Meet The Hedge Funder/Venture Capitalist Whose Finance Roots Date Back To The Shanghai Stock Exchange During WWII
"I purchased five shares of a re-insurance company, which I really did not know much about it, but it looked good to me at age 11. I used gardening money. Ever since, the $25 profit on that trade, I was hooked."
Tsai, who is now 39, runs long/short equity hedge fund Tsai Capital. Today, he announced the launch of Tsai Ventures- a seed and early stage venture capital fund that will use his hedge fund's proprietary capital to invest in companies. He's partnered with Justin Soffer, who has had a long career in internet media.
He's been running Tsai Capital since he was 22 years old.
Perhaps the biggest reason he got started at such a young age is that he grew up in a financial household.
Tsai's late father Gerald Tsai was a prominent Wall Street figure who worked for mutual fund behemoth Fidelity.
"I grew up surrounded by his friends and just speaking with him everyday about what's going on in world, politically and economically," Tsai told Business Insider.
During his teenage years, he spent his summers working for his father at his office at 230 Park Avenue office analyzing companies.
At age 16, Tsai took a course at New York Institute of Finance on securities analysis. He also started to manage money informally at that time for certain friends and business owners he met growing up in Connecticut.
His first client was a Chinese restaurateur who entrusted pretty much all of his liquid savings to him, Tsai recalled.
"I think the number was about $400,000 at the time. I was roughly 16 years-old and I fortunately did quite well for him and he referred me to some other of his friends and eventually I used his capital as well as a small amount of family capital to launch Tsai Capital in 1997 at age 22."
Tsai's father isn't the only prominent financial figure in the family. He recently learned that his grandmother, Ruth Tsai, was the only woman on the floor of the Shanghai Stock Exchange during World War II trading stocks, gold and other commodities.
"She was an incredible lady and quite influential to my father in his investment philosophy."
In fact, philosophy has played an integral role in Tsai's investment strategy. He's formed his philosophy from lessons his father taught him, philosophers he's studied as an undergrad philosophy major at Middlebury, and pieces of investment literature he's read along the way.
One philosophical lesson he learned from his father happened on a fishing outing on his 16-foot Boston Whaler.
"I cast the rod into the wind once. He said to me, 'You can't do that. You have to have the wind behind you just like in investing. You want to position yourself with the wind at your back.'"
He said at the time he didn't quite understand what his father meant. However, it's a lesson that has stuck with him through the years.
"At the heart of that, is the philosophy that you don't want to fight the Fed, basically. That philosophy is integral to how we manage our long/short fund."
He explained that while many managers have been short in the past few years, his fund's view is that the Fed is printing money so "the wind is at our back." In other words, right now it's a bull market so they don't have any shorts or significant shorts on.
"When the world changes, and I think we are going to roll over, we will execute quite heavily on the short side," he explained.
As for investing literature, he's been influenced by Benjamin Graham's "The Intelligent Investor." Within that text, the chapters that stood out the most are chapters 8 and 20. Chapter 8 deals with market fluctuations and the need for an investor to control his or her emotions. Chapter 20 is about margin of safety, or buying things at a discount to minimize downside risk and maximize returns.
The other book that's influenced him is Phillip Fisher's "Common Stocks And Uncommon Profits." Basically, the philosophy in that book is that if the work has been properly done up front the time to sell a stock is almost never, Tsai explained.
So Tsai's strategy is a hybrid of both Bill Graham and Phil Fisher's thinking in the long only space. It means that Tsai Capital is looking for cheap companies with a lot of upside to hold on to for the long haul.
"Unlike many managers we are looking for companies that are high quality and have exceptional long term growth prospects. Our ideal holding time is indefinitely. In actuality that's not feasible because fundamentals and conditions change. We go in with the mindset that we want to hold the investment indefinitely."
As for his new venture capital fund, he's also using his long-term philosophy to pick his investments. He sees these companies as partners.
They've already started to invest through the venture capital fund. Tsai told us that the first one is in a company called CrowdTangle, which is owned by holding company Open Page Labs. It's a service that allows companies and individuals to see what's trending on Facebook in real-time. He said the company's clients include the American Red Cross, Pfizer, Greenpeace, The White House, among others.
As for how much money Tsai Ventures will be putting into its new investments, Tsai didn't specify. He did say that they will be targeting investments between $100,000 and $500,000.
"We are going to be taking long term positions in companies that we want to nurture and help entrepreneurs expand their horizons, their relationships and create a success for both parties. We consider investing in entrepreneurs as a real partnership."
That's how you turn one client into a book. Tsai learned that in his teens.