As part of my series about the “How to Navigate and Succeed in the Modern World of Finance”, I had the pleasure of interviewing Eric Chung of Lighthaven Capital.
With a J.D. from Vanderbilt University, Eric Chung is a lawyer-turned-hedge-fund-manager and the founder of Lighthaven Capital Fund (www.LighthavenCapital.com) based in San Francisco. His long-short equity strategy is paying off for his high net worth clients as the Fund has bested both the benchmark for long-short hedge funds and the S&P 500. Eric has deep experience in Fintech in Silicon Valley. In addition to running his hedge fund, he is also the COO of Coinbase Custody. His vision is to become the 21st century Warren Buffett.
Thank you so much for your time! I know that you are a very busy person. Our readers would love to “get to know you” a bit better. Can you tell us a bit about your ‘backstory’ and how you got started?
I became a hedge fund manager in a very nontraditional way. I started my career as a corporate lawyer at a large law firm and then became a chief legal officer of a sizable company. Like most lawyers, I focused on practicing law and outsourced other things like investing to others. In my case, I let a well-known investment bank help me with my investments, but that turned out to be a very poor experience. My investment advisor was educated, nice, and very polished, however, my results were mediocre at best. In a moment of frustration, I decided to fire my advisor and learn to handle my investments on my own.
I read everything I could from the legendary investors of the 20th century including Peter Lynch, Warren Buffet, Charlie Munger, Benjamin Graham, and Philip Fisher. After years of managing my own investing, I discovered that not only did I have an extraordinary aptitude for this arena, but I developed a passion for it as well — in fact, being a professional investor is my calling in life. It combines my love of high-stakes poker with the analytical rigor of being an attorney and also draws upon my ability to stay Zen under pressure.
In 2011, I decided to share my passion for investing with others and started my hedge fund, the Lighthaven Fund. I haven’t looked back since.
Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lessons or ‘take aways’ you learned from that?
Funny story: Before launching my hedge fund, the first person I asked to invest in my proposed venture was my father. He responded, “You went to law school, what do you know about investing?” From that, I learned that I needed to have a super thick skin now that I was going to be wearing this new hat. So I would say to others be prepared, especially if even those who are closest to you, like your family, don’t support your dream. It’s not personal, and they still love you, but they simply don’t know what your vision is and are stuck seeing things from their own perspective versus yours. Persist and gut it out.
Is there a particular book that you read, or podcast you listened to that really helped you in your career? Can you explain?
The single most important book I read on my road to becoming a world-class investor is “Poor Charlie’s Almanack”(that misspelling is correct!). This book is a compilation of the writings and philosophy of Charlie Munger, Warren Buffett’s business partner. As a professional investor, I am measured by the profitability of my decisions. Making good decisions is one of the hardest things in light of the lack of certainty. This book taught me to be a much better thinker and to be aware of my personal biases and where I was making mental errors. It also provided me insight into how Munger and Buffett make investment decisions which has contributed to my success in a significant way.
Are you working on any exciting new projects now at Lighthaven Capital Management? How do you think that will help people?
Yes, I trained for almost 10 years to grow my clients’ assets and protect them against stock market calamities like what we experienced during the Great Recession. I could not have imagined that in 2020 the world would experience a global pandemic and that the stock market would collapse as quickly as it has in the past month. Lighthaven protected our clients by hedging our portfolio. While the market collapsed, Lighthaven was able to weather the storm and increase in value. I explained in detail how to hedge in a book I wrote which was published late last year and circulated exclusively to my investors and network. In 2020, I plan to release the book to the public so that others can learn how they too can protect themselves by using a long-short equity strategy. I hope that this information will help many investors reduce the stress and despair they feel about their investments during this unsettling time.
Thank you for that. Let’s now shift to the central focus of our discussion. Extensive research suggests that “purpose driven businesses” are more successful in many areas. When you started your company what was your vision, your purpose?
I recorded a 1 minute video about my vision here: https://vimeo.com/258543803
Lighthaven’s purpose was, and still is, to become the best long-term investors anywhere for hard-working individuals. I want to bring to the world something that I couldn’t find for myself when I was looking for somebody to help me with my own investments, namely, I want to deliver to our investor’s great returns while also protecting them from stock market contractions and collapses, have a personal relationship with them and maximize alignment of our interests.
