2023 Annual Letter

Interpretation of Results

As always, one-year mark-to-market results are by and large random, so I take neither credit nor blame for one-year performance.

Long-term investing takes about 3-5 years to get sufficient feedback, and an investor's career is considerably longer than a sport’s players, so in essence, the first five years constitute the rookie period. I have made material mistakes during this five-year period that have materially detracted from performance.

“Edges” That Did & Did Not Contribute

“Edges” That Did Not Contribute

The fund's first five years weren't contingent on the bells and whistles of a Bloomberg Terminal or an exhaustive immersion in business publications. During my middle school and high school years, you could spot me engrossed in Institutional Investor, derivatives textbooks, Bloomberg BusinessWeek, and any other relevant (and in hindsight often irrelevant) financial literature that I could lay my hands on. In college, despite majoring in philosophy, politics, and law, I spent far more time immersed in the Bloomberg Terminal, absorbing every piece of news, or in the library crafting a senior thesis on George Soros's philosophical theory of reflexivity. However, as my financial knowledge deepened, I now find more valuable insights in history, philosophy books, and real-life experiences. A single variant perception from unusual readings or experiences holds more weight than a myriad of common ideas gleaned from the news everyone else is consuming at the same time, from their similar workbenches, all in anticipation of positively differentiated results.

Additionally, this was achieved without a dependence on Microsoft Office, devoid of company visits, only one expert network call that proved unvaluable, and without adhering to standard office protocols such as a uniform, fixed location, workdays/hours, and personal assistants. The fund used zero specialized data. Being at a significant informational disadvantage compared to competitors has not hindered the process.

“Edges” That Contributed

I believe one factor that may have contributed over the first five years is an approach that combines hyper-divergent and hyper-analytical thinking—an extreme amalgamation across the thinking spectrum, leading to:

An ability to perceive a wide array of ideas that others might overlook and to swiftly analyze these divergent thoughts while maintaining an objective approach.

Pioneering new methods for portfolio diversification and risk management and ensuring their structuring aligns appropriately.

Identifying risks unnoticed by others and thoroughly analyzing these risks.

Another edge over these five years arises from an alliance of extreme patience and aggressiveness, resulting in:

Willingness to wait for extended periods, even years, for an opportunity.

A genuine lack of concern for short-term stock or portfolio performance, enabling the seizing of opportunities perceived as "dead money" or likely to negatively defy Wall Street expectations temporarily.

Making substantial bets on rare opportunities with substantial margins of safety.

Acting swiftly ahead of other market participants when an opportunity emerges, avoiding delays imposed by investment committees or partners.

Additionally, a less overt yet crucial edge is neuroplasticity and neurogenesis. Often overlooked in the investment industry and society, is that fluid intelligence, without intervention, peaks at 18-24. Fortunately, Peter Lynch correctly points out that investing is more about the stomach than the brain.

Recognizing that a healthy diet and exercise significantly contribute to neuroplasticity and neurogenesis, I employ a myriad of vitamins, minerals, medications and substances to maintain and enhance brain function. I meticulously measure the results through blood tests, adjusting my diet to optimize biomarkers, much like correcting investment mistakes. Regular exercise, sufficient sleep, and deliberately seeking new experiences further contribute to brain health. I have gone as far as to study pillows and then design my own pillow to optimize my sleep.

Stance on Current Market Paradigm

Going into 2024, the fund is over 100% net long, but historical beta negative, and my version of beta (future beta) even more negative. I continue to not consider this an exciting time to make money, so the fund has been, and continues to be, positioned more defensively than ever before.

Broadly, the fund's holdings center around concentrated interests in US subprime money lending and global tobacco, with far less concentrated interests in Georgian banking. The fund’s US subprime money lending spans 44 states with a footprint of approximately 1400 physical branches. The fund’s global tobacco footprint spans about 180 countries across about 400 brands. In the country of Georgia, the fund’s interests extend to roughly 200 bank branches. I consider this an unintended abundance of diversification.

