The hurdle-rate framework

The guiding principle

Invest from the viewpoint of someone who has already exited. When making a decision, imagine the investment is already complete, then look back and ask whether the decision was a wise one.

Hurdle rate: a capability line, not a loss line

First principles: the US dollar is not the unit of account

The whole framework rests on one judgement: fiat currency, the US dollar, keeps losing value. So the baseline that decides whether an investment succeeds or fails (the hurdle rate) is neither the nominal US-dollar return nor the risk-free rate. It is:

Hurdle rate = true inflation in US-dollar terms + 3-5%

What the hurdle rate really is

The hurdle rate is a capability line, not a loss line:

• Whether purchasing power is being eroded depends on true inflation. That is objective and set by the market.
• The hurdle rate (true inflation + 3-5%) is a subjective expected return that starts from your own capability.
• It is the judgement 'with my capability, I am confident of achieving this return'. That makes it a psychological line and a capability line, and one set above the hurdle rate commonly used in the market.

Corollary: an asset below this line is not necessarily losing money (it may even be beating inflation). What it shows is that your capability is not fully used and the opportunity cost is not covered. That money could have earned inflation + 3-5%, and it earned less.

So cash and short-term government bonds are rejected, not out of fear of losses, but out of unwillingness to let capital work below your own capability.

What follows: fully invested by default

An asset below the capability line wastes capital. So as long as there is still one name in the market that you judge undervalued, or relatively undervalued, on absolute valuation (P/E, PEG, growth rate, cash flow), your capital should be working in it, not lying in cash.

Here, 'relatively undervalued' is a conclusion reached by absolute valuation methods, not a side-by-side comparison within the portfolio.

The normal state is fully invested. Cash has a place in only one extreme situation: every available asset is severely overvalued on absolute valuation and no suitable name can be found. Then cash is held as a last resort while you wait.

This is essentially Buffett's 'waiting for the pitch', except that the bar for swinging (the hurdle rate) is set higher.

Key distinction: the trigger for holding cash is the current valuation, not a prediction of a future crash. That makes it valuation discipline, not market timing. Holding cash on purpose to wait for a systemic crash is market timing, and this framework does not do that.

The five-layer capital waterfall (an offence-to-defence gradient)

Defence comes not from bonds and cash but from equities at different risk tiers. Capital cascades down tier by tier, from offence towards defence, in the order below, and each layer picks reasonably valued names within itself:

Layer 1: ten-year ten-bagger offensive position (most aggressive)

• High-conviction, high-growth core holdings
• By default, capital stays in this layer

Layer 2: HI Index / Humanity Infrastructure Index (an index of the infrastructure of human civilisation)

• A self-built index, modelled on Chris Hohn's TCI portfolio approach
• Global high-quality leaders, weighted by three factors: growth, moat and valuation (Apple, TSMC, Google, Microsoft, Tesla, Palantir, Visa and others)
• Positioned as a transition layer between offence and defence: more diversified than the ten-bagger position, but still offensive

Layer 3: SG DIY Index (a self-built Singapore index)

• Adapted from the STI: less concentrated in banks, with higher weightings in REITs and utilities
• A low-beta, high-dividend, low-valuation portfolio (weighted P/E about 17, dividend yield about 4%)
• This is the truly defensive layer

Layer 4: Gold / Crypto

• Allocated opportunistically, according to the valuation at the time
• Serves as an anti-fiat store of value and a candidate for the waiting position

Layer 5: Short-term government bonds / cash equivalents (last resort)

• Held only when every layer above is severely overvalued and there is nowhere else to go
• Known to be below the capability line, it serves only as a temporary parking place
• Exited as soon as a suitable name is found

Two key insights

1. A deep moat is not the same as low beta

These are two independent dimensions:

• The moat determines whether, and how fast, a company can rebound once the crash has finished falling
• Beta determines how much it falls during the crash itself

High-quality leaders are liquid and held by everyone, so in a systemic crash they are the first to be sold for cash, and they still fall a lot. Layers 1 and 2 will therefore fall sharply together in a crash. They are assets that can rebound strongly after falling, not safe havens that resist decline.

2. The real dry powder for buying the bottom comes from the layers that fall less

In a systemic crash, the assets that fall less come out ahead in relative terms and can be moved across to buy the bottom in high-conviction names that have crashed. These are mainly:

• Layer 3 (SG DIY, low beta)
• The reasonably valued part of Layer 4

Falling less is itself a form of relative return, and it is the source of dry powder for rebalancing.

In one sentence

Start from one premise (fiat currency is depreciating), set one capability baseline (true inflation + 3-5%) and veto every asset below it, then use a five-layer equity risk gradient to carry the principle of resisting depreciation and using your full capability from the most aggressive offence to the last of the cash, so that in any market every cent sits where the current valuation is most reasonable and does your capability justice.

