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.

Farfetch Failings

A business is the present value of all its future cash flows. I will do well to remember that. I know I had the assumption that they would be break-even EBIDTA this quarter, but they would not be. I can't keep catching falling knives. I compounded my error by doubling down every time that its stock fell. That only works if it was original a plus EV bet. Maybe I was due and all it took was one to wipe out profits from ATVI, SPWH, and SAVE this year.

Liquidity or the lack of is what doomed them ultimately. Cash to a business is like oxygen to humans. I can't bank on the kindness of strangers or a zombie companies go up even more. Leverage always hurts. I cannot rely on good luck like Carvana and other zombie companies.

Uncertainty should have forced me to be smarter and survive as the #1 rule. I had a chance to get out with minimum loss when Neve was rumored to buy it, but chose to gamble. Difficult to make a decision like that as hindsight, but I should have sized more appropriately and not have been in that terrible spot. Don't get in that situation is the easiest way to not lose.

Bet sizing was a failure on my part here. I had committed over 20% of the portfolio to this position. The last third of the position was not meant to be a position, but just to replace the third in a taxable account. Even replacing the 25% less, I still had 15% of the portfolio on a speculative gamble best left to VC. I had several times to sell to "not lose" money, but failure to do so cost me 25% of the losses. I was spoiled by two previous trades with SPWH and SAVE. I had returned 65% in <2 months on 15% of the portfolio with SPWH when I bought on its earnings collapse and returned 45% in <2 weeks on 7.5% of the portfolio with SAVE when it collapsed to 8.88 and I thought it was worth an arbitrage play. They were both more sure bets than FTCH and my sizing was smaller. 

If you don't know yourself, the market is an expensive place to find out. I know it is all back to the basics: value, bet-sizing to survive (aka Kelly Criterion conservative times 2), and the perspective of "Sub Specie Aeternitatis."