There's a particular thing the mountains teach you if you spend enough time in them: You can't outrun an avalanche from inside one. The work is in not being on the slope when one comes down. After a couple of decades of doing this, that's become the lens I use for almost every important call I make as an investor. The most arrogant premise in this business, in my opinion, is the one that says “if you’re sharp enough, you'll see the warning before everyone else (and head for the exit just in time).” I disagree with that premise entirely. Catastrophe in the markets doesn't give you that window. The work has to happen long before the event, in the choice not to have been on that slope to begin with.
For the full version with all the context, the video below is the long form. If you'd rather have the condensed read, keep on reading.
A lot of what I've learned over the last twenty-plus years is best described in the negative. My day-to-day work is more about what I rule out than what I rule in. I came to that orientation after watching enough portfolios get permanently impaired by binary outcomes nobody had priced into a discount rate. The structure of my process now starts with avoidance, and what's left after the avoidance pass is the universe I actually look at.
That orientation is unusual in active management. A lot of investors are taught to find the upside first and pressure-test the downside later. I work in reverse. The downside is the gating question for me, because the math of permanent capital impairment is unforgiving in a way the math of opportunity cost is not. Missing a winner costs you returns. Owning a catastrophe can cost you the ability to recover.
What stays on the list is small.
I'm looking for businesses with durable competitive advantages (ideally network effects), that have the potential to grow above GDP for a long stretch. My favorite moat to find is a platform that connects many to many… something like an e-commerce marketplace that links large numbers of sellers to large numbers of buyers, where the value of being on the platform increases as the network grows. Once those connections solidify, they become very hard to dislodge.
I want global reach when the business can support it because the runway extends materially when a company can sell into more than one home market. A business that's only viable domestically has a finite addressable market. A business that translates across geographies has a longer time horizon over which to do its work, and that lengthening is much of what can create asymmetric upside.
I also want a management team I trust at a price that isn't already discounting perfection. The companies I do own are usually ones I've been tracking for more than a decade. That's where the conviction comes from for me… probabilities, applied to the few things I’ve found that actually matter for the long-term profitability of the business. Everything else I might know about the company is interesting, but it often isn't load-bearing.
The universe of what I won't touch is much wider.
Heavily leveraged businesses come off the table fairly quickly, particularly the ones that need to keep rolling debt over to keep operating. The GFC made the hazard of that model pretty obvious. The credit markets can shut, and if they do, a business that needs to refinance to function doesn't have a path back.
Conglomerates I struggle to underwrite from quarter to quarter (too many divisions doing too many different things to forecast with any meaningful precision). Fixer-uppers almost never get fixed… the narrative about turning a company around is one of the most seductive stories in active management, and the data on actual turnarounds is unkind. Changing the inertia of an organization, the culture, the people who run it, is genuinely hard work, and most of the businesses pitched as turnaround candidates simply don't get there.
Geography is the other major filter. There are countries I simply won't invest in, and the reasoning is bottom-up rather than political. In Russia, my honest estimate is that 80 or 90% of listed companies might have some fraud in their ranks. In the US, it might be 10%, but that delta is enormous. Yes, that's still a lot of fraud, but it's a population where the apparatus exists to find them. Russia isn't, and trying to identify the 10% of companies in that market that are genuinely good corporate citizens strikes me as a very difficult way to do this work responsibly.
China is a different version of the same problem. The leadership there has been pretty explicit about its intentions on Taiwan, and I don't know enough to handicap whether that's a bluff. Some of the businesses I'd otherwise want to own would likely go close to zero in the worst-case outcome. Pricing a binary like that into a discount rate is genuinely hard… so most of the time I step back from geographies like Taiwan for that reason.
The bottom line on my geographical red zones is that if I can’t trust the numbers coming out of companies there, I would rather not risk an avalanche in the worst-case scenario (even if the short-term upside might be tempting).
TSMC was a business I owned for more than a decade. An incredible company by almost any measure, and one poised to ride the AI wave for at least the next few years.
I sold it anyway.
