# TCI _If it's not obvious, you probably just leave it alone because it's probably not sustainable._ --- ## Risk first, valuation last Chris Hohn founded TCI Fund Management in 2003, after learning his trade at Perry Capital and, before that, in private equity at Apax. The track record since: roughly 18% compound annual returns, assets under management now exceeding $50 billion, and a portfolio of just nine stocks. This concentration is deliberate. Hohn estimates that only about 200 companies globally meet his investment criteria. Most businesses are mediocre or worse - exposed to competition, lacking pricing power, vulnerable to disruption. The few that aren't deserve outsized positions and holding periods measured in decades. What makes Hohn distinctive is the clarity of his frameworks - and how directly they translate to running a company, not just investing in one. --- ## Moats before valuation TCI's process is inverted. Most investors start with a view on price, then assess quality. Hohn does the opposite: "We don't even look at [valuation] until we get comfortable that the barriers are so strong it will be around." Financial models are irrelevant without fortress-level competitive barriers. If the moat won't survive twenty or thirty years, the discussion ends before the spreadsheet opens. This is inversion applied to investing - start from what could go wrong, not what could go right. Hohn's definition of risk, borrowed from Soros, is simple: "not knowing what you're doing." Risk is ignorance about competitive dynamics, not volatility. The implication extends beyond investing: audit your competitive position before obsessing over growth. Growth without moats is a trap - [[The whole game]] starts with positioning, and without it you're building something someone else will eventually take. --- ## Five barriers, not one One competitive advantage isn't enough. Hohn wants multiple, overlapping barriers: "Often you would like not just one barrier to entry but maybe five: intellectual property, brands, hard assets, contracts, network effects." His portfolio reflects this. Airports like Aena are physical monopolies - economically irrational to replicate. Visa benefits from two-sided network effects plus regulatory embeddedness. GE Aerospace and Safran operate a jet engine duopoly with fifty-year product cycles, protected by IP, installed base, and certification requirements. Moody's and S&P Global sit in a ratings duopoly where their services are legally mandated for bond issuance. Each position stacks multiple barriers. The compounding comes from their interaction - network effects reinforce switching costs, regulatory requirements entrench installed bases, physical assets create natural monopolies. A useful exercise: list your competitive advantages. If you can only name one, or if explaining them requires a whiteboard, the position is weaker than you think. --- ## If it's not obvious, leave it alone "If it's not obvious, you probably just leave it alone because it's probably not sustainable." This cuts against the typical strategy presentation - the elaborate explanation of why the competitive advantage works, the nuanced argument for why this time is different. Hohn's view is that durable moats are self-evident. Aircraft engines have two manufacturers. Credit ratings have two agencies. Airports have one per city. Complexity in explanation often signals weakness in position. If you need ten slides to explain your moat, you probably don't have one. The businesses that compound for decades are the ones where the advantage is obvious - obvious to customers, to competitors, to anyone who looks. --- ## Pricing power as proof Pricing power is "the rarest element in the investing periodic table" - Hohn's phrase. It's proof of competitive strength, not a consequence of it. If you can raise prices above inflation without losing customers, you have something real. If you can't, you're in a bad business. The maths is concrete: "If you can price 1% above inflation with 20% profit margins, profits grow 5% faster than revenue." The leverage comes from fixed costs - the price increase flows directly to the bottom line without incremental expense. Small pricing advantages compound into large profit advantages over time. [[The pricing lever]] explores this in detail: most companies leave pricing discipline to sales or finance, treating it as technical rather than strategic. Hohn's framework puts it at the centre. Pricing power isn't something you negotiate; it's something you earn by building a position customers can't leave. [[TransDigm]] exemplifies the extreme version - sole-source aerospace parts where the alternative to paying is grounding the aircraft. [[Heico]] shows a different path to the same outcome: price below the OEM, build loyalty, still compound at 20% annually for decades. Both work because both have genuine [[Switching costs]] - just different strategies for exploiting them. --- ## Good stays good, bad stays bad "Good companies stay good and bad companies stay bad." The observation sounds obvious but its implications are not. If quality persists, then buying excellent businesses and holding them indefinitely makes sense - which is why TCI's average holding period is eight years, with some positions held for over a decade. If quality persists, then trying to fix broken businesses is usually a mistake - the industry economics will reassert themselves. This challenges the turnaround mentality common in operations and private equity. Sometimes poor performance reflects poor execution that new management can fix. But often it reflects industry structure that no amount of operational excellence can overcome - the [[Execution trap]] in its purest form. Hohn avoids the second category entirely. His "bad business blacklist" is explicit: banks ("opaque, highly leveraged, speculative"), airlines, wireless telecom, traditional asset managers, insurance, commodity manufacturers. What unites them is structural disadvantage - competition commoditises returns, opacity masks true economics, or leverage creates fragility. Even excellent operators struggle in these industries. The game is rigged against them. The uncomfortable question follows naturally: is your business structurally advantaged or structurally challenged? If the latter, incremental improvements won't change the outcome. [[Economics vs playbooks]] - the industry matters more than your effort. --- ## What the letters reveal Hohn's activist letters strip away the diplomatic language typical of shareholder engagement. The criticisms are specific, the demands are concrete, and the operational lessons are clear. **The Alphabet letters (2022-23).