Do you have a “number one principle” that guides you through the ups and downs of running a business?
Yes. Every day I remind myself what my goal is and why I am aiming for it. For many years, I’ve committed to three goals: (1) To be the best investor anywhere in order to help my family and others, (2) To have a great family life including being a wonderful husband and father, and (3) to achieve spiritual enlightenment.
Lead generation is one of the most important aspects of any business. Can you share some of the strategies you use to generate good, qualified leads?
The best thing that I did to spread the word about my business was to write a book about hedge fund investing. The industry is notoriously tight-lipped. “Block Box” is often associated with hedge fund investing, but in the 21st Century, we live in a world where people value transparency and authenticity. I believe that sharing what we think, how we operate, and why we do what we do, is table stakes now. As a related matter, I also shoot quite a few videos. My goal isn’t to be a YouTube star but rather to connect with others. Video is a powerful medium for accomplishing that.
If a fellow CEO would ask you for advice about whether to bootstrap or to look for VC capital, how would you help them weigh the pros and cons of that decision?
This is a very personal issue for me. I bootstrapped but it’s been very difficult. Initially, I set aside 1½ years of savings in order to launch my business. I had a great track record, a great story, and naively thought “if I build it, they will come.” They didn’t, and I had to do other things, including player poker professionally and going back to practicing law in order to extend my runway.
I often think that if I would have taken VC money, Lighthaven would have garnered traction faster, but the grass is always greener on the other side. Maybe it would have been faster, but by bootstrapping I was able to learn at my own pace. I also forced myself into the situation where I had to commit to my dream and do whatever it took to succeed. Quitting wasn’t an option. Bootstrapping therefore forced me to “burn the boats” and succeed no matter what because I wasn’t playing with other peoples’ money. This was my baby and I’ve always been “all in,”period.
What measure do you use to determine the value of a company? What advice would you give to other leaders about how to get an optimal evaluation of their business?
As a “growth at a reasonable price” investor, I value companies based on the growth rate of their earnings. I look at their historical growth rate and think about how likely it will be for the company to continue that growth into the future. To do this, I consider the company’s “economic moat” and whether I believe the company’s products and services will continue to be in demand.
I think numbers play a big part in business valuations, but so does the narrative. Some leaders talk about revenues. I think that to get a maximum valuation, leaders must go beyond revenues and talk about profitability. Whether they say it or not, no long-term investor will invest in a company that it thinks will never be profitable. The path to profitability is key. The reason there are so many highly valued unicorns in Silicon Valley is because the companies are able to explain why they will be hugely successful in the future, but many of them have recently declined in value because they just focused on the top line. Now, investors want to see a path to bottom-line growth.
What would you advise to a founder who initially went through years of successive growth, but has now reached a standstill. From your experience do you have any general advice about how to boost growth and “restart their engines”?
I think complacency is our greatest enemy. If things aren’t working out, come up with hypotheses and test them. Think like you’re a shark and keep moving. In my opinion, intentional action is almost always better than inaction. I am not saying that you should always be acting. Sometimes the right action is to pause or wait. The key is to be intentional.
What are the most common finance mistakes you have seen other businesses make? What should one keep in mind to avoid that?
I think following the herd is a cardinal sin. It feels better to do what others are doing, until it doesn’t. In the investing world, most advisors told their clients that passive investing was the way to go. The mantra was to invest in a low-cost index fund and basically “fire and forget.” I think that financial advisors, and investors generally, should carefully consider whether this is always the best advice. The reality is that some people don’t have the emotional disposition to stay calm through a stock market collapse. For those individuals, they may need more active management or need to put a larger percentage of their assets in safer investments like fixed income.
Ok, here is the main question of our discussion. Based on your experience and success, what are the five most important things one should know in order to succeed in the modern finance industry? Please share a story or an example for each.