Core investment principles

1. Invest only in what you understand thoroughly

• Understand an individual stock or coin in depth before you invest in it and hold it
• Hold no more than 4-5 names, so that research effort stays concentrated
• Holding stocks you don't understand is more dangerous than not diversifying (Fisher)

2. Two types of investment, two different methods

3. Growth is the truly low-risk route

• Prefer Peter Lynch's route to Buffett's
• Buy high-quality companies (usually the leaders) in industries that are good businesses

4. Take valuation seriously

• Well bought is half sold
• Look at valuation dynamically: compare it with the industry's 10-year average
• Aim only for the bottom 1/3 of the price range, and don't chase the lowest point
• Consider selling only after more than 3 years of overvaluation, not on ordinary overvaluation

5. No market timing

• Don't try to call short-term share-price moves
• But the current valuation level can be judged:
  • If valuation is attractive, buy the whole position in one go
  • If valuation is average or somewhat high, buy in tranches
• If fundamentals deteriorate, sell everything immediately

6. The goal: beat the market

• Don't pursue absolute returns (for example, 10% a year)
• The target for rapid wealth growth is 10x in 10 years (26% annualised), carried by the Layer 1 ten-year ten-bagger offensive position

View of the market

• The market is wrong most of the time (Buffett)
• Inefficiency comes from emotion and from areas that lack attention
• Contrarian investing is not simply doing the opposite but having reason to believe others are wrong
• Contrarian investing is uncomfortable, and years may pass without anyone agreeing

Macro views

• No macro forecasting (Howard Marks): you cannot profit consistently from forecasting the macroeconomy
• What can be judged is the position in the market cycle (P/E level, market sentiment, credit availability)
• In an era when governments print money without limit, declines caused by tight liquidity are buying opportunities

Decision checklist

Before buying, ask yourself:

1. Do I really understand this name thoroughly?
2. Is this a Type A or a Type B investment? Does the method match?
3. Where does the current valuation sit within its historical range?
4. If the fundamentals deteriorate, will I spot it immediately?
5. Is the size of this position reasonable?
6. What is the ROCE trend? Over the past 5-10 years, has ROCE been rising, stable or falling? Where does the current level sit among peers? If ROCE is falling, is that because of a heavy-investment phase (acceptable) or because the competitiveness of the business itself is declining (a danger signal)?

Sell signals:

• Fundamentals deteriorate: sell immediately
• Overvalued for more than 3 years: consider selling
• High growth ends and a re-rating is needed: sell before the market does

ROCE formula (unified standard)

ROCE = EBIT ÷ (net working capital + net fixed assets) (excluding excess cash)

• Net working capital = current assets - current liabilities - excess cash
• Excess cash = max(0, cash and short-term investments - total debt)
  • Total debt = interest-bearing debt (short-term borrowings + long-term borrowings), not total liabilities
  • Total liabilities include accounts payable, deferred revenue and other free operating capital, which should not be counted
• Net fixed assets = non-current assets (PP&E, intangible assets, goodwill and so on, net of depreciation and amortisation)

Why exclude excess cash: ROCE is meant to measure the capital efficiency of the existing business. Surplus cash is not an operating asset, and the large amounts of cash that high-ROCE companies produce would drag ROCE down for no good reason. Management's skill in handling cash (buybacks, dividends, reinvestment, risk reserves) is assessed along a separate dimension.

Whenever ROCE is quoted, label it '(excluding excess cash)'

Note: financing (for example, convertible bonds) can make the denominator balloon without the business deteriorating. You need to tell apart capital that has not yet been deployed from a genuine fall in the return on capital.

Common mistakes to watch for

1. Paying too much attention to share-price swings: in the long run, only intrinsic value determines the share price
2. Over-diversifying: you end up not understanding any holding thoroughly
3. Getting hooked on skyrocketing stocks: low beta actually delivers higher long-term returns
4. Ignoring the historical track record: this matters most for Type B investments
5. Waiting for a dip before buying: excellent companies should be owned as early as possible, unless the valuation is very expensive
6. Believing the market is always right: the market is wrong most of the time
7. Ignoring ROCE: the most common blind spot

Lessons learned

Leverage and risk

• Never use leverage (Munger: you only need to get rich once)
• Risk in investment markets is fat-tailed, and the probability of black swans is not normally distributed

Balancing diversification

• In the 10x-in-10-years portfolio, 5 names are enough and 3 is barely acceptable
• Berkshire's Apple position once accounted for 50% of its public-market investments
• Excessive diversification means you cannot understand your holdings thoroughly, which actually increases risk

Better to miss out than to make a mistake

• With 3 names already held, diversification is acceptable
• The goal at that point is to keep false positives out of the portfolio
• The opportunity cost of a false positive is a genuine 10x-in-10-years name

Switch positions decisively when fundamentals deteriorate

• Not timing the market is the principle, but the judgement on fundamentals comes first