** TCI accused Google of letting headcount double in five years whilst productivity stalled. Compensation ran 152% higher than the industry's twenty largest tech companies. Losses piled up in non-core businesses like Waymo. The demands: 20% headcount reduction, compensation benchmarking against peers, and killing "pet" projects that consume capital without returns. Alphabet cut 12,000 jobs in January 2023. Hohn's follow-up letter called for deeper cuts. The underlying point wasn't about Google specifically - it was about the discipline that erodes when competitive pressure is absent. Monopolies can afford bloat. They shouldn't. **The Canadian National letters (2021).** TCI attacked the board for having "no meaningful involvement, background or training in the railroad industry." The CEO was pursuing a "copy-cat" acquisition that TCI called "an egregious failure of oversight." The campaign succeeded: the CEO departed, new board members joined, and the acquisition was abandoned. The lessons are concrete. Headcount discipline is a governance issue, not just an HR issue. Compensation benchmarking is real - your employees compare themselves to peers whether you do or not. Board expertise matters - directors without industry knowledge can't challenge management on strategy. And "diworsifying" acquisitions destroy value more often than they create it. --- ## Management matters less than you think When asked whether management quality matters, Hohn's answer is counterintuitive: "Less so. It matters for reinvestment risk." For businesses with hard assets and structural moats, the asset does most of the work. An airport generates returns regardless of who runs it. A credit rating agency compounds regardless of the CEO. Management matters more when they're allocating capital into new areas - that's where judgment determines outcomes. This cuts against the cult of the exceptional operator. Great management can accelerate compounding in a good business. But great management can't fix a bad business, and mediocre management usually can't destroy a good one. The business quality dominates. This creates a useful test: how much of your company's performance comes from structural advantages versus operational excellence? If you disappeared tomorrow, would the business keep compounding? If not, you may be confusing your skill with your position. --- ## Seven people, fifty billion dollars TCI manages over $50 billion with seven or eight investment professionals. "It's small - very small - it's collegiate. We've known each other a long time and there's something that we've built, which is an intangible trust." Structure enables strategy. Long holding periods require conviction, conviction requires deep understanding, and deep understanding requires time. A larger team would generate more ideas but shallower knowledge - exactly the wrong tradeoff for a concentrated, long-duration portfolio. The same logic applies to operations. Small teams with shared context can move faster and make better decisions than large teams with formal processes. The constraint is finding people who share the philosophy deeply enough to trust their judgment. Hohn on hiring: "The best employees don't work for the money; they work for a great environment, proper conduct, and, above all, a shared purpose." --- ## Purpose beyond returns Hohn donates most of his income to the Children's Investment Fund Foundation, which he founded alongside TCI. The "Say on Climate" initiative - requiring portfolio companies to publish emission plans and seek shareholder approval - emerged from this parallel track. The philanthropy connects directly to the investment model. Long time horizons require purpose beyond returns. Holding a stock for a decade demands conviction that survives quarterly volatility, market panics, and the temptation to trade. Purpose provides that anchor. The lesson extends to any organisation with long-term ambitions. Short-term incentives produce short-term thinking. If you want people to build for decades, they need reasons to care about decades. --- ## Applying the filters Hohn's frameworks are clear. Applying them to your own business might reveal things you'd rather not see. How many overlapping barriers protect your position? If you removed one, would the others hold? Can you raise prices above inflation without losing customers? If not, what does that say about your competitive strength? Is your industry structurally advantaged or structurally challenged? Are you building something durable or running hard to stay in place? Most businesses fail these tests. The filters are supposed to be severe - Hohn invests in roughly 200 companies globally because only 200 pass. What matters is what you do with that information. You can dismiss it as investor logic that doesn't apply to your situation. Or you can ask whether you're building a business worth holding for a decade - and what would have to change if you're not. ---