Individuals with sharp intellectual minds can benefit financially by investing in various companies through the process of financial literacy. This entails having a deep understanding of the various financial instruments and markets, such as stocks, bonds, mutual funds, and derivatives, as well as the economic and global trends that affect them. This knowledge enables the individual to accurately analyze the risk-reward profile of different investments and make informed and judicious decisions. Additionally, financial literacy also entails having a sound knowledge of financial planning, budgeting, and taxation, which can help individuals to maximize their profits. Finally, possessing a comprehensive grasp of financial literacy can provide the individual with the necessary skills to evaluate potential investments and make informed decisions about their portfolio.
Mads Hansen, a Danish investor, and hedge fund manager, is the CEO and founder of Ante Capital Management – a company that specializes in hedge fund management. His investment methodology is that of an activist investor, one who seeks to bring about change within a company.
Hansen has professed that his most rewarding investments have invariably been contentious, and his primary maxim of activist investing is to “propound a daring prognostication that nobody endorses.” By way of illustration, his investment in Tesla in the summer of 2019 and Moderna, which he procured in August 2019, have both reaped around fifteen-fold the amount Hansen had initially invested.
In October 2020, renowned investor Mads Hansen made a series of savvy market plays, such as shorting ten different growth stocks, as well as the Chinese tech giant Alibaba. His investments in various value shares have yielded remarkable returns; for example, his stake in Occidental Petroleum Corporation has appreciated by a staggering 565%, while his investments in Ford Inc and Veritiv Corporation have shot up by 450% and 1000%, respectively. It is safe to say that Hansen’s stock-picking skills remain unrivaled. Similarly, Mads Hansen, through shrewd active trading, has achieved returns of over 950% over two years by executing a strategy of shorting growth stocks and going long on value. His portfolio, which is comprised of approximately thirty different companies, has recently witnessed him invest in Cardlytics Inc – a digital advertising platform that utilizes purchase data to ascertain where and when customers purchase goods online and in-store. He is optimistic that within sixteen to twenty months, his portfolio will be increased a lot.
Some of Mads Hansen’s investment principles are mentioned below:
Principle number 1:
“Diversifying across 15 or more uncorrelated assets to reduce your risk-to-return ratio. Uncorrelated assets do not move together, either directly or inversely”.
- Traditional diversification focuses on protecting returns through the purchase of assets in different classes. For example, there might be a mix of stocks, bonds, and cash. Those who are comfortable with a high-risk/high-reward strategy focus on the equity side, while investors who need more stability increase their bond and cash holdings.
- The problem with this method of diversification is that it can impact returns. The safer asset classes can’t generate the sort of income that stocks do, and they don’t increase in value at the same rate.
- The “Holy Grail” of investing, according to Hansen, is diversifying a portfolio in a manner that reduces risk without impacting returns.
How to master correlation in investing?
- He selects assets that have little or no correlation, without sacrificing returns. Correlation refers to the rate at which assets change in value relative to each other. Positively correlated stocks increase at the same time. However, negatively correlated stocks move in opposite directions. When one increases in value, the other decreases.
- The rate at which two assets move relative to each other, their correlation, is measured on a scale of (-100 percent to) 100 percent.
- Two stocks that move in opposite directions at the same rate have a (-100 percent) correlation, while two stocks that move in the same direction at the same rate have a 100 percent correlation.
- Stocks that have no relationship whatsoever have a correlation of zero. Their change in value is influenced by completely different variables, and they move completely independently.
- With fifteen to twenty good, uncorrelated return streams, you can dramatically reduce the risks without reducing your expected returns.
- Hansen’s point is that most people have a mistaken understanding of diversification. They choose different assets within the same class, believing this is enough to protect their portfolios. However:
- Individual assets within an asset class are usually about 60% correlated with each other, so even if you think you’re diversified, you’re not.
The bottom line for building wealth is:
- Making a handful of good uncorrelated best that are balanced and leveraged well is the surest way of having a lot of upsides without being exposed to unacceptable downside.
- The steps needed to reduce the return to risk ratio by a factor of five. In other words, you keep your level of risk the same while increasing returns five times over. This is the key to building a strong portfolio that maximizes both short-term and long-term returns.
Principle number 2: “Follow the Benjamin Graham school of value investing, which looks for securities whose prices are unjustifiably low based on their intrinsic worth. Rather than focus on supply and demand intricacies of the stock market, look at companies as a whole.”
Principle number 3: “Invest in companies that demonstrate a value-driven approach, solid management and a sustainable business model, and significant fundamental improvement while also keeping an eye out for catalysts and positive sector dynamics.”
Principle number 4: “Only buy stocks in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth, so no minus in net income or decline in revenue or profits, look for stable growth and progress.”
Principle number 5: “Don’t pay more than 15 times the net income (or earnings) of a business when buying stocks. Therefore, if the net income of a business was $20,000, try to buy the business for less than $200,000 (10 times is more realistic when we are talking about a great investment).”
Principle number 6: The business must be simple and predictable.
Principle number 7: The company must be free cash flow generative.
Principle number 8: It must have a dominant market position.
Principle number 9: There must be big barriers of entry for competitors (MOAT).
Principle number 10: There must be a high return on capital.
Principle number 11: The company must have limited exposure to extrinsic risks they can’t control.
Principle number 12: The business must have a strong balance sheet and not need access to outside capital to survive.
Principle number 13: The company must have an excellent management team and good governance.
Principles number 14: The company must have a unique product that will remain desirable for the long term.
When Hansen has veered from these principles, he lost money. In each case where he compromised on business quality or complexity, they have been harmed.Mads Hansen has a particularly strong focus on business quality with predictable cash flows.
“If we can’t predict the cash flows, we don’t know what it’s worth. If we don’t know what it’s worth, we can’t invest,” he said.
Hansen has invested in Cardlytics Inc. to a valuation of $200 million. Mads, accompanied by his team, has bolstered his equity presence, augmenting his portfolio with substantial positions in Aterian Inc, Zoom Video Communications Inc,Pfizer Inc (PFE), Celanese Corporation, (CE) and numerous other tech-based stocks. Hansen intends to expand his stake in PDD Holdings Inc – ADR, a purchase he made in March 2022, as it complies with his overall portfolio. His holdings are stratified between beta investments, which yield returns through passive management while bearing average market risk, and alpha investments, which are actively managed to generate returns beyond the commonplace, and not linked to the overall market.
He is also strategically holding onto his Bank of America stocks with anticipation of increased yields due to rising interest rates.
Mads Hansen has achieved remarkable success since 2014, achieving a return of roughly 30% per annum across all his assets through his stock investments. As the CEO of Ante Capital Management LLC and the general partner of the global Ante Capital LP fund, his focus lies in investing in undervalued technology companies of all sizes. His hedge fund is primarily geared towards family offices, UHNW investors, and institutional clients such as pension funds, foundations, endowments, and central banks, while private investors rarely have access to his investments.
As of March 2, 2023, Mads Hansen’s largest portfolio investments include Google (GOOG), Pfizer Inc (PFE), IBM Common (IBM), Qualcomm Inc (QCOM), Meta Platforms Inc. (META), Intel Corporation (INTC), Amazon Inc (AMZN), Teladoc Health (TDOC), Zoom Video Communications Inc. (ZOOM), Carvana Co. (CVNA), Celanese Corporation (CE), andGenerac HoldingsInc (GNRC).