Finding Value in Increasingly Uncertain Times
New Portfolio Additions and What We Are Buying More Of
Introduction
The time of algorithms and passive capital is beginning to fade and, in its place, bottoms up stock picking and individual security analysis will win the day.
It is a fine line that we walk as deep value stock pickers, searching under every stone and leveraging our relationships with other sharp, liked minded individuals in an attempt to provide outsized returns for our consulting clients who utilize our full suite of services.
In the quest for generating outsized equity returns it is often the case that we are purchasing hate. In this pursuit we are often starting a new position in or adding to names that have no investor attention and certainly have underperformed the broader market indices since the global financial crisis.
One of the things that provides us with comfort when buying hate is our view on the idea of “risk v reward” in equity investing. We think the idea that simply using the word risk is essentially meaningless, and that an adjective proceeding the risk is essential to properly avoid the worst kind of risk, Business Risk. Business risk in our view is the only way to permanently lose capital which is obviously the cardinal sin in investing of any kind.
We feel that the other kind of risk that presents more opportunity than real Business risk is Market Risk meaning the possibility in the short to medium term that investor sentiment on a business in our portfolio, or the market broadly pushes price below our cost basis in a meaningful way. We feel market risk versus reward is very easy to mitigate.
To avoid the worst effects of market risk the first thing one must do is to pay the right price - in other words, to buy assets for far less than they are worth. In that way, one limits risk of permanent capital loss over a 3–5-year period. On the reward side, it stands to reason that paying a lower price for a business leads to better prospective returns or reward for the market participant.
In other words, you mitigate the risk that matters by paying dirt cheap prices for assets and you increase reward at the same time by purchasing ownership share in the business for far less than replacement cost of the asset base and by extension its latent earnings power.
This way of thinking has not been very profitable in the last decade, and for many underperformance of the broader market investing in this way would simply be unacceptable causing many of the larger market participants or performance driven funds to exit names such as these and move onto what has “worked”.
We are of the belief that what has worked is in the process of transforming - with the winning industries of today becoming the highly capital intensive, fragmented and lower returning entities of tomorrow. What is in the process of occurring broadly is a movement from a decade of abundance of the tangible world to a decade of relative tightness - this is increasingly present in any commoditized or tangible asset-based industry.
These lower returns on capital and poor equity performance in the tangible economy has led markets to underinvestment and starve many critical and every declining industries of essential capital not just to sustain what they already have, but to grow supply meaningfully to keep up with demand for the commodity itself.
The physical world is making a comeback, and it has been slow thus far with many setbacks in the process. We think that in 2032 when we look back on equity valuation and market history that 2022 will stand out as a significant shift in global markets and will likely be marked as the starting gun for a long and grinding bull market for commodities.
With all of that said, let us give you a brief update on some of our moves, detailing what we have added to in the last year, and what new positions we are finding value in as additions to our core portfolio.
New Positions
In the last year we have added 3 brand new positions to the portfolio. We believe these are business with exceptional return profiles, operating in consolidated markets that will allow them to earn outsized returns on capital.