As part of some of the reader feedback I received in the last couple of months I’ll start penning a quarterly update (although I’ll call it ‘Quarterly’) of some updated thoughts and the state of the portfolio etc. Again, I disclose what I own for transparency. If I’m actively covering a story it’s important that you know whether I own it or not. It will naturally have an effect on the analysis. I post on Twitter when I buy or sell something, but not weightings.
This has been a much more active period for me personally in terms of transactions than what it is usually. Whether or not that is a bad thing is not yet clear to me. Some of the things I’ve bought have probably been decent opportunities for at least a couple of years. Now that we’re longer in the tooth, does that present more risk? I’d like to think not.
Certainly, having a large portfolio holding decline nearly 40% over three trading days on the back of some scandalously reckless tweeting by a federal bureaucrat is a new ground for me. They say reality is stranger than fiction and I can’t help but agree with that. This is, however, in the nature of markets. The reassessing of future earnings streams is constantly contextualised against a ready supply of events, both expected and not.
As far as personal responsibility is concerned, things go wrong. My analysis can be wrong. It can sometimes be wrong ex ante where I’ve decided to deprioritise certain risk factors, or overlook some things that were apparent before purchase. Funnily enough, this happens on the downside and the upside. Things develop, and I think that’s where the Updates have been helpful for me (and hopefully for you!).
When one owns a lot of government-supported/sponsored monopolies (naturally sustainable or not) the primary risk factor on is faced with is the source of that company’s product scarcity: the government. When one owns dominant companies supported by consumers the principal risk factor to product scarcity is the consumer. Predicting either’s future actions is not easy.
There is a common element in all political regime changes, however, that was heavily discounted by market participants in the last Congressional and Presidential election: some elements that help a leader come to power are almost immediately abandoned and attacked post a successful campaign. One is reminded of President Kennedy’s persecution of organised crime immediately after leveraging the Chicago Outfit to ballot stuff in key precincts. Populist leaders can be even more unpredictable in this regard.
Certainly there is an overlap in certain situations between government sanction and consumer support and/or surplus. This is the sweet spot.
My recent foray into infrastructure has been enlightening in this regard. Personally, I’m attracted to things that look like taxes, royalties, and toll booths with longevity. There are obvious economic rationalisations for this (cleaner, more predictable cashflows, without the need to reinvest etc etc). They are also pleasing to my mind and personality. Like most humans, I cling to predictability.
Indeed as is the case with all other industries, there are gradations of asset quality across infrastructure. Some of these assets have financial performance closely tied to the economic and credit cycles (as many of them are financially levered this is a compounded issue). Many are at the whim of regulators who cap returns in line with demanded capital investment cycles. Geopolitics can play a large role in their future prospects, as can the domestic political climate. As always, finding interesting situations in this regard is the art of finding companies that will succeed irrespective of these externalities.
As I am becoming acutely aware of, the margin of safety comes in many different forms.
A company I own, the Tel Aviv Stock Exchange, owns a grade A office building that was literally struck by an ballistic missile in downtown Tel Aviv. This was also a first for me. Despite this, and the fact that the building had an appraised value at about one-tenth of the company’s market capitalisation, its shares rallied nearly 4% on the day. Real life truly is stranger than fiction. In truth the Israeli government offers an insurance service via the tax authority where property owners can get favourable coverage for just such a contingency. I think Taleb would be proud of such anti-fragility.
The more I think about it, the more I think that Buffett’s widely parroted conception of the margin of safety is only myopically understood, and rudimentarily applied. In contrast, I don’t think Buffett has myopia about this at all. That is evidenced by the fact that so many of his early Berkshire picks (public equities that is) are still kicking around today. The margin of safety can be found in contracts, management, legislation, a consumer surplus, relationships, networks, real estate, branding, and on and on. Buying securities at a low price is of course essential, but when I look at the positions I have had that have really done well it came from things that could not be well know ex ante. It is only easy to explain these thing via parables.
Portfolio
As of this writing, the portfolio looks like:
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