

Graham Rhodes (27:29): Yeah. Sure. And thanks for reminding me, that’s another reason not to invest in China. The economic model there is very different and I guess we could say the role of the state in the economy is very different. And so you’ll be surprised by how active, I guess, or interventionist the state is in steering capital or steering people towards certain things and away from others. And what you’re referring to was an article recently in a state owned newspaper, which called gaming spiritual opium and great term. Hawks all the way back to like the opium war and colonization. And I think that’s true if you think about how children enter entertain themselves or the kind of like fun that they get and the entertainment that they have, then video games certainly ranks up there in China.

And I think it’s only fair that the government come in and say that, We need to protect younger people who might not have the self-cont control to discipline the amount of time that they spend on that.” Is that a threat to the gaming companies? I think in some degrees, no, if you just go with what Tencent disclosed in it’s recent earnings call, minors people 18 and below contribute something like, I think 2% of their revenue from gaming. So in terms of the money, it’s basically immaterial. But then if you think about the broader context where the state intervenes, decide how people, spend their leisure time, what constitutes good entertainment and bad, then that’s a little bit worrying.

Kalani Scarrott (29:10): To touch on the current investment landscape within Hong Kong and China. And I know you invest globally. What are your feelings going forward? What are you watching for? Or how are you proceeding, I guess?

Graham Rhodes (29:23): This goes back to what I was saying earlier about having a concentrated portfolio of companies that I understand well, and one of the things that my wife loves to tell me is that there’s no such thing as a perfect relationship. You just choose the problems that you have. And what I mean by that is you can choose to accept China macro risk or Hong Kong macro risk, or you can’t, or you don’t sorry. And I guess implicitly I’ve chosen to do that. But at the end of the day, if I’m investing in a company like Tencent, part of me is betting on the fact that it is just so critical for the future of the Chinese economy to have a company like this, which could help propel their technology, which can help them raise their productivity, which can help enterprises become more digital and so forth. That you don’t have a get out of free card, but you do have some license there to continue innovating and to be free.

And then as I mentioned earlier, a lot of Tencent’s ambitions in gaming at least are to go more global. So you’re moving away from simply accepting China market risk there to looking at other markets elsewhere. And then what I’m investing in a company like Tencent I’m also not betting on the price of steel or inflation in pork prices or that kind of thing. So I’m really narrowing down from country risk to specific risk within an industry that I can understand and partnering with a business and people who, again, I think have a long track record which I can trust.

Kalani Scarrott (31:01): Just curious, don’t have to answer. It’s more just for me. Do you think maybe Tencent has an advantage because it can build that maybe soft power abroad?

Graham Rhodes (31:08): Oh, building soft power abroad. I would say that isn’t their strategy at all actually, I think what Tencent has done to invest abroad has been to take small stakes in leading Western game companies. Like I mentioned, Activision earlier I think Tencent is one of it’s largest minority shareholders. And recently it’s been using it’s expertise in building mobile games and open world games to help translate legacy Western IP into what I’ll call the new era. And so I think that’s a really valuable skill. And again, it’s simply an accident of history that Tencent’s good at doing that, and that it’s exactly the skill that’s needed today. But they’re using it well.

Kalani Scarrott (31:54): I’d love to transition maybe into your fund, LongRiver at the moment and your writings maybe just why you started Long River and what’s the story behind it?

Graham Rhodes (32:02): Yeah, sure. So to be clear, I work at a multifamily office at the moment and we don’t manage any client capital and it’s been a really cool place to work for me for the last two years. I used to work in a more institutional role and I think being away from the pressures of short-term performance has been a real blessing. And also being able to concentrate capital into my best ideas has certainly made me feel more confident about my investments. And again, that allows me to weather the volatility much better. So that’s kind of where I work now. And then Long River at the moment is a blog that I started at the end of 2019 to really document my investment thinking and to put pen to paper, to flash out my ideas. And what I found was even if I’m writing just for an audience of one, just for myself, any time I try to put my idea into writing like that, I’m always realizing what the implicit assumptions are, what I’m taking for granted.

And so one thread will lead to another and I’ll keep pulling and pulling and pulling until I’ve developed, what I think is a much more comprehensive and rigorous understanding of a business. And that is been an enormous help in terms of, again, being prepared for when things go wrong. And the longer of a blog it’s my window for sharing my investment thinking. And I also help that it’s a way to build community too, because you put things out there, you get people replying to you, they help kick the tires. And they also help bring new ideas as well. So it’s a and pretty fun in that respect. And I also just really enjoy the process of writing, so.