Both US subprime money lending and Georgian banking, though cyclical, are anticipated to maintain profitability across economic cycles. These businesses trade at modest single-digit earnings multiples. Meanwhile, global tobacco, also trading within similar earnings multiples, operates non-cyclically, with all three sectors generating substantial cash flow that predictably funds further investments.

These businesses have generous capital return programs in place. By combining these cash generative assets with shorting a variety of highly overvalued stocks I believe the portfolio is positioned to generate meaningful dividend income relative to capital deployed. Additionally, I believe the fund’s longs may appreciate over time due to 1) the businesses growing their ability to generate earnings, 2) the businesses earning substantially more cash than they return to shareholders via dividends, and 3) the stocks being rewarded by the market with multiple expansion. I also believe the fund’s shorts may depreciate over time due to the businesses either bleeding cash and being on the trajectory of bankruptcy or being highly overvalued relative to the ballpark present value of their respective earnings streams.

New Investments

The fund persisted in its measured investment approach, initiating one significant new investment and one minor new investment on the long side over the past year. Like the preceding year, the fund executed two new investments. While some might label me a "slow money" investor, distinguishing me from CNBC's "fast money" traders, I acknowledge that in life and entrepreneurial endeavors, the expense of making mistakes is often less than the cost of inaction. However, in the domain of value-oriented investing, this dynamic is inverted, echoing Buffett's sage advice that the cardinal rule is to avoid incurring losses.

The fund's minor investment involved AlerisLife (ALR), a position swiftly closed following initiation due to the company's acquisition. I believe (though not aligned with the Board's perspective) that my bid to take the company private played a catalyzing role in this favorable outcome, detailed in the subsequent section titled "Positive Contributors to Mark-to-Market Performance."

British American Tobacco

The other capital allocation decision did not contribute positively to the mark-to-market performance and involved British American Tobacco (BAT). Given the fund's longstanding concentrated investment in Imperial Brands, the further foray into the tobacco business was made with the industry firmly within my circle of competence.

In contrast to some of the fund’s short positions that, perplexingly, seem to capture the crowd's excitement, I perceive British American Tobacco as an exceptionally enticing growth business. This is underscored by its consistent growth in revenue, operating profit, and earnings per share, even amid various headwinds. Market participants, accustomed to favorable economic times and rising earnings per share, appear to overlook the value inherent in a dependable and growing cash generation machine. Perhaps when economic conditions become less optimistic, the true value of this gem may be duly appreciated.

Unlike Imperial Brands, which focuses its operations on five core developed markets, British American Tobacco (BAT) has a longer tail of combustible tobacco earnings, driven by its robust presence in emerging markets. A firsthand experience during a two-month stay in Indonesia revealed the astonishing popularity of cigarettes. In fact, nearly two out of every three Indonesian males smoke.

To put it lightly (no cigarette pun intended), market participants continue to underestimate the tobacco business, particularly BAT. Following the FDA's ban on some VUSE flavors (integral to BAT’s next-generation products), the stock experienced a significant drop. This decline was further fueled by the noise surrounding the UK's new smoking legislation. Despite being a highly predictable and economically resilient growth business, BAT traded at around 5x earnings during this period, prompting me to increase its position, making it the second largest in the portfolio.

To echo Marcus Aurelius, "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." The UK legislation is expected to have minimal impact on the tobacco business in the next five years. Even with the assumption that such legislation remains in place, it is unlikely to deter younger adults from exercising their freedom of choice to smoke. Do younger adults under 21 and under 18 in the US drink? Did younger adults in the US use cannabis while it was illegal to produce, sell, and consume in all states? Now imagine that we are assessing a highly addictive substance that is legal to consume (just not to purchase for some age groups); what an irrelevant piece of legislation. Furthermore, in contrast to the prevailing view that only old people smoke, the smoking rate in the UK among the 25-34 year old age group is 16.3%, which is almost double the smoking rate of the oldest group aged 65+.

