HOW WE THINK
We partner with the world's best teams, products and services. We seek consumer and enterprise franchises in large, growing markets.
Our investees are innovative companies disrupting incumbents or creating new markets. We focus on businesses with strong competitive advantages and attractive reinvestment opportunities.
As acolytes of Benjamin Graham and Warren Buffett, we are standing on the shoulders of giants and adapting to a world permeated by software, network effects and zero marginal costs.
What's our investment strategy?
We look for businesses that fit the following criteria:
Can scale globally, and that operate in large addressable markets that are themselves growing.
A large market allows a business to grow for many years. Having a business operating in a market that is itself growing is even better, because that typically means the business is competing with non-consumption, instead of competing with consumption, which is much harder to do.
Provide exceptional products and services that are loved by consumers, have no close substitutes, have unregulated pricing (a consumer franchise), and have demonstrated product/market fit.
Product/market fit means your phone is ringing off the hook and cash is piling up in your bank account. There is strong demand from consumers.
Are riding one or more technological adoption curves (S-curves)
Total shareholder returns are highly correlated with revenue growth and return on invested capital. Technological adoption curves provide growth, and wide-moat businesses riding these curves can reinvest capital at high rates of return. It therefore follows that investing in these businesses is a great way to generate excess returns for our portfolio.
Have a defensible and growing competitive advantage (moat).
Every day, you’re either a bit better or a bit worse than the day before, and the same is true for businesses. We want to be in businesses that are growing their competitive advantage (“widening the moat”) over time. A wide moat keeps competition at bay, and tends to ensure high returns on invested capital. Businesses with higher returns on capital are valued more highly by investors and have greater options when it comes to corporate strategy.
Benefit from multiple feedback loops (more usage of the product creates more data, which improves the product, attracting more users, for example).
We like businesses that have virtuous circles of more users, begets more data, creates a better product, which attracts more users, and so on (a flywheel). This creates network effects and tends to result in a wide moat.
Have the ability to reinvest free cash flows at high rates of return for the foreseeable future.
Ideally, we’d like all of a company's cash flows reinvested for growth at high rates of return, since this is what creates value.
Have a strong balance sheet, enabling investment optionality.
We like to sleep well at night and not have to rely on the kindness of strangers; a strong balance sheet ensures this.
Are led by founder/CEOs who are missionaries, not mercenaries.
Companies that are mission-driven have the ability to attract better talent, develop a strong culture, and navigate through the ups and downs inherent in any company’s life. Companies led by founder/CEOs are desirable because there is an owner in place who really cares (in economist parlance, it reduces agency costs for the outside shareholder). On the other hand, mercenaries are just in it for the money, and while this can certainly work out, we find it’s much riskier and increases agency costs.
Additional filter: “Would you personally go to work at that company, receiving your entire compensation in stock?”
This one really focuses the mind.
Bonus: Potential for winner-take-all or winner-take-most, and an aggregator per Aggregation Theory.
If we can be in winner-take-all or winner-take-most businesses, even better; it means less competition. Many modern consumer-facing software businesses that have zero marginal costs and focus intensely on the user experience have the potential for winner-take-all (or at least winner-take-most). Aggregation theory is an evolution of disruption theory for internet businesses.
When we find these types of businesses, we seek to understand their value creation potential and only invest if we can do so at a significant discount to our estimate of intrinsic value. The growth potential and returns on invested capital are critical components of the intrinsic value calculation.
These businesses have the ability to compound our capital for years without our having to sell, pay taxes, and reinvest. As a bonus, because they’re riding up several S-curves they tend not to be cyclical, there is a strong secular tailwind and these businesses tend to gain and take share even in recessionary environments, as explained above.
What are our values?
First and foremost, honesty and integrity. We’re adherents of Warren Buffett’s “newspaper rule”: would you have any contemplated act appear the next day on the front page of your local paper – to be read by your spouse, children and friends – with the reporting done by an informed and critical reporter?
We understand that the most valuable asset we have is our reputation. A good reputation takes a lifetime to build and a few seconds to destroy; it is like fine china: expensive to acquire, but easily broken.
We are also relentlessly curious. Curious about the world, about how things work, about whether our mental models of the world can be improved, about how to better serve our clients.
We have strong opinions, but don’t hesitate to change our minds quickly if the facts change: strong opinions, loosely held.
Mental flexibility and open-mindedness are keys to success in our line of work.
Three other manifestations of this idea:
“In the beginner's mind there are many possibilities, but in the expert's there are few.” – Suzuki
“Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.” – Charlie Munger
“Perpetual beta.” – Superforecasting
Finally, we are always testing, evolving, and improving; we are in perpetual beta. To borrow a phrase from Jeff Bezos, one of the CEOs we most admire, at Heller House, it’s always Day one.
How are investors' interests aligned with heller house's?