Kalani Scarrott (33:44): Yeah. There’s so many benefits to it and I can never recommend it enough to people just putting your work out there, because, yeah, you’re bound to learn something, you’ll meet someone new. But what does your typical day look like for your role and what you do?

Graham Rhodes (33:55): I became a father recently proud dad to a six and a half month old son. So my a day these days starts with just hanging out with him. We spend about an hour together in the morning, we play together, I feed him breakfast and then because I work from home, I just put him down and walk through a couple of rooms into my office. It’s really quite nice. And I’ll probably start by checking the market to see what happened overnight in the U.S. or if there have been any filings released, which pertain to our investments. And then I’ll dive into a research product project or something that I’ve been reading.

There’ll be times when my reading is quite varied, looking across different companies or sources, but then there’s times, and these are the best of times when I get really excited about a company and I can’t do anything else. And I’ll spend days on end just trying to learn as much as I can pulling on those threads to figure out the business. And yeah, so it’s really quite random and really quite varied. And just to supplement as well what I was saying before about part of being a good investor, having a good life as well. I definitely can’t sing enough praise for the virtues of exercise or good sleep or eating healthy. I think if you can try to control the stresses that you’re facing elsewhere, they’ll definitely make you a much more resilient person. As an investor.

Kalani Scarrott (35:20): Especially for me, I don’t know much about of multi-family office investing. Do you think there’s any maybe misconceptions or misunderstandings about what you do or your role, what’s important things that you think maybe me, someone new to it should know I guess?

Graham Rhodes (35:33): I talked with a recruiter a while ago. He approached me and I told him I was working in a family office and he said, “Ah, family offices.” Once you’ve worked at one, you’ve worked at one. And I think his point was, there’s just no way to generalize because they’re just such unique animals. And so much of it just depends on who the family is and what their expect are. If I can say how they built up their wealth and that kind of thing. So I’m afraid I can’t really offer too many generalizations there.

Kalani Scarrott (36:06): No, that’s fine. I suppose, yeah, maybe it’s too specific, but if there was any advice for someone thinking about going into a family office role, what would you recommend that they don’t do I guess?

Graham Rhodes (36:16): Oh, what they don’t do. I think as much as anything, just take the time to understand the people behind the business. So don’t rush into, it would be one piece of advice.

Kalani Scarrott (36:33): I don’t know. I do like the idea of family office investing. It’s just like, what do I want to know more about it I guess maybe. I don’t know. What’s the natural evolution, I guess. Is this a forever role? I know you obviously maybe you can’t speak, but yeah. Where do you go from here? I guess maybe.

Graham Rhodes (36:48): I think one of the greatest benefits of working in a family office is for me anyway, having a good mentor. So again, I mentioned I’m recently became a dad and I actually met my current boss when I was six months old at a play date. Because he and my mom were colleagues and his first daughter was born just a couple of weeks after I was. So we’ve known each other for more than 30 years. And I think having that kind of trust and that kind of bond is really, really cool because again, when things get a little bit hairy, you can have a little bit more confidence in each other than you would elsewhere. So for that reason this current role for me has been really exceptional. I get a mentor, I get someone I trust. And I have someone who backs the way that I think about investing and is willing to take these long term bets with me.

Kalani Scarrott (37:42): It’s so interesting for me, because obviously not something that’s common, I guess.

Graham Rhodes (37:46): Now when we have play dates at our house and I meet these babies, I’m looking out for the next analyst.

Kalani Scarrott (37:51): Is there any other people in similar roles you bounce ideas off or is it the same thing it’s a one of one you just got to figure it out yourself I guess?

Graham Rhodes (37:57): I do spend most of my time working alone, but again, I’ve been very deliberate, I guess, to cultivate a network of like-minded investors not just here in Hong Kong, but elsewhere around the world. And yeah, I certainly will bounce ideas off of them. And it’s always quite fun actually having all these different perspectives, people based in China, outside of China looking at the same thing and seeing it in many different ways. And Kalani you’ll be no stranger to this, but there’s tools that you can use to accelerate that process of network building like Twitter or writing a blog or writing a newsletter. And for anyone thinking about how they can do the same, I’d highly recommend them.