BAT's recent foray into a "smoke-free" future created a stir, marked by a substantial write-down of its US combustibles business last December. This led to a further drop in the stock, prompting me to seize the opportunity and increase my position. Many market participants may not realize a crucial fact: the goal of being "smoke-free" is oddly defined as less than 5% of adults smoking. For instance, Sweden is about to become the first "smoke-free" country despite 5% of its adult population smoking. To illustrate the absurdity, consider this: if 4.9% of all adults were considered deadbeats, would we call the country "deadbeat-free"? It's a nonsensical statistic seemingly constructed out of thin air to provide politicians with a false accomplishment to tout.

If BAT pursues its "smoke-free" goal by 2035, this politically correct objective implies a projection of further steady declines in the smoking rate in developed markets (not groundbreaking news). Even if, in some developed countries, less than 5% of the population smokes in 2035, it would still represent a significant market share. Many companies could only dream of capturing 5% of developed market consumers. In a "smoke-free" world, BAT's combustible profits in these developed markets are likely to increase due to price hikes and margin expansion. The combustibles business in emerging markets will surely not be "smoke- free" by 2035. If BAT succeeds in substantially increasing the penetration of non-combustible products like vapor products in developed markets, this cannibalization may further contribute to the company's growth in earnings.

The vapor market is frequently misunderstood. Currently, BAT and other regulated players face a challenging environment due to the proliferation of illicit players in the market. Presently, the vapor market resembles the wild west, with illicit flavored products more prevalent than regulated products. However, what often goes unnoticed is the fact that today's illicit vape users, part of a super high-growth market, are likely to become the regulated tobacco vape users of tomorrow.

Governments are bound to become increasingly frustrated by missing out on tax revenues and allowing their constituents to use potentially dangerous products. This frustration is likely to prompt crackdowns on illicit products and/or a shift away from authoritarianism, liberating adults (at least of some age groups) to exercise their precious free choice in selecting flavored products that enhance their lives. A similar paradigm unfolded when consumers couldn't use Juul flavors, leading them to migrate to BAT's products. A comparable migration is anticipated once there's a crackdown on Elf Bar and similar illicit vape products.

Now, many individuals will overlook these facts and concentrate solely on the combustible volume decline in some markets as evidence of a declining business. However, this is a prime example of an unidentified cognitive bias, and I'd like to name it "Univariate Obsession Bias" – a term I would cheerfully suggest to Charlie Munger if he were still around to add it to his wonderful list of 25 cognitive biases.

Univariate obsession bias occurs when individuals fixate intensely on a single variable (univariate) within a multifaceted situation, disregarding other crucial factors. To illustrate, consider the debate on working remotely vs. working in an office. People often exclusively focus on the hours worked variable, stating things like "people just don’t work as hard." However, hours worked multiplied by productivity equals output, and ignoring the productivity variable is asinine. Intelligent individuals make this mistake due to the irrational univariate obsession in society with "hard work," despite productivity being the more critical variable to output since its potential increase is not limited. Perhaps their fixation on hard work stems from focusing on it during their careers, leading to cognitive dissonance, a separate cognitive bias.

In the tobacco business, both prices and volumes contribute to sales. The dynamic of prices rising as fast as volumes decline in this business leads to higher margins. The univariate obsession bias on "volumes" tends to confuse people from recognizing the significance of other material variables.

Positive Contributors to Mark-to Market Performance

One Main Financial (OMF), Bank of Georgia (BGEO), and AlerisLife (ALR) emerged as the three primary contributors to positive performance in 2023.

