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Circle Of Competence Issue #11

Department of Letters

Charlie Munger's (Wesco Financial Corp.) 1983 Letter to Shareholders

I came across a full collection of Charlie Munger's Wesco Financial Letters (1983-2009) online in PDF format and have begun reading them. In the 1983 letter, Charlie gives some great insight on how savings and loans institutions worked back in the 80's. I find it interesting how competitors were taking extreme risks to borrow short and lend long in an interest rate environment as volatile as theirs was in the early 80's (think about how interest rate peaked at 15.6% in 1981). This is foreign to most of us in the 21st century since rates have been artificially hovering just below 3% for the last 10 years. It is also interesting to note his investment in the steel warehousing and specialty metals production business given his emphasis on buying companies with moats

Google 2017 Letter to Shareholders

Google 2017 Annual Report

Wonderful businesses like Google don't come around often. Though they are trading at roughly 30x trailing free cash flow, if shares were to trade lower moderately to significantly, I would love to own this. Top line growth of 20%+, 'Other Bets' revenue growing at over 50%, free cash flow of ~$25B, fantastic returns on tangible capital, virtually no long term debt ($7B vs. $150B shareholder equity), and a monopolistic hold on the digital ad market with global room to grow.

One interesting note (see Note 14 in the 10-K) was the negative effect of the new tax plan enacted by Congress which resulted in a $10B one-time provisional charge due to a 15.5% tax rate charged on accumulated foreign earnings not taxed in the US.

Highlighted Company: Exor

Exor (John Elkann) 2009 Letter to Shareholders

Very interesting to learn about the history of the Agnelli family and how John Elkann combined IFI (started by his grandfather) and IFIL into the Exor Group. I have highlighted this company's letters in previous week's reading. However, I wanted to learn more about their formation and evolution as a family holding company so I went to the archives for their 2009-2012 letters. The Agnelli family essentially controls Exor with 51% ownership after the 2009 combination of IFI and IFIL into Exor.

In their 2009 letter, they briefly highlight their private and public investments, and a few paragraphs caught my eye. Elkann talks briefly about the Fiat-Chrysler partnership which resulted from Chrysler's dire position during the 2008-2009 downturn. Also, they own ~2% of Perella Weinberg Partners, which I found interesting to note. Their total book value increased 93% over the year (mostly from the rebound of their publicly listed investments' price appreciation after the crash).

Exor 2010 Letter to Shareholders

Book value increased 45.8%, driven mostly by the appreciation of FIAT shares (30% owner). It is also interesting to note the separation of Fiat and Fiat Industrial into two separate entities.

I enjoyed the refresher of what happened in 2010 from a macroeconomic perspective - particularly from someone who was watching from afar as the crisis turned global and affected the euro. Exor chose not to hedge during the crisis and recovery, which at the time must have taken a significant amount of resolve, not knowing what the future held for the EU, euro, or global markets.

Exor made new investments in The Economist, Almacantar (a London Commercial real estate firm) and BTG Pactual (a Brazilian financial services firm) during 2010.

Final note - I thought it interesting that the Italian tourism company Alpitour (100% owned by Exor) notched a record year during 2010, given the global economic conditions.

Exor 2011 Letter to Shareholders

Book value declined by 24.4% due to the mark-to-market effects of their largest investments (Fiat Industrial, Fiat, Cushman Wakefield, and SGS) despite these four investments improving their collective earnings before interest and taxes (EBIT) from 1.5B to 4.8B in just two years.

The declines in prices in 2011 were more macro driven than company driven, and the macroeconomic backdrop in Europe is discussed briefly in this letter. As Graham often states, "in the short run the market is a voting machine (popularity based), but in the long run it is a weighing machine (fundamentals based)."

Exor 2012 letter to Shareholders

Book value increased by 20.6%, CAGR of 27.9% since 2009. Typical of Elkann's letters, he discusses the largest investments of the company, but I found four quotes to be the best parts:

Ben Graham: "Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earning power through economic change or deterioration in management."

The master!

John Maynard Keynes: "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

So true.

Mark Twain: "A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain."


And finally, Elkann's Grandfather Giovanni Agnelli: "Groups like ours typically go through three stages in their development: a time of strength, a time of privilege, and a time of vanity. For me the first is the only one that counts."

Powerful quote on family business.