- Be multidisciplinary. In addition to running my hedge fund, I also serve as the COO of Coinbase Custody, the largest cryptocurrency custodian in the world. I was introduced to Coinbase not because I was a blockchain expert, far from it — before Coinbase, I had to look up what a BitCoin was! But I was offered a position at this FinTech unicorn because the company was looking for a lawyer in San Francisco who understood hedge funds and who is entrepreneurial. I’m probably not the only lawyer in San Francisco who runs a hedge fund, but because I have two very unique skill-sets and am an entrepreneur, I stood out. I see this all the time. Coinbase recruits many engineer/MBAs because they have both technical and business skills. Specialization is good but being multidisciplinary can be very helpful in one’s career progression. It will give you the skills and experience to thrive in more situations and will underscore your adaptability to others.
- Technology & Disruption. Technology is changing (and in some cases, disrupting) the world of finance and people entering the finance industry would be well-served to consider “FinTech” as potential employers in addition to traditional financial firms. Take investment management as an example. With the rise of discount brokerages, people stopped calling stock brokers and just accessed brokerages from the internet. While people still used investment advisors, the rise of robo-advisors like Personal Capital, Wealthfront and Betterment are casting doubt as to whether Millenials will still want to talk to a traditional advisor when they need financial advice. If you’re getting out of college and want to go into the finance industry, learn about software & product development in addition to business and corporate finance. Doing this will maximize your job opportunities.
- People Skills. People’s attention spans are getting shorter. With the widespread popularity of text messaging, Slack, Twitter, it’s possible to get a lot of work done without seeing somebody face-to-face, or even speaking with them. Social, persuasion, and leadership skills have become even more important, especially if you want to become a manager. Fewer and fewer younger workers excel in this area. If you do, it will set you up for success. If you have “emotional intelligence,” it’s highly sought after it — leverage it! In addition to running my own hedge fund, I also serve as the Chief Operating Officer of Coinbase Custody, the largest crypto-currrency custodian in the world. At Coinbase and other leading FinTech companies clear communication is a core value and those who excel are able to articulate complex ideas clearly, persuasively, and succinctly.
- Understanding generations. Millennials dominate the workforce in tech and finance, but often GenXers and Baby Boomers run the show. The two generations are dramatically different and it’s important to understand the perspective of your boss. For example, a study by the Education Advisory Board found that Millennials change jobs up to 20 times in their careers, more than twice as frequently as Baby Boomers. Another difference is that Millennials prioritize being a good parent, having a successful marriage, and generally helping others over work-related priorities. On the other hand, many Gen-X and Baby Boomers, value sacrifice and putting work first. There’s no “right” answer, but if you’re joining a finance firm, there’s a good chance your boss may not be a Millenial and it will serve you well to understand their perspective in order to better achieve alignment.
- Brands are changing but old isn’t necessarily bad. Sometimes there’s a human tendency to assume everything new is better. Progress and change are good but it pays to remember to learn from the lessons of others and not to say “out with the old” too quickly. Robinhood is disrupting the online brokerage industry, but in just the last few weeks, their new systems have crashed multiple times, depriving their customers of liquidity just when they needed it. Robinhood could have learned a thing or two from “old guard” brokerage firms about platform stability and redundancy. Another amazing development is the crypto currencies. Many block-chain tokens show promise of potentially revolutionizing the finance industry, but they can be complicated and are relatively untested. Until just a few weeks ago, it was assumed that crypto would be a “safe-haven asset” — however it collapsed along with the stock market. With anything new, there is automatically so much that is unknown. Reinvent the world, but remember to learn from the past, and to stay humble.
Which tips would you recommend to your colleagues in your industry to help them to thrive and not “burn out”?
The most important thing that allows me to manage stress is sleep. I also believe in doing the most important thing first in my day, so I think of the start of my day at 7:45 p.m. I sleep 8 hours and typically wake at 3:45 a.m. This guarantees that I get about 8 hours of sleep which makes me super productive. Sleep and being on top of my work both help to drastically reduce my stress levels.
You are a person of great influence. If you could start a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)
If I could start a movement, I would teach children about financial literacy. It’s shocking to me how little the typical American has saved and how unprepared they are for an emergency, such as the one we are currently experiencing. I think every citizen should have a firm grasp of finance, economics, and investing just so they can gain financial security for themselves and their family.
How can our readers follow you online?
The best way to follow me is on Linkedin: www.linkedin.com/in/ericcchungFollow us out on Youtube by searching for “Lighthaven Fund”