I’ll start this week’s Investing Digest off with a quote:
I’m something of a student of dementia, and I can ordinarily classify dementia on some theory structure or another but modern portfolio theory involves a type of dementia I can’t even classify.
- Charlie Munger
I would like to propose we substitute the words ‘modern portfolio’ with ‘deep research’, or ‘deep reality of a business’, or, god forbid ‘due diligence’.
It’s not that research and understanding is unimportant, but it’s remarkable how often I have heard deep research used to justify an investment in a highly speculative business. Another Munger quote, if you don’t mind:
You know if you mix raisins with turds, they’re still turds.
It simply doesn’t matter how much “due diligence” you do in “underwriting” an investment - a well researched shitco is still a shitco.
Commitment and consistency bias does give us some insight into why otherwise extremely intelligent people do pretty inexplicable things. I revert to Mr Munger in this regard.
This line of thinking was inspired by Twitter-user Todd Fernandez (@Pharmakoiboy) who posted the following:
I can think of half-a-dozen public examples of the same, but I’ll restrain myself for now.
Twitter user Luo Ji (@Wallfacer_LuoJi), in the same vein, imparted some much needed wisdom through the best information dissemination method known to man - memes.
While last week’s mantra may have been: “durable, capital light, volume growth, pricing power, defend the moat, return the capital”, perhaps this week’s mantra should be: “Monopoly, monopoly, monopoly!”. I’m imagining this being delivered Steve Balmer style.
Incidentally, In Practise has done some truly excellent research over the years, although from behind a paywall.
In what appears to be a fairly well orchestrated move, the likes of Amazon, Alphabet, and Microsoft have all announced the slashing of non-core services and further staff lay-offs:
Alphabet: Cut 12,000 employees.
Amazon: Unilaterally decided to stop AmazonSmile.
Microsoft: Also reducing their headcount significantly.
Church this week was a little less uniform than last.
You can see the Sequoia Fund’s latest quarterly update here.
I have followed along with the Sequoia Fund for a number of years, mostly due to it’s legendary historic performance but also because they have invested in a number of names I have found interesting. Unfortunately, they have more or less wandered into mediocrity, as risk aversion and group think seems to have pervaded in the wake of their concentrated Valeant bet 7 or 8 years ago.
From parts of their updates over the years, I take away that they have the unfortunate practice of regularly cutting winners and adding to losers. This is, of course, a practice that guarantees mediocrity. Outstanding stock returns, identified ex ante, have to be very unevenly distributed in a select number of names. If your conceit is that you can identify them, why would wish to dilute your ownership in such a stock? Furthermore, the frictional costs of trading must detract from any one person’s ability essentially arbitrage short term valuation discrepancies.
The names they have invested in recently also prompt further questions. For the most part, they seem to fall into the great swathe of fund managers who invest in consensual, substandard businesses when they appear optically cheap. Many of these names have both gained, and then subsequently lost, considerably as part of the capricious outcomes of the pandemic.
They are a fellow Credit Acceptance ($CACC) holder, and have proved a good source of information on the company in the past.
Jeremy Raper discussed an energy-related UK special situation/potential corporate action. It was a fascinating break down of the misdeeds of a fairly misaligned management in relation to an upcoming extraordinary event. For the Coal-bois, Jeremy also discusses the existing situation in a number of Australian names.
Below is a link to Joel Greenblatt’s Columbia University lecture on how he and his partner, Rob Goldstein, came to invest in Moody’s after it’s demerger from Dun & Bradstreet in 2000.
The rationale employed was a reconstruction of Buffett’s reasoning when he purchase shares in Coca Cola in the late 1980’s. An extremely worthwhile watch, and I plan to write a more detailed summary of the reasoning, both mathematical and philosophical, for the next monthly issue.
While the shares have appreciated about 32 times since then, Joel and Rob sold their shares for a modest 50% gain! They also talk about the thought process that lead them to sell in the context of an extremely concentrated portfolio.
For those who are interested, I had a great chat with Tim Lester of The Salty Investors this week. It was an enjoyable exchange and I would recommend his channel and it’s weekly dissection of current events with a very Australian bent.
Fear not, if you’d like to get me on your podcast or YouTube channel, my rates are extremely economical.
I have been asked by a couple of followers to include a link to my previous blog (warts and all). I do plan on not renewing the site eventually, so enjoy it while you can. The link is here.
Buyback’s Tick of Approval (TM):
As we are all unashamed capitalists, I will start to include some referral links at the bottom of the Weekly Investing Digest. I promise to only promote products I actually use and gain value from.
TIKR Terminal: An extremely cost effective way to access a veritable cornucopia of public markets information. Historical financials, filings, share registry info, and the ability to visualise the data (which is very helpful for the 55 IQ crowd, of which I am apart).
Check them out at this link.
As always, I appreciate you following along with the blog. Remember to subscribe if you haven’t done so already.