jfan

Dropped into the Linamar agm. A few notes to share: 1) semiconductor shortage will hopefully resolve 2021 year-end 2) no contract renegotiation with existing customers last year 3) MacDon acquisition is fully integrated 4) Looking towards further debt reduction this year as a use of cash flow 5) little takeover business available last year, possibly due to significant governmental support, unlike 2009 which didn't 6) Acquisitions likely to target mobility electrification, infrastructure, or ability to extend global reach 7) will continue to support the Thornhill life-support product at a low level given the product complexity but all the ventilator product line will stop. No opportunity to expand here 8- seeing significant labor shortage, commodity (steel) price inflation, shipping costs increased 3x 9) able to cut significant amount of costs last year, looking to continue digitizing their factories

It was interesting how Prem gives alot of air time to his insurance managers to discuss their business segments. Although he gives credit to his investment team, it would be encouraging that he has Wade and Lawrence to speak about their philosophy, learnings as well. I know that Buffett doesn't, but Fairfax isn't Berkshire. Perhaps next year?

I was browsing through their website and under corporate it states the Wade Burton is hwic chief investment officer. Has that always been the case?

I attended. I think I was the only outside passive shareholder there. Got all my questions answered. I didn't take extensive notes but here are a few observations: 1) These guys are honest and not afraid to openly discuss the poor investments made in the past in the presence of Fairfax leadership. They said prior investments were loaded up too much with debt, poorly timed, and lacked execution. 2) In order to consummate the deal, fairfax had to provide them with insurance to set the floor on asset devaluation from their prior investments. 3) Helios brings in some existing carried interest and fee revenue that they present valued at 22% and 19% discount rates respectively. 4) I asked about the competitive landscape among asset managers in Africa. They said that it was very specific to each country. They prefer to focus on larger economies that may have lower margins. They spoke of how capital flows were very cyclical and many of the larger players are questioning their continued activities there. In their 3rd fund, they looked through 400 potential investments for 12 picks. 75% were proprietary (i guess they meant no other bidders), and of the 25% that had other offers, only a very small # were based on price. Most were based on how the asset manager can add value to the transaction. 5) I asked about stakeholder alignment. They said there are 3 parties. The fund LPs, Helios investment manager, and Helio Fairfax shareholders. Helios partners invest along side their funds (I assume personally) to align with their LPs in addition to their management fees and carried interest. Helios is aligned with HFP by being equity owners of HFP shares. HFP is aligned because fee and carried interest sharing between with Helios and LPs. 6) HFP will co-invest with all of Helio's future funds. In fact, there may be investment opportunities that would not be fitting for the funds but better within HFP's structure. 7) I asked about inflation risk management. They said they are USD return focused and of this currency risk, they manage very carefully. They look to invest in businesses that have the ability to pass on these currency risks and have less import reliance. 8 ) They are looking for secular growth or consumer non-discretionary (not cyclical), growth rates that are multiples higher than gdp, capital light except for situations of high revenue visibility. Sectors of interest include financial services and tech, clean energy and power, telecom/internet infrastructure, consumer non-discretionary. 9) Their portfolio assets now are $0.61/share in cash, $1.50/share in insured and guaranteed investments, $0.14/share in public investments, and $0.73/share in non-guaranteed private African investments. The present value of carry income was $0.81/share and present value of fee income was $1.71/share. 10) I "feel" Fairfax Africa shareholders may have gotten lucky that Fairfax Financial was able to put this one off.

Wrote a summary for trisura. Welcome the feedback https://thequestionableinvestor.substack.com/p/trisura?r=981jm&utm_campaign=post&utm_medium=web&utm_source=copy

Came across this article that might be helpful in understanding the hybrid fronting appeal... https://medium.com/pillar-companies/the-insurance-stack-a-battle-for-margin-24aef01620a8#:~:text=The%20insurance%20stack%20is%20most,significant%20portion%20of%20the%20risk

How do you see a mine expand their operations without making large costs, exactly? I'm just thinking about the difference between an existing mine that might be underproducing, on maintenance and repair, or has adjacent brownfield expansion opportunities vs a mine that has probable reserves that requires building of infrastructure to gain access to the commodity. With commodity price inflation, wouldn't the first mine be better position to capture profit vs the second that requires rapidly inflating capex and thus be less valuable?