Kalani Scarrott (38:35): So yeah. Is that plan, I guess, going forward, build that up a bit more or?

Graham Rhodes (38:38): Yeah, I think so. Obviously like I got to balance my time between focusing on investment and building up my own brand. But I really love this idea of reciprocity. And if you give back to the world, you’re going to find some people who give back to you and you can just keep doubling down on those kind of relationships and get more and more back from them. So, yeah.

Kalani Scarrott (38:58): Yeah. And this podcast has been the best thing that’s ever happened to me. Some of the people I meet with and group chats with now, it’s made it all worth it. So I’d recommend anyone start a podcast just for this to be honest.

Graham Rhodes (39:10): Well, I think what’s really cool about you is it’s often hard to be the one to take the first step. And you’ve done that in spades, with your newsletter and your podcast. So kudos to you.

Kalani Scarrott (39:21): Thank for sure. I don’t want to pump my tires too much, but yeah, especially being Australian. It’s kind of hard. There’s tall poppy syndrome, you know what I mean? You’re scared to go off a different path and try something new and maybe be prepared to fail, I guess. So for me it’s a bit of a, yeah, it’s scary a lot.

Graham Rhodes (39:37): Yeah. Totally understand that.

Kalani Scarrott (39:40): If you don’t mind go on the final round of questions.

Graham Rhodes (39:43): Sure. Go ahead.

Kalani Scarrott (39:44): Yeah. So what do you, think is an undervalued life experience, university age students don’t give weight to what’s an underrated skill or maybe experience you think they should have, or what do you think you wish you had at that age?

Graham Rhodes (39:53): Yeah, I thought about this question from a number of different angles and the first one is what’s the role of a university in a young person’s life? In many different ways, it’s I guess another filtering mechanism before you get into the job market, future employers want to see that you’ve met some minimum threshold of competency or that you’ve acquired some minimum threshold of skills. But you don’t have to go through a university to do that now. I mean, as I mentioned to you earlier, I learned more reading Warren Buffett’s letters than I did in four years doing a BCom hands down. And I was able to do that in a couple of weeks. But you think about places like YouTube or Twitter again, where just the volume of people sharing and the diversity of what they’re sharing and the expertise that they’re sharing.

It’s just unparalleled, I think in human history, the volume of knowledge into which you can tap. So long answer short, look outside of the classroom for your learning. And then I think the other part of your question was really directed towards the specific age group of people. And it brought to mind this quote from George Bernard Shaw that, “Youth is wasted on the young.” And I thought about this and one piece of advice, I sit here in my mid ’30s, ruminating, but one piece of advice I’d have for someone in their ’20s is don’t be timid. Life is just too short to be timid. Think big, think bold, take risks.

I recently read the biography by Ashley Vance of Elon Musk and my God, what a human being, not just trying to change the world in one field with electric cars, but also trying to send people to Mars. I mean, that’s incredible. So yeah, advice for a young person, don’t be an incrementalist, go out there and try to change the world when you’re older, you won’t regret it.

Kalani Scarrott (41:51): Yeah. Exactly. And that’s the thing, what’s the worst that can happen sometimes.

Graham Rhodes (41:54): Exactly.

Kalani Scarrott (41:56): Yeah. I totally agree with you learning outside the classroom. I used to joke that I learned more listening to podcasts in the way to union than what I did for an hour and a half class.

Graham Rhodes (42:03): Well, that’s another advantage of working in a family office. If I was in my old job listening to podcast, my boss would be like, “What the hell are you doing?” But here I can listen to them all day long. And I totally agree with you. It’s actually better quality learning than most things I’d read.

Kalani Scarrott (42:21): Yeah. Has there been, you obviously mentioned Warren Buffett’s letters. Has there been any other books, ideas, experiences been influential in shaping your worldview? Do you think you studied a bit history, you mentioned?

Graham Rhodes (42:30): Oh yeah, absolutely. So in terms of in investing in business, I think the three great canons for your readers would be Buffett, Jeff Bezos and thinking a little bit further afield, a guy called Mark Leonard in Canada who runs an outfit called Constellation Software. And between the three of them, you will get the best business and investing, abundant, abundant. And it’s all free. So take advantage of it. And then in terms of I guess history, one book, which I really liked was by an author called S.N Paine, called The wars for Asia. And I might have to come back to you and requote that title, but she basically looked at the Chinese Civil War, the Japanese war in China and the Japanese war with America as three levels of the same conflict.

