Paul Tudor Jones

 Read this quote a few times in the past and it always rings so true:

There are two unpleasant experiences that every trader will face in his lifetime at least once and most likely multiple times. First, there will come a day after a devastatingly brutal and agonizing stretch of losing trades that you’ll wonder if you will ever make a winning trade again. And second, there will come a point when you begin to ask yourself why it is you make money and if this is truly sustainable. That first experience tests an individual’s grit; does he have the stamina, courage, guts, and smarts to get up and engage the battle again? That second moment of enlightenment is the one that is actually scarier because it acknowledges a certain lack of control over anything. I think I was almost 38 years old when one day, in a moment of frightening enlightenment, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years. This threw my confidence for a jolt. It sent me down a path of self-discovery that today is still a work in progress.

https://novelinvestor.com/paul-tudor-jones-the-mental-obstacles-of-investing/

It is a fitting quote not just about the market, but life itself. 

Magic Numbers

 Crossfit seems to be very fond of magic number of reps such as 21, 15, and 9 in a set. Or maybe triplets like 6, 7, 8. Or maybe even just a climbing sequence in 10, 20, 30. Investing seems to have some magical numbers too. Rule of 72 is 72 divided by a multiple would be the number of years it takes to double. The Rule of 10 Bagger would be 240 divided by a multiple would be the number of years it takes to 10x. 

The current 10 year treasury rate is a big number. Numbers are arbitrary other than the math in them. From my experience, I want a 6% risk-free as a planning hurdle. If a stock gets to a FCF yield of 15%, I am willing to back up the truck or 5% if it is growing like crazy. The yield should be EV, but the low interest environment has lowered those standards to market cap. Numbers are arbitrary and only mean as much as the standard we hold. I try to be like the rock in principle as opposed to swimming with the current in style, but hard truths are evidently hard to follow.

ESL

 I once made many mistakes with SHLD in my life, but that is another story for another day. I just read a short post on Lampert successes with AXP, IBM, AZO, and AN in his past.

 From 1988 to 2002, ESL’s gains averaged 24.5%, nearly double that of the S&P’s 13% annual return, with only one down year in 1991. AUM rose from a mere $28mm to $5bn, with prominent L.P.s including media mogul David Geffen, Michael Dell of Dell Computers, and Ziff Brothers Investments. Although he briefly contemplated retiring, Lampert compared himself to Michael Jordan, saying that people kept criticizing him, but he kept on winning [1, 2, 5, 6].

Trading at a little over $20 per share in 1997 when he began building his stake, Lampert ultimately exited this investment for between $500 to $600 per share in 2012 for a total of approximately $1.5bn. 

A 30x in 15 years is 25.5% CAGR. If he had held, AZO from June 2012 for 12 more years to today, it would have 8.41x for 19.4% CAGR. 

Moats in Networks

If you don't have a moat, you don't have a competitive advantage. If you don't have a competitive advantage, you have no edge. Networks are one type of moat. I just read a post on four types and wanted to journal it to remind myself:

1. Physical network like pipelines

2. Platform network like Windows or Android

3. Data network like NFLX or Google

4. Marketplace network like Amazon or Airbnb

It does not matter how big or small of a company you are looking at. It's fine to gamble, but to have an edge, you have to have a moat/competitive advantage.

Two 2024 Commencement Speech Takeaways

 Federer at Dartmouth

1. Effortless is a myth and discipline is a talent.

2. It's only a point as he won 54% of the points in his career.

3. Life is bigger than the court and you need a team as his partnership with Tony is called "Team8."

Seinfeld at Duke

Fascination is better than passion. Give up finding one thing. Just be willing to do your work as hard as you can with the ability you have. 

1. Make an effort.

2. Pay attention.

3. Fall in love.

Housing vs Stock Market

 Kyla Scanlon had a great article on housing: https://kyla.substack.com/p/why-we-have-a-housing-crisis

"($10,000 invested in equities in June 1974 would today be worth $2.4 million. If invested in housing, it would be worth $139,000 today.)"