AlerisLife (ALR)

AlerisLife was a company that traded at a significant discount to its substantial senior living real estate assets. I attributed this discount to the business burning cash due to its exceptionally poor corporate governance. The potential for cash flow positivity could have been achieved by reallocating headcount expenses related to managing properties to DHC, but the company, in my opinion, chose not to do so for reasons unrelated to AlerisLife shareholders and more aligned with the personal interests of certain key decision-makers. Notably, the Chairman of the Board rented his Trust's real estate asset to the company. Furthermore, the company insisted on obtaining expensive consultation from a firm in which the Chairman had significant ownership, despite AlerisLife already retaining consulting company Alvarez and Marsal. Without delving into additional business school textbook examples of poor corporate governance, the key point is that the substantial discount the stock was trading at was entirely due to poor corporate governance, leading to negative cash flow. I believed I could address both issues, prompting me to take control of the destiny of my investment.

You may recall my discussion in the 2021 annual letter regarding Five Star Senior Living (which later changed its name to AlerisLife). If that doesn't ring a bell, here's a refresher:

“This was a bit of a tricky situation that should not be characterized as a mistake, but rather a misunderstanding.

However, this is an important case study of the kind of situation I plan to get involved with in the future when I have full autonomy. Here is a senior living business with $100 million or so of cash, $150-$200 million of assets and at time of purchase a $130 million market cap. The owned portfolio is 98%+ private pay, fully sprinklered, and has normalized 80%+ occupancy, producing $13.5 million in net operating income annually ($192 million in value at a 7% cap rate).

My idea was to build a substantial position and try to convince management to take specific actions to improve free cash flow and shareholder value. I did attempt to do this, but management was uncooperative. At this point, I intended to then control the outcome of the investment by:

As promised, I acted on my stated intention to get involved once I had full autonomy. In early 2023, the fund established a non-concentrated position in AlerisLife. To execute the Mitzvah of providing the shareholders of AlerisLife with a substantial premium and an exit from the further decline of the business they owned, I established a new company called Mitzvah Capital. This aligns with option C, as described in my 2021 annual letter.

Utilizing the business’s real estate assets, I secured debt financing to present two separate and distinct bids for the company. The first bid was for $75 million, a significant premium compared to the market cap in the vicinity of $25 million. These bids are public information.

To condense the narrative, the Board of Directors, acting on the behalf of the mom-and-pop shareholders, made decisions that, in their view, best served these shareholders. This included rejecting my $75 million bid, accepting the Chairman’s $44 million bid, not seeking competitive bids from other senior living home players or private equity entities, waiving the Chairman’s standstill agreement (occurring December 19th 2022), and rejecting my subsequent bid, which also offered a substantial premium over the Chairman’s bid.

This episode provided a valuable learning experience because when strategizing my game plan, I anticipated every potential scenario to ensure a victory in all scenarios; however, while I foresaw the potential breach of fiduciary duty by the Board in denying my bid, even with the substantial premium to market price, I never envisioned the Board accepting a materially inferior bid. Perhaps my idealistic view clashed with the harsh realities of business, where commitments and laws are sometimes blatantly disregarded, as per Carl Icahn's infamous advice: "If you want a friend, get a dog."

Despite the fund earning an attractive return on its modest investment in the company, due to the acquisition at a roughly 70% premium to the fund’s cost, I fundamentally disagreed with the Board’s "process.”

Moving forward, I won't hesitate to pursue the privatization of Philip Equities, LP portfolio companies when it aligns with logical considerations and opportunity arises. The paramount objective is maximizing long-term performance, ensuring that Philip Equities’ limited partners receive the value they rightfully deserve.

One Main Financial

As Ken Fisher articulated earlier in 2023, every year banks fail. Early in 2023, notable bank failures justifiably caused financial market participants to more closely scrutinize banks with deposit flight risk. Unjustifiably, practically the entire financial sector sold off. Amidst this, One Main Financial, a non-bank subprime lender in the fund's portfolio, stood out due to its immunity to deposit flight risk.

