Buyback Capital Annual Letter
Blogging, reading, and investing
2023 has been a particularly fruitful year for me. Having spent a significant portion of it on trains, planes, and other miscellaneous forms of transportation it has nice to be able to spend a few weeks sleeping in the same place. The learnings this year have been great.
Firstly, thank you once again to everyone who supports the newsletter. Your support is greatly appreciated, but not simply for the custom. Many readers reach out to me via X/Twitter, email, and in the comments section. I’d like to say that the feedback is invaluable, but that would be something of an understatement. I get ideas, push-back, and occasionally spelling and grammatical advice. I’ll admit that last part has never been my strong suit, and my intention is always to get the content out, with the message as legible as possible. I’ve also met a great many readers here and followers on X/Twitter in the flesh this year. I’m almost never disappointed in doing so - as they say: ‘always meet your mutuals’.
While I’m loathed to comment on anything macro or the market generally, I can say that the way things panned out in 2023 has been a surprise to me, and pretty much everyone else I know. This has also been the case for every other year I have been cognisant of markets. At the ripe age of 29, I have seen some truly astounding things happen in auction driven markets. A manufacturing recession without a services recession in 2015/2016, the vol implosion in early 2018, the cataclysmic events of a global pandemic that saw negative oil prices and interest rates, the subsequent bubbles in crypto, and then in Chinese real estate, and then technology, and then crypto again etc etc. I can confidently say that I have absolutely no bloody clue what will happen in 2024 either.
Luckily we don’t need to know what markets will do. All we need is a small number (1 will do) of high quality situations a year to do well. If I were going to comment on anything, it would be to say that the prices of some of my favourite companies have gotten significantly richer since 2022. As an example, my beloved FICO currently sits at an eye watering 67x LTM trailing earnings. Such prices demand performance that it is extraordinary, and if I’m being honest, not a probability to materialise. The opportunities look scarcer now, but who knows what tomorrow will bring?
2023 saw my focus narrow. This was on purpose. In my earlier years managing my own money I had a lack discipline in a few regards. As many young investors do, I relied on the insights of others. This is as big a sin there is. I was also generally unrealistic about how many businesses I would be able to properly understand. In any event, my approach has moved more and more toward simplicity. The results have been more than acceptable - however the costs for my previous sins has been high. We repent, we ask for forgiveness, and then we redeploy the capital.
My results this year have been hampered by a large cash balance as I have scaled out of a few holdings, but also by not taking larger positions in new portfolio holdings. The gains in a couple of positions were also held back by a large holding in British American Tobacco. Many lessons have been learnt here, and thankfully at a very modest cost to my net-worth. I saw it as a reasonably attractive alternative to cash, which has so far proven to be wrong. Alas.
In descending order of position size:
Amazon.com Inc, (This year’s article links: A Note on Amazon and Fair Isaac Corporation, Amazon Hitting Stride, Amazon [insert term here] and Pillaging),
British American Tobacco,
Fair Isaac Corporation (links: FICO - Boring and Excellent, FICO Note)
Tel Aviv Stock Exchange (links: Risks at Tel Aviv Stock Exchange),
Hemnet Group AB (Hemnet Introduction, Hemnet Note),
Dicker Data,
I also have a significant portion of my assets in S&P 500 ETFs and cash. Over the last two years I have been able to save a very significant amount in relation to my portfolio. Unfortunately excellent opportunities don’t show up at the same time as windfalls. This will be less of an opportunity over time.
Leaving the portfolio this year was (I wrote explanations for each of these sales too):
Alphabet,
Credit Acceptance Corporation,
Travelsky Technologies.
With one glaring exception, the individual names represent a collection of businesses that are going through multi-year inflections in business quality. At least three of these businesses are driving unusually strong growth in earnings power through pricing power alone. In almost every case, the strength in underlying earnings power growth is accompanied by relatively little need for reinvestment. In most, but not every example, the lack of reinvestment opportunities means that the remainder of the excess cashflow can be returned to shareholders as cash today. In at-least two of these businesses, continuing shareholders regularly get to benefit from marginal leverage through the means of additional share repurchases. I also don’t mind saying that almost every business I own has an optically high valuation, although this was less of an issue at the time of their purchase.
There can be no doubt that low prices are essential for a great investment. What is a low price, however, is something of a relative concept. An appropriate price for a security is the derivative of the amount of cash an investor can hope to see returned over the investment’s life time, discounted back at the appropriate rate. There are a two qualifications needed here. Firstly, investments which need relatively little reinvestment to produce more earnings in the future are worth more than their counterparts which need capital reinvestment. Secondly, it is worth qualifying all earning’s power analysis with the question of how much money makes its way back to the shareholder. For example, a company that spends all of its cash proceeds on executive compensation is worth less than a company that returns all of its cash proceeds to the shareholders. Finally, if I could pick between only knowing a stock’s near term earnings metrics, or intimately know its business prospects, I would always choose the later. As Buffett says, the important thing is to be right on the business.
Over the last year I have also come to appreciate the idea of business momentum much more than I had in the past. This is not to say that I have come to appreciate short term earning’s beats more (although I’d be disingenuous if I were to say they aren’t nice to benefit from). When you’ve done enough work on a name, you get a feel for how a business is developing and whether or not momentum is with it in a secular way. For example, despite Amazon’s share price roughly going nowhere over the past 5 years, it would be wrong to say that it was same quality of business as it was 5 years ago. There has been a tremendous momentum behind its retail business for almost 30 years now. However, the dominance and reach of its logistics and fulfilment infrastructure, coupled with the ever alluring siren’s song of lightening fast delivery, creates an ever great draw for customers and merchants every year. The same kind of observations could be made for AWS too.
In any event, next year will be another opportunity for further learnings and I relish the opportunity.
Larry.
P.S. as far as the newsletter goes, you would have noticed a couple of changes since the end of October. I have been keeping to a pretty tight schedule of posting on Wednesday’s and Sunday’s (AUS time). I plan to keep to this going forward as more regular work seems to be preferred to less regular work. I do plan to continue to cover my portfolio names, and to continue to post about historical high quality businesses at inflections. What I am most excited about will be posting about new ideas that appear on my radar. From time to time I will also post about business generally, as well as investing philosophy.
I hope you plan to continue following in the new year.