Those would be a CAGR of 11.6% for 240x for equities and 5.4% for 13.9x for housing.  It is amazing that just double the CAGR for 50 years is not just a difference equivalent to double the difference in returns, but 17.2x MORE. I know which way I lean in this debate for a variety of reason, but this number does not reflect leverage or rent collected. (Pet peeve when people say you did not have to pay rent if you buy a house, but I suppose it depends on how you view an "investment") 

The leverage is a very powerful concept for real estate, but could be a double edged sword depending on interest rate and timeframe. The rents collected is a weaknesss compared to equitity dividends that can be compounded with reinvestming into the stock. (Real estate is a forever cigar butt at best in an analogy for its rents) In addition, the expenses of housing are often underestimated and with stocks, it is built in before you get the net income.

David Rubenstein

 I am currently reading The American Story by Rubenstein and have his other book on hold. I also love listening to his interviews with "leaders" on The David Rubenstein show. I think he is hilarious and hope his books and show provide a medium of knowledge. His guests vary from policy makers to CEOs and I am often left wondering do all these elites seek to deliver a message to the public through his show. I am not convinced that private equity is the "highest calling of mankind," or the benevolence of his guests, but I am grateful for the opportunity to reflect through their experiences.

LSXMK

 The spread of 8.4 shares of SIRI to one share of various Liberty Sirius trackers has narrowed to 5%. When I buy, I am not buying for the arbitrage opportunity that is suppose to collapse the spread come the end of 3q this year. I am buying because I think the Sirius radio has a decent prospect going forward. Yes, this started off as a thesis of most likely Ted Weschler who I look up to as an investing model, but I have grown comfortable as its valuation has continued to drop from arbitrage to undervalued thesis. I have think the fcf and unit economics of the business model weighed against the negatives of terminal value and increased competition favor the former.

SiriusXM had $1.2 billion of FCF of which they returned half ($650 million) through dividend/buybacks to shareholders last year. In the current year, costs are suppose to be cut by another $300 million. This leads to $1.5 billion in fcf on a market cap of 12.5 billion of market cap and 21.5 billion in enterprise value. The FCF yields are 12% and 7%. They will have a cycle of capex coming up with the launching of satellites, but this might be a scaled business that will cash in on the high fixed cost. The $9.5 billion of debt they have is manageable and at a 5% rate that will stagger in maturity dates vs. a lump sum soon.

The 34 million subscriptions with minimal churn is attractive as long as the churn does indeed remain minimal. Spotify and Apple is scary, but there does seem to be a differentiator when they are installed in so many new vehicles as a base and the conversions of 40% of trials seems to suppor that. The US will sell around 15 million new vehicles a year.

I have grown comfortable with the thesis although I am not sure what Ted still sees. I see the fcf and the unit economics and think it's worth a roll of the dice with the bonus of Ted being in too. 

Biotech Buyouts

JNJ buys Ambryx for $2b

BSX buys Axionic for $3.7b

Merck buys Harpoon Therapeutics for 680mm

AbbVie buys Cereval, a neurology and psychiatry company for 8.7b. It has a drug in development for Schizophrenia. Immunogen for $10 billion

PFE buys 43 billion for Seagen

BMS buys Karuna Therapeutics for $14 billion for its neuropsychiatry pipeline.

It is so seductive to think I can find one that will be taken out for many multiples. The advances in health science makes it even more exciting. Simply does not work to buy in hopes of a buyout. Maybe the list is a form of survivorship bias with cherrypicking the ones that do get picked out. I like looking at biotechs because I have become somewhat of a healthnut as I have gotten older; however, I do not get how to price life itself. Pricing anything is difficult.

Housing

All investing is based upon suriving and the cash flow generated. It seems that the Holy Grail is uncorrelated returns that outpace risk taken. In order to do that, you have to bet big when the few good opportunity arises and cap your downside. Real estate can be concentrated and the tangible quality has people at least thinking of the downside. 