Department of General Finance

Daniel Rasmussen's Quest to Disrupt Private Equity

Very compelling article about Dan Rasmussen's management company, Verdad Capital, and how he is using small cap stocks to mimic, and beat, private equity funds. His original research paper on the leveraged small cap universe is below:

Leveraged Small Cap Value Equities

For those who are more academic in taste, this is a fantastic read, spelling out the basis of Verdad Capital's strategy. It seems to be very similar to what Tobias Carlisle of is doing - namely, cheap stocks on an EV/EBITDA basis but also throws a few more factors into the mix (actively reducing leverage, small cap, credit quality, and more).

Chamath Palihapitiya's Sohn Conference AI Presentation

Not much in the way of words, but the theme is clearly geared towards how AI will impact the future of business and which companies are poised to gain most from the digital revolution.

A Hedge Fund Fee Plan That Only Charges For Alpha

These are hedge fund structures, as they should be: fair, transparent, with aligned interests. This reminds me of a famous investor who started a fund with a fee structure like this... oh yes, Warren Buffett.

Department of Real Estate

Starwood Capital Looking into Sale of Apartments

When Barry Sternlicht is selling, it should tell us something about where things are in the multifamily market - or at least where this billionaire CEO thinks they are.

Department of Technology and Startups

COBOL Still Runs Financial Transactions

Who knew our financial systems were so old?

SenseTime - AI Facial Recognition Startup Watches Chinese Citizens

China is using this startup's facial recognition software to monitor citizen movement and behavior.

Here is a quote:

“We are actually trying to do things that will help people,” Xu says. “For example, facial-recognition technologies can also help prevent missing children. If you apply surveillance cameras in that way, it can really help the general public.”

Right. Or for citizen oppression.

A Data Storage Revolution?

Moore's law is making it ever harder to develop more powerful computing chips and storage devices, however a new method of data storage based on DNA could be promising. Binary data storage simply involves representing information as 0's and 1's electronically, but DNA could represent information in binary... but the kicker is that it takes up much less space than even the most advanced storage devices today. The challenges seem to be how to synthesize the DNA chains as well as how to read the data from the DNA chain later.

Biology Will Be The Next Computing Platform

Extremely interesting article on how Synthego is using a hybrid approach between software and hardware to exponentially reduce the time for experimentation using CRISPR gene editing. They are essentially trying to become the Apple for gene editing experiments, selling any type of custom CRISPR experiment made to order.

Bill Gates: 'I would short Bitcoin if I could'

When Buffett and Munger speak up against BTC, I'm not surprised. When Bill Gates speaks up against it, I think people should really listen.

A Look at Uber's Air Taxi Concept

Flying cars... finally! For those who are more interested in Uber's concept, they have a white paper available:

Uber Elevate

At-Bay Raises $13M - Cyber Insurance

This is a new and upcoming segment of the insurance market that many large players have not made moves in because of the lack of actuarial data and long-tailed nature of cyber events. Enter At-Bay, which helps underwrite the risks, but also works with companies on their current infrastructure to educate companies on where they are most vulnerable to a hack. This part of the insurance market could represent a small but growing market in years to come as most companies move data and their businesses to the cloud.

Robinhood Raises Money at $5.6B Valuation

Robinhood, a commission free equities platform, has raised new venture money at a $5.6B valuation. I use Robinhood to accumulate shares slowly and would highly recommend it to young investors looking to start saving and investing small to medium amounts in equities.

Department of Books

Superintelligence by Nick Bostrom

Interesting book that attempts to map various paths from where current artificial intelligence capabilities are to the potential for AI with superhuman ability (orders of magnitude better than human performance). Discussed topics include neural-computer implants, neural networks, human augmentation, various forms of strong artificial intelligence, and more. If you are interested in a meta-view of AI, this book may be for you.

The Unfinished Reformation by Gregg Allison and Chris Castaldo

Great introduction to the historical differences between Catholic and Protestant doctrines. The book ends with a call for all believers to find their commonalities in the gospel of Christ rather than peripheral differences, but to also continue working through difficult issues that continue to divide the Church. Easy and quick read!

Department of Podcasts

The Investor's Podcast Episode 189 - Ian Siegel from ZipRecruiter

Great episode of TIP where Preston and Stig interview Ian Siegel, the CEO of Ziprecruiter, about the life of an entrepreneur, how to know when a startup is likely to succeed, and personal circle of competence (product dev, sales, finance, etc. - what is your strength?).

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