Even before the unwarranted selloff in One Main Financial. the business represented an attractive investment, being undervalued relative to its intrinsic value. When the stock experienced a significant drop from its already cheap valuation without any fundamental reason, I recognized the irrationality of market behavior, leading me to think, "this makes no sense." Situations in which market participants act this irrationally are rare, and reminiscent of previous fortuitous events like the selloff in Apple shares in early 2019 or the selloff in AerCap shares in March of 2020. Seizing this perfect pitch, I swung for a homerun.

Since then, the business has efficiently utilized earnings to maintain a substantial dividend, repurchase its own stock, and acquire the entire stock of another company. The long-term outlook remains positive, with the business expected to continue growing earnings organically.

Bank of Georgia (BGEO)

Over the years, I've discussed the Bank of Georgia and the nation of Georgia in different annual letters. To keep it brief, the well-managed business in this business-friendly and geopolitically stable country has consistently demonstrated strong earnings growth. The stock price has generally tracked this earnings trajectory. Additionally, the business has consistently paid a growing dividend. Remarkably, the stock, not including the dividend, has now delivered a threefold return for the fund.

The success of this investment underscores a broader principle that guides the fund – the art of capitalizing on market dislocations. While I often metaphorically apply the legendary Rothschild saying to buy when "blood is in the streets," in these instances, I mean it quite literally. A substantial portion of Bank of Georgia stock was acquired before the eruption of hostilities between Russia and Ukraine. However, additional shares were procured when the stock plummeted dramatically at the onset of the conflict – a time when blood was both figuratively and literally in the streets. A similar scenario unfolded with AerCap, one of my most successful investments, purchased significantly during the depths of the COVID pandemic when, once again, blood was literally in the streets.

The concept of "buying when there is blood in the streets" holds merit when people become emotionally charged and, consequently, logically muddled. The key is to be vigilant for situations marked by distress, identifying specific assets that are 1) associated with the tumultuous conditions, experiencing a precipitous sell-off, yet 2) remain unaffected or, ideally, stand to benefit from the circumstances. Once individuals acclimate to the new reality, emotions subside, paving the way for a more rational valuation of the previously disrupted assets. I fully anticipate the fund seizing similar opportunities in the future with swiftness and substantial commitment.

Negative Contributor to Mark-to-Market Price Performance

The three most significant detractors this year were Nemaura Medical (NMRD) and two unrealized short positions. I typically refrain from elaborating on short positions, and I will continue this habit by abstaining from discussing these two unrealized short positions, leaving us to focus on NMRD.

Nemaura Medical (NMRD)

Over the last few years, the fund ventured into an early-stage medical device company. In December, the fund divested the stock at approximately an 80% loss from its average cost, imparting a painful lesson. Investing in an early stage of an industry company and backing a cash flow negative entity were both missteps in the investment process.

Looking ahead, Philip Equities, LP will adhere strictly to its investment principles, refraining from making even a single exception to invest in a business in the nascent stages of an industry or one with negative cash flow. Instead, the fund will focus exclusively on highly cash-generative businesses in the decline, mature, or growth stages, with the latter limited to scenarios involving oligopoly, duopoly, or monopoly. The only exception to this rule—more of an idiosyncrasy—is if a business, despite being in one of the specified phases, temporarily lacks cash flow due to unique circumstances (e.g., AlerisLife), provided there's a clear path to actively influence the investment's trajectory.

While acknowledging the importance of venture capitalists and adventurous investors, Philip Equities' capital will not be going on adventures. The Fund remains committed to its rule with zero tolerance for deviation. This means accepting the potential missed opportunities presented by businesses in their introductory stages, where innovation and potential for huge gains might be abundant.

The new standard for Philip Equities is clear: no permanent capital losses, no speculative "fliers." It's a definitive standard.

Shorts

The fund strategically maintains substantial short positions in approximately a dozen stocks, a tactical move that keeps the fund (historical) beta negative, even as it operates with over 100% net exposure. In the current market climate, identifying short opportunities has become remarkably straightforward—conducting a cursory review of basic financial metrics for companies in major indexes reveals numerous companies egregiously overvalued. These initial findings are then refined by delving into their respective annual reports. The simplicity of pinpointing such glaringly overvalued businesses highlights the prevailing market conditions. Although there have been years when the fund had no short positions, and this paradigm could be revisited, the fund's current portfolio of short positions serves to generate positive carry, act as a hedge in bearish markets.