Some people are obsessed with real estate which certainly has its charms with the tax code and leverage, but the latter cuts both ways. Maybe one day I get an opportunity to invest in real estate, but the best I can think of now to get exposure to that market that makes sense would be homebuilders. REITs don't appeal to me and the cap rates everywhere seems to be bloated; especially if rates stay high to combat inflation. With a homebuilder business, the constraint of inventory on the market due to some homeowners having locked in lower rates a few years ago preventing them from moving, will be a tailwind to provide more supply by building. Below is a list and the NVR reminder that is one of the best investing thesis to have hit imo.

DHI 51b

LEN 43b

NVR 23b Norbert Lou, Punchcard, on June 20, 2001, made a VIC post on it. It was succinct and vcut down to why it would generate value. The stock has 50x in 23 years or 18.5%. Last 5 years it has done 22.5% and in the last 10 years it has compounded at 21.7% for 7x. The thesis was NVR used options to control land and they presold their homes before building. This efficient use of capital helped them develop a moat. This separated it from its competition that would be at the mercy of the cyclical nature of their business.

PHM 22b

TOL 10.7b

KBH 5b

BZH 1b

LGIH 3b

MTH 6b

HOV 924mm

TPH 4b

TMHC 5.6b

Healthcare

Healthcare is fascinating and is a big pie in America's GDP at $4.5 trillion or close to 20%. It was not always this way. In 1960, it was 5%. In 1980, it was 8.9%. In 1990, it was 12.1%. In 2000, it was 13.3%. In 2010, the first year that the ACA was enacted, it was 17.2%. The costs don't seem to be sustainable, but here we are. Since the beginning of 2010, the SPX has returned 12.8% a year assumming all dividends were reinvested. Healthcare in general has outperformed despite the big techs emerging in the 2010s. The breakdown below does not do service to how complicated and complex the industry is as the PBMs are inside UNH, CVS and CI.

Insurance Companies: UNH (up 17x since 2010 at 22.4% a year), CVS, ELV, CI

Hospitals: HCA (9.87x since 2011 at 19.3%)

Drug-Makers: PFE, MRK, AZN, ABBV (15.27x since its spinoff in 2012 14.9%), AMGN (5.2x since 2010 at 12.6%), GILD, BMY, LLY (20.5x since 2010 at 24%), NOVO (17x since 2010 at 22.4%)

Drug Distributors: MCK (7.8x since 2010 at 15.8%), CAH, COR (formerly Amerisource Bergen)

Device Manufacturers/Equipments: SYK (6x since 2010 at 13.7%), BSX, 

Service Providers: ABT, DVA (3.5x since 2010 at 9.4%)

Everyone is getting a cut and the pie that divides is interesting beyond the science of health.

Quick Hits

Risk is permanent loss of capital. Rule #1 and Rule #2. To win, you must first survive. (WEB)

Untapped Pricing Power (WEB)

Royalties with asset-light/low capex businesses. (WEB/CM)

Below Replacement Cost (Sam Zell)

"Listen, business is easy. If you've got a low downside and a big upside, you go do it. If you've got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.”(Sam Zell)

In any deal, locate the weakness in it. The rest don't matter as much. (Jay Pritzker)

Margin of safety. (Seth Klarman)

Free cash flow (John Malone)

Big bubbles get bigger, small bubbles disappear — it’s surface tension, the law of physics; and in business it’s scale economics." (John Malone)

Scaled Economics Shared (Nick Sleep)

Buy what you know (Peter Lynch)

Don't cut your flowers and water your weeds (Peter Lynch)

Turn-arounds seldom turn around (Peter Lynch)

Yield on company and roic. (Joel Greenblatt)

Buy good companies. Buy at low costs. Wait. (Terry Smith)

Three legs are extraordinary business, good management, and great reinvestment opportunities and history. (Chuck Akre)

Heads I win, tails I don't lose much. (Monish Pabrai)

Recurring and predictable revenues. (Bill Ackman)

Three engines of returns: earnings growth, change in P/E, change in shares outstanding. (John Huber)

Buffett's Japan/Apple investment: cheap valuations, rising ROIC, and significant capital allocation policy changes. (John Huber)

Rising ROIC is increasing the capital invested, increasing the productivity, or shrinking the denominator. (John Huber)

If you have won the game, stop playing. (William Bernstein)

Buying What You Know

My college roommate loved NVDA and MSTR. Lets use 2007 as the start point for those two. 17 years.