The majority of investment portfolios are run without the investment manager having any skin in the game.
At Heller House, however, we truly eat our own cooking: your manager has the majority of his family’s net worth — and all of his net worth — invested in the fund.
Altogether, this comprises about 20% of the capital in the fund. Our family rejoices or suffers alongside our clients, and we couldn’t do it any other way. As Charlie Munger (Warren Buffett’s partner) says, show me the incentives, and I’ll show you the outcome. Our incentives are aligned with our clients’, and the outcome takes care of itself.
What is Heller House's mission?
Our mission is to deliver excellent investment results to our partners and clients.
This mission drives us every minute of every day. We are in a state of perpetual exploration, searching for better ways to do things. We are never satisfied and always seek to learn, to improve, and to do better.
What is Heller House's goal?
Our goal is to maximize the generational wealth of our partners and clients; we aim to compound capital at above-market rates over long periods of time. We are thinking about our client’s kids and grandkids and attract clients who have a similar long-term mindset.
What is our edge?
A lot of investors, in evaluating an investment manager, want to understand the source of that investment manager’s edge. The idea is to disentangle skill and luck: how much of an investment manager’s success is due to skill, and how much is due to luck.
Is a potential investor being fooled by randomness, taking superior returns as a measure of skill when in fact it was due to a lucky outcome?
More importantly, the question of identifying an edge goes to the heart of the sustainability of the investment manager’s success. In short, investors want to know that skill is primarily responsible for investment returns, and that the skill is the product of a sustainable and repeatable process.
Here are the key sources of our investment edge:
Unique combination of skills
Our background in software development, and the fact that we are often customers of the companies in which we invest (and do our own API integration coding) means that we have the ability to really understand how the technology works.
In addition, our many years of work as value investors and business analysts means we have the ability to understand the financial underpinnings of our companies, and model them based on their growth trajectories and returns on capital.
Because we study industries and management teams, we also understand how company culture, management incentives, corporate strategy and the competitive landscape affect our investments.
Analytical: Our job is to gather information, analyze it, and act on it. Because the world is in a perpetual state of information overload, it is important to focus on the most attractive investment opportunities. To do this, we apply a series of frameworks — mental models — that we have collected over the years and continue to hone and improve. These filters allow us to sift through the noise and focus on what matters.
Behavioral: Our long-term orientation, and our ability to be greedy when others are fearful (buy when prices are lowest), allows us to stay true to our mission and our goals. On the flip side, we avoid anchoring bias and do not hesitate to buy a stock just because it is trading at an all-time high, provided that it is significantly below our estimate of its intrinsic value.
Client alpha: Clients who behave well allow managers to perform better. Our clients are self-selected into a club of long-term thinkers who value our analysis, our alignment of interest, and the value we create for them.
Organizational: Our organization is set up in a way so as to minimize distractions and maximize time spent conducting research, analysis, and thinking deeply about the businesses we own, the industries we are in, the incentives of our management teams, the moats our companies are developing, and the long-term value creation potential ahead of us.
Finally, while many investors claim to have experience, we have expertise. Experience means you’ve been doing something for a long time. Expertise means you have a predictive model that works.
How do we define investment success?
Because our goal is long-term capital appreciation, we do not focus on short-term price movements. If one is investing for a generation, it makes little sense to obsess over daily, monthly and quarterly price moves. Success is compounding our capital at an above-market rate over a multi-year period.
In many situations it is easier to make long-term forecasts than it is to make short-term forecasts. For example, nobody knows for certain if the stock market will be higher or lower a week from today. On the other hand, it is a near certainty that in the next few decades we will have more electric vehicles than today, that e-commerce penetration will be higher than it is today in the U.S., and that cloud computing will continue to grow.
We can make these forecasts because they depend on technology costs and adoption curves. While we don't always know the precise slope and duration of the curves, we can make very good estimates based on past experience.
For this reason, we are interested in businesses that are riding one or more of these technology adoption curves. These businesses must meet a number of other requirements (see "What is our investment strategy?" above).
Another reason long-term investing is superior is that it’s more tax efficient. It’s much better to compound capital without having to sell and pay taxes over and over again. Unrealized investment gains are an interest-free loan from the IRS.
Finally, over the long-term, investment results tend to be better (at least for our type of investing, which is primarily focused on great businesses that are growing — equities — rather than fixed income).
Who's the team at Heller House?
Heller House was founded by Marcelo P. Lima in 2010. Marcelo studied engineering at Cornell University, and was a software developer before turning to entrepreneurship and finance.
At Heller House, we have a team of service providers that provide accounting, auditing and legal services. On the investment side, we have a wide network of analysts and colleagues with whom we collaborate on Slack, Twitter and WhatsApp. Our goal is to grow our investment team and build Heller House into a world-class asset manager.