Where to Fish

“The first rule of fishing is fish where the fish are.”- Charlie Munger

I think before thinking of a geographic region, a sector might be more fundamental. Terry Smith's ideas of fishing in the 3 sectors of consumer products, healthcare and technology is due to the enduring ROIC of those three. The enduring ROIC of those three is from its moat(s) that provide it with a competitive advantage and pricing power. My fondness for tangible wealth is silly at times and leads me to energy, material and cable companies. Those three sectors require a tremendous amount of capital expenditure and its pricing power is almost non-existent due to commodity cycles. Even cable as it works against the wheels of technology when access gets cheaper over time. This is compared to sectors I should look at with light-asset companies that have pricing power due to its structure. I need to get the structure right from the foundation of the building. It is hard to change habits though as evidenced by my infatuation in my portfolio with energy and increasingly material. It is difficult to know something about technology and medicine, but I can start learning from consumer products as I am a consumer. Medicine will need to be worked on and maybe I can see patterns from the two in technology one day.

Change

It seems like living in the past is dangerous even if they say history rhymes. It's fascinating how things change, but it seems that change itself is changing. The dominant companies are now even more dominant and have gotten there in only since the 2010's.

Three Types of Value Creating Companies vs. Value Destructing Companies

1. Can redeploy capital and grow it in early stages of building out such as Wal-mart or Amazon in the past. 2. Can redeploy some of the capital, but return the rest of it such as Lowe's. 3. Capital light and returns all of the capital such as tobacco companies or See's Candy. 1. Cannot reploy capital efficiently and needs more of it such as Berkshire's early mills. 2. A slowly melting ice cube such as cable stations in face of NFLX. 3. Does not have a satisfactory return on capital and has little or no prosect of future growth such as newspapers or B&N.

All One Long Game

It is all one long game. Calendar year performances are silly and I always think about the legendary Bill Miller streak and the arbitrary divisions of a calendar year. Miller quickly dismisses the significance of the streak: "Our so-called 'streak' is a fortunate accident of the calendar ... If your expectation is that we will outperform the market each year, you can expect to be disappointed."

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.