Philip Equities' approach to shorts hinges on valuation, reflecting a long-term perspective that disregards catalysts. Contrary to many successful short sellers' advice to avoid shorting based on valuation alone (citing the potential for further overvaluation), Philip Equities maintains its stance, driven by three key reasons: first, shorts are sized prudently to prevent liquidity issues even in the event of substantial upward movement; second, stocks with low borrowing rates are selected for shorting; and finally, the fund remains entirely unconcerned about short-term performance.

Exited Investments

Following an abrupt surge in the stock, the fund strategically exited Dye & Durham early in the year, securing an immaterial discount to the cost basis. This decision aimed to create space for a considerably more concentrated investment in One Main Financial, which exhibited even greater undervaluation. It is noteworthy that the exit from Dye & Durham occurred just months after endorsing the stock in my 2022 annual letter. Consistent with my philosophy, I retain the prerogative to revise my stance, prioritizing long-term results over appearances. After the fund's exit, the stock promptly plummeted by more than 50%, underscoring the importance of not reading my letter and cherry picking.

In December, the fund exited Nemaura Medical, registering an approximate 80% loss from the cost. As acknowledged earlier, this marked the fund's second significant mistake within the five years since inception. My commitment is to reduce the number of such errors in the coming five years.

Additionally, the fund successfully exited various short positions at a profit.

Historical Mistakes: Reflecting on Since Inception (& Prior) Financial Market Mistakes

When I began Philip Equities, LP I understood investing fundamentals. Yet, over time, my investment capabilities have significantly evolved, thanks to mistakes, an obsession with learning through various mediums, and notably guidance from my late mentor—the greatest long/short equity manager of all time.

Seneca's wisdom, "A gem cannot be polished without friction, nor a man perfected without trials," aptly applies to investing: trial and error refines the investment process. Like the Navy SEALs, my process revolves around learning from successes and failures, and refining for excellence. I believe the few historical mistakes of the fund would not occur today, and opportunities missed in the past would now be seized.

Mistakes began before I started Philip Equities, LP, which has allowed Philip Equities, LP to succeed. My first investment was as a little kid into some new device that was cash flow negative that I believed would get big; it went bankrupt, and I lost all of a few hundred dollars.

My next investment enterprise was a successful event-driven recommendation to my best friend in high school to buy a basket of cash flow negative cannabis stocks before legalization in Colorado. This was hugely successful (as a high schooler), but it led to a hubris rooted in intelligent speculation rather than intelligent investing, and intelligent speculation is not sufficiently reliable.

In my first year of college, I arrived with dual monitors, setting up a trading station in my dorm room that left my roommate and hallmates bewildered. Using my bar mitzvah money and childhood savings, I delved into trading across various asset classes, strategies, and geographies late into the night. Driven by confidence in my intelligence and years of daily textbook study since the age of 12, I believed I could easily generate profits. While I did experience some initial success as a 'trader,' I eventually faced a permanent loss of capital while speculating in a cash flow negative music festival company called SFX Entertainment. The weight of this loss in my stomach was palpable, as it comprised a significant portion of my savings needed for non-school-related expenses in college. During this period, I operated more as a 'trader,' making numerous trades each day, rather than adopting an investor mindset.

A few years later, while at USC, my best friend, who had access to some capital, decided to invest with me in a fund. Despite my earlier trading losses, I hadn't fully shed my inclination for speculation. Unfortunately, our plan was to trade across diverse strategies globally. Although the value-oriented equity investing performed well, I made a significant error in predicting the direction of rates. In less than a year, the fund experienced a permanent capital loss, causing my best friend to lose more than I had helped him make in the previous event-driven cannabis- related bets in high school. While the overall amount of funds involved was retrospectively immaterial, the moment of losing money for my best friend was deeply impactful, instilling in me a passionate aversion to taking unnecessary risks. This marked the turning point when I committed to becoming an investor.