The business itself hadn't changed. The AI boom is going to drive enormous demand for the chips TSMC makes in the near term, and the company's competitive position is as strong as it's ever been. The sale came down to the aforementioned geopolitics. If China moves on Taiwan, TSMC as a business probably goes close to zero. The supply chain likely shuts down, the key materials and components for chip manufacturing probably stop flowing, and the equity is likely worthless for the current shareholders. Owning the stock through that event would amount to permanent capital impairment; that’s the one outcome my entire process is built to avoid.
TSMC is where the avalanche frame becomes most concrete for me. The argument for staying in was that I'd see the warning and exit before the worst of it. Even if I believed I could and would, I wouldn’t risk my clients’ capital on that kind of gamble. The work was in stepping off the slope, even when the slope was still producing excellent returns (and the conditions hadn't yet turned).
This isn’t to say TSMC is off the table for me forever. If the political climate changed, or if the majority of its fab plants moved to the U.S. or elsewhere, TSMC could present a great investing opportunity down the line. But at this exact juncture, the risk outweighs the potential reward.
There's a thought experiment I used to run on people who pitched me Russian businesses at a discount. The pitch would be something like, "this is the Google of Russia, trading at a 20 or 30% discount." My response was always to translate the question into a physical asset they'd actually own with their own money. Imagine, I'd say, a pipeline you could buy in Russia for $100,000 of your hard-earned cash. A comparable pipeline in the US gives you a 10% return. Add the Russia discount, and you're at 13%. Is that enough?
Most people scoff at that. They want 30, 40, 50%... enough to recoup their capital in two or three years.
So my question back was always “why should a 20% discount be the bar for client money in the same country, when the same country risk applies to the underlying business?”. The asset wearing the costume of a publicly-traded growth stock doesn't make the underlying risk go away. The same question applies to TSMC's geopolitical exposure, and the answer for me came out the same way.
Over the course of my career I've collected what's now a page-and-a-half list of red flags that are immediate disqualifiers for a potential investment. When one of them appears in a company I'm evaluating, I don't try to analyze around it. I step back, and the company comes off my list… I'm not even looking at it anymore.
A few of them carry more weight than the others.
Employee turnover is one of the more powerful ones. The most important asset a tech or financial firm has is its people; if those assets are walking out the door at a meaningful rate, I've already discovered something important about the operating culture before I've even opened the financials. Healthy companies tend to be low-turnover companies. Companies with high churn usually have real problems running underneath.
Related-party transactions are an almost immediate disqualifier. In plain English, that's a CEO doing business with his brother-in-law's property company and paying above-market rent on the buildings he operates out of. The cash leaves the company, some of it lands in the executive's household, and the shareholders lose every quarter in a way that doesn't show up obviously on any single line item. That structure happens in companies all over the world (including here in the US). Once I see it, what it tells me about integrity at the top is bad enough that there's almost never a way to underwrite the rest of management's claims.
Governance is the broadest of these factors and probably the most important. The clearest place to test the trust is in the accounting. There's enormous leeway in accounting standards, and a management team that wants to make earnings look better has many legal tools available (from changing depreciation schedules on assets to timing the recognition of certain costs). When I see a team reaching for those tools without a substantive operating reason, I get cautious very quickly. The numbers stop being a reliable representation of the business, and I lose the ability to underwrite with confidence.
For industrial companies specifically, the fastest diagnostic I know is the safety record. I learned that about fifteen years ago from a restructuring consultant who'd spent a year and a half embedded inside an industrial company doing operational improvements. I asked him what he looked at first when assessing whether a plant was well-run, and he said “safety.” Companies with good safety records are almost always more efficient operations with better margins, and the correlation is strong enough that I’ve found it to be causal. A company that doesn't have its safety operations together usually doesn't have anything else together either.
I started running sustainability products back in 2010, mostly because no one else at my firm wanted them. They were seen as a pain to manage, and I had the same misperceptions of them everybody else did at the time (mainly that I'd be fighting with one hand tied behind my back trying to outperform without the option to own certain sectors).
What actually happened was the opposite.