MNST 2024: 61b $59 2007: 3.1b $3 CAGR 19.2% for 19.67x In 2009, it had 133mm in FCF that has grown to a billion a year in 2020s.

NVDA 2024: 1.34t $543 2007: 13.7b $5.61 CAGR: 30.9% for 96x In 2010, it had 408mm in FCF that has grown to 8b in 2022 and 3.8b in 2023.

Hard to beat. I am the idiot who at the time said they barely make money and skyhigh PE. Value is Probability multiplied by Payout. Business is making money and growing the empire. MNST and NVDA did both of those things and the making the money as simplified by the PE lags. 

Visa

Visa is an interesting study case of what is a good business and what would one should pay. Below are the market cap, free cash flows, yields and returns since its IPO. After all, all a company is worth is its free cash flow and what you should pay for an adequate return.

IPO 2008 Market Cap:17.9b FCF(2009):252mm FCF/MC yield: 1.4% CAGR to 2024: 23.60% (30x in 16yrs)

2010 Market Cap: 44.25b FCF: 2.543b FCF/MC yield: 5.75% CAGR to 2024: 19.42% (10x in 13yrs)

2015 Market Cap: 132.75b FCF: 6.18b FCF/MC yield: 4.66% CAGR to 2024: 16.67% (5x in 9yrs)

2019 Market Cap: 249b FCF: 12b FCF/MC yield: 4.81% CAGR to 2024: 16.35% (2.13x in 5 yrs)

2023 Market Cap: 531b  FCF: 19.69b FCF/MC yield: 3.71% 

The gross margins of 98% and net income margin at 50% is insane. There can't be a better business from that standpoint although Bezo's quote of "your margin is my opportunity" comes into play. Why can't fin-tech "disrupt" the networks of Visa and Mastercard. The price now does seem rich, but it has still managed to compound like crazy since its IPO. I am not sure I am smart enough to recognize how dominant of a buiness it is before its price has exploded. I am not sure I can justify my stupidity without the margin of safety as implied by the fcf yields of the past. Maybe in 2010, that 5.75% FCF/MC yield was on the fringe as it was probably growing like crazy, but the Treasurys were also higher back then a decade ago. Buiness, free cash flow, and pricing are three things I should focus on and the returns will come. 

Consistent Compounding

 I am going to strive to post random thoughts more often to refine them. Every Saturday. Consistently. Compounding only works because it is consistent.

In 2023, the Magnificent 7 were a rehash of the FANG of the past. The point is the concentration at top is now stronger than ever and if you were not in one of them, it was very hard to keep pace. Here lies the performance of the top 7 market caps.

AAPL 2.99T 48.2%

MSFT 2.79T 56.8%

GOOGL 1.75T 58.3%

AMZN 1.57T 80.9%

NVDA 1.22T 238.9%

META 910B 194.1%

TSLA 790B 101.7%

SPX 24.2%

In the last 35 years, the top 10 companies have averaged 25% of the weighting of SPX. During the dot-com, it peaked at 25%. It is now in the 30% range. This time is different. I keep thinking not, but I keep getting proved wrong. WEB and CM touted how SPX is the best investment for the know-nothing investors as the theory is that you own the entire pie without paying high fees. When the top companies fade to time, the new ones replacing them will replace their performance is the theory. I just find it hard to fathom this working as it has in the past, but the list looks completely different is the point. Maybe things are different this time as the performance of these top stocks have the indexes weighted so heavily, but isn't the theory that even when they get replaced, that value will be captured still.

These companies are so massive it really is difficult to imagine how they outperform as they are the economy. Those numbers are astounding. It's just a reflection of our economy today as if you are not first, you are last.

As someone who had a short in TSLA for the year, I am very lucky I have not blown up. How much longer am I tempting fate. 

Consistency compounds. Compounding is consistency.