Despite the profound pain of the earlier loss, my logical instincts quickly took charge. Within a couple of days, I suggested to my best friend that we should embark on a new venture together, focusing exclusively on global equities. The equity theses were consistently logical and proved accurate, leading me to believe that by adhering to value investing principles, I could achieve high long-term compounding rates. However, he declined the proposal. In fact, none of my family members or friends were supportive. Undeterred, armed with my modest accumulated internship compensation, I initiated Philip Equities, LP, naming it after my late grandfather. I began this solo endeavor from a returnable Amazon mattress on the floor of my entirely bare dorm-room.

As the burn rate became challenging to sustain, I transitioned to living in the USC Leavey Library, and later found myself on my mom's couch in her one-bedroom/one-bathroom apartment. During this period, my diet primarily consisted of protein powder and frozen broccoli, occasionally treating myself to the cost-effective 2 McDoubles for $3. I remained steadfast in my commitment to the value investing script, even if success took a decade. Despite the challenges, I intelligently invested while diligently cold-calling and emailing billionaires every day. Some measure of success began to materialize within a year.

Today, I consider myself fortunate to have encountered these financial market challenges at a young age, well before establishing Philip Equities, LP. Had I experienced early success in 'trading' like some individuals do, I might not have embraced the path of a conservative investor. This inclination, I believe, has laid the foundation for decades of sustained compounding.

Philip Equities has navigated only two significant mistakes, but these two missteps are two too many, and I am eager to minimize such occurrences in the next five years.

The Qurate Retail blunder from the previous year, detailed in the 2022 annual letter, distilled down to a crucial lesson: avoid investing in a cash flow positive business that is excessively leveraged relative to potential fluctuations in operating cash flow. Moving forward, I am committed to heightened vigilance regarding the predictability of operating earnings when engaging with leveraged businesses.

In the 2021 annual letter, I confessed to a non-material mistake involving an investment in Hello Group. The crux of the error was failing to ensure that the shares purchased belonged to the intended company. (VIEs are distinct from the company they purportedly represent, lacking legal claims to the assets.)

This year's annual letter delved into the double mistake of investing in a cash-flow-negative business at the introductory stage of the industry.

Beyond Philip Equities, LP, I also miscalculated a couple of years ago when I found SPAC sponsor share+warrant investments seemingly attractive. Despite noble intentions and historical attractiveness, I overlooked a fundamental rule: investments should be in cash flow-positive businesses, and ideally, in the decline, maturity, or growth stage of the industry (the latter only if it is an oligopoly, duopoly, or monopoly). Furthermore, I failed to heed the rule of avoiding permanent loss of capital. While these investments historically had a low probability of liquidation, the possibility remained.

Philip Equities as a Business

My passion is long-term oriented investing. Business, to me, is about the joy of the game. The individual intellectual process is what I value and enjoy. Increasing the funds I manage would heighten this experience, enabling me to maximize my potential professionally and to perhaps enhance returns through the ability to actively control the destiny of more investments. However, my motivation is not swayed by short-term fundraising goals. My approach is long-term, rooted in the belief that merit will ultimately prevail.

Philip Equities, LP began in my University of Southern California dorm room with the assumption that it would take ten years to raise outside capital. I even accepted the possibility of being homeless for ten years prior to raising capital. This path, surprising to family and friends, was appealing as it allowed undisturbed focus on my investment process, which would logically produce excellent long-term results. My conviction remains steadfast, bolstered by the fund's myriad successful scalable investments, and the invaluable time spent with my late and esteemed mentor. In one of our final in-person conversations, he offered simple yet profound advice: "just keep going." And so, the journey continues.