And for me, it really put a lot of the history of early 20th century Asia into perspective. And I think that’s such a fundamental foundation to have, because it explains the relationships in the region for the rest of the 20th century and the kind of, I guess, antagonisms and rivalries and bitterness that still exist in the 21st century and shape the world today.

Kalani Scarrott (43:52): Yeah. Because I think like you mentioned, it’s so handy to understand maybe why the relationship between Japan and China is what it is going back to Nanking or whatever. You know what I mean? Everything’s linked in has a history and sometimes you might only see the surface level and not understand the deeper meaning behind it, I guess.

Graham Rhodes (44:08): Yeah, exactly. And especially as someone who didn’t grow up in those places or perhaps at school, wasn’t taught history from their perspective. It’s really good to I guess try to stand in their shoes for a minute and understand where they’ve come from.

Kalani Scarrott (44:25): Slightly off topic. If you were 18 today, where and how would you be spending your time? Do you think whether it’s internships, travel if you could, I guess building technical skills, what would you be doing?

Graham Rhodes (44:36): If I was 18 and living an hour south of Perth, I’d be at the beach.

Kalani Scarrott (44:40): Middle of winter mate, I wish. Spewing.

Graham Rhodes (44:43): Oh yeah. Sorry, Southern Hemisphere.

Kalani Scarrott (44:45): Yeah, nah you’re right.

Graham Rhodes (44:47): And you’re wearing a hoodie obviously. No, seriously. I think if you look at the skills that are needed to do well today, the bar just keeps on getting higher and higher. So if I was 18 and I have a son, so I am thinking about this, I would really be emphasizing he or she learns to code and learn to speak a foreign language. And my first choice for the foreign language would be Mandarin.

Kalani Scarrott (45:12): Much of a difference between specializing and going broad or deep, do you think? People should be going deeper or broader? How do you view it maybe?

Graham Rhodes (45:19): Well, that’s another really good question too. In my experience, depth is usually more valuable than breadth, but the caveat to that is what if you go deep into something without any value. So you have to depend on a bit of like, I don’t know, good luck that your interests coincide with what society finds valuable. And there’s a really good book written by a guy called Cal [Newcomb 00:45:47], I think, called, So Good They Can’t Ignore You, which focuses on exactly…

Kalani Scarrott (45:52): Oh, Cal Newport?

Graham Rhodes (45:52): Cal Newport. Thank you. Which explores exactly this question. And I think his conclusion is, “You should go deep, but you should think very hard about where you go deep first. You might want to choose something like neurosurgery.”

Kalani Scarrott (46:07): Yeah. So my last question, what plans or vision do you have for the next five, 10 years? And what areas, I guess, are you most curious about going forward?

Graham Rhodes (46:14): Yeah, for me, I’m on this journey as an investor and I guess the next stage for me will be perhaps going out to start my own business. And again, I’d really like to create something that lasts as duration. So I’m thinking about how to create an investment product which can allow me to express my long-term views on different companies. And I think that means structuring a company so that I have that resiliency again to be there for the duration, finding the right clients, finding the right fee structure and all that kind of thing. So that’s kind of my immediate plans.

Kalani Scarrott (46:51): I love it. So Graham, it’s been an absolute pleasure. Where can people find you as well before actually wrap up?

Graham Rhodes (46:56): Thanks again, Kalani. If people want to reach out to me, they can send me an email at grahamfrhodes [@] longriverinv.com, or you can find me on Twitter @longriver_hk.

Kalani Scarrott (47:09): Easy, and I highly recommend the website, some of your writings and the translation of Li Lu’s work is just phenomenal. And I really appreciate it.

Graham Rhodes (47:15): Thanks again, Kalani. And it’s really impressive to see what you’ve done with the podcast. Keep it up.

Kalani Scarrott (47:20): Well, you’re too kind mate. Thank you. If you enjoyed this podcast episode, be sure to check the website, compoundingpodcast.com. On the website you’ll find every episode complete with transcripts, show notes and other related resources. Also be sure to sign up to my weekly newsletter, Curated by Kalani, where I share what I’ve been reading, learning, and watching for that week. Same as the podcast, it’s compressed to impress and I aim for maximal return in the time invested. So sign up at kalanis.substack.com. You can also connect with me on Twitter @ScarrottKalani. But until next time, have a good one.