The sustainability funds outperformed the unconstrained products over a long period of time. And once I felt I understood what was driving the alpha, my framing of the whole category flipped. The criteria I'd assumed would hold me back turned out to be very effective first-principles filters for business quality. In my experience, companies that took governance seriously tended to be better-run companies generally. Companies investing early in electrification, ten or fifteen years before most of the market cared, ended up benefitting from a massive structural trend the rest of the industry missed.
The way I came to practice sustainability investing is as a filter. I'm running bottom-up, first principles to find what I believe to be better businesses; these particular factors happen to do useful selection work in my analysis thereof.
The label has become loaded in the financial-services conversation, but the underlying mechanic I use is identifying companies that take governance and environmental footprint seriously (both of which I think of as indicators of a well-run operation). None of that requires me to push a value system on anyone else's portfolio.
I was investing professionally in the late 1990s, and the conversation I'm having with clients today about international diversification feels strangely familiar.
Back then, the US looked unbeatable. The budget was balanced, GDP was growing four to five percent a year, the USSR had recently collapsed, and the internet was going to revolutionize everything. I had folks ask me, more than once, why they should own anything outside the country at all.
Then 2000 to 2010 happened; the S&P fell in nominal terms over that decade. International markets did far better, and emerging markets in particular delivered very strong returns. The clients who had stayed diversified came through it intact. The ones who'd concentrated into US equities because that was what had worked over the prior decade fared worse because of it.
I think about that period a lot when I look at where flows are going today. Equities are pro-cyclical at the regional level, and the runs do reverse. The case for international exposure has never been about outperforming every year. It rests on what happens to a portfolio on the downside when the leading region turns. Historically, the losses in those reversals have been measured in many years.
The reasoning I hear today for skipping international exposure is essentially the same one I heard in 1998. "We have the best companies. Why own anything else?" My answer today, now with the benefit of having lived through the decade that followed: in my experience, allocating everything toward what's already done well (geographically or asset class) over the last five or ten years has a long history of painful outcomes. Not always, but frequently it can lead to disaster. That is the purpose of diversification: not to maximize return, but to ensure financial survival in an unknown future. Most investors today are woefully underweight in international assets. That may cost them dearly in the years ahead depending on unknowable future events.
The avalanche frame applies to firms too, not just to the businesses I invest in.
If an investment firm has high turnover, I treat that as a warning before I look at the strategy. Active management requires taking real risk, and the portfolio managers who do this work effectively can't be the ones who retrench every time a bet goes against them because they’re afraid of being judged or pushed out the next quarter. In high-turnover firms, that's often the dynamic that takes over. Most people play it safe, the strategy never has time to mature, and the result is underperformance (often by margins that don't justify the fees being charged).
That's part of why I came to CDI. The discipline that produces actual long-term outperformance requires people who've worked together long enough to trust each other under pressure, especially when a position is moving the wrong way and the easy answer is to capitulate. I’ve found that when the team is rotating in and out, that trust is hard to cultivate. The firm ends up running a sequence of people through the same seat, each doing the job a little differently, and the strategy never finds its footing (especially in a business where the most valuable thing being produced is judgment).
I get asked some version of "why should I trust you with my money" pretty regularly, and the honest answer comes back to a few related things that are really one thing.
Passion is part of it. I've cared about getting better at this work for a long time, and that hasn't changed. I'm competitive by nature, in investing and in the sports I pursue outside of it, and I don't rest on the work I've already done.
Candor is another. I'll tell my clients the truth even when the truth is difficult, even when it would be harmful to the firm I'm at or to the product I'm running. That comes from caring about integrity and reputation, and from a saying I think about a lot… that it takes decades to build a reputation and minutes to destroy one. I've never wanted to do the destroying.
And the way I approach risk is the piece that ties the other two together. I worry about a lot of risks so my clients don't have to. The work is grounded in a specific observation… that the avoidable mistakes in this business are usually the catastrophic ones, and the catastrophic ones come from not having been thinking about them early enough. That's the avalanche theory of investing. The work happens long before the event, in the choice not to have been standing on that slope to begin with.
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