Does this depend if the asset (mine) is already existing and needs less cap ex to expand in the future vs an outdated asset that needs significant upgrading?

What a great discussion. Thank you for all the perspectives. This year has been a interesting/painful/hopeful experience in understanding the importance of position sizing and its effect on your portfolio. I think when it comes to position sizing it depends on a bunch of additional factors: 1) Past stock picking skill/experience that in turn depends on ability to make good decisions, process information, ability to see around the corner, mentorship, team-based vs individual-based work, full-time vs part-time 2) Recent performance - Druckenmiller in an old interview gave advice that when he had a poor performance streak, he would size down future positions to regain confidence. I suspect that he recognizes the possiblity of poor cognition or bad investment framework 3) Ability to exert control/influence the direction of the business 4) Illiquidity - I think taking large positions in illiquid investment requires a little bit of all the above or a huge degree of trust in the management of the underlying business 5) Personality - Do you enjoy high risk or are you risk adverse? Are you holding on in the volatile times because you are confident vs feeling like a deer-in-the headlight? Can you stomach the pain on selling out a large losing position after a period of under-performance? What is your time-frame preference (ie can we hold something for 3-5-10-15-20 years)? Just some of the questions I had to ask myself.

Being in a similar situation, I would say that it depends on how this hobby is going to fit in your life/regular work. More important than the source of information is your strategy of how you are going to learn. Concentrated investing in small caps requires lots of working knowledge of the industry, a track record of correct thinking, and lots of time monitoring the situation +/- access to management. In the beginning, the best approach (after making plenty of mistakes and not listening to experienced investors coupled with an ego) in my opinion, are small bets across a continuum of styles with a structured investment process to evaluate how correct your thinking is with a 3-5 year holding period. The rest of your portfolio, just dollar-cost average in a index are regular interval. It is most probabilistic that you will have more FOMO and action at the beginning, and I would use this tendency to learn on a larger case series to inform your future self. Once you prove to yourself that you can learn from your mistakes and successes, then re-evaluate your style. The appeal to concentrated investing is you don't have to track a large number of positions, but you have be damn sure you are right in the end, you can handle the volatility, possible long periods of underperformance, and have the ability to track the right things to inform your holding. If you aren't in the industry and willing to dedicate hours analyzing, scuttlebutting, talking to management, it is probably better to have smaller positions, extremely long holding periods, learning a bit of technical analysis to placate your trading tendencies, and diversifying across very deep value <--> growth styles (or Peter Lynch's 4 different buckets).

Gbtc

Appreciate your thought processes on this. I don't know if this is the right way to think about it but here is my logic. Single customer in Y1 and Y2 provides $120 each year. Assuming that after year 2, it becomes an annual subscription renewal option with a 10% churn rate (ie 10% chance of losing them as a future customer), the expected revenue in Y3 ~ 90% x $120, then in Y4 ~ 90%^2 x $120, and so on and so on. After 10 years, the probability of this customer remaining will be ~ 35%, with an expected revenue of 35% x $120. It will take until year 25, for the probability to drop down to 7%. Taking this expected revenue stream, I discounted it back to present value (10% discount rate), which would give me a present value of ~ $600 for this single customer. Assuming that there is no significant CAC, and the net profit margin once stabilized is 30% (you are right, will likely be much lower if the gross profit margin is 50%), each customer would generate a present value of ~ 30% x $600 of value = $180. If the payback period is 1 year, then the CAC will ~ $120 and the value per customer would drop to $144 or [($600-120)*30%] (This number is an over-simplication as it doesn't account for growing cash flows with increasing deferred revenues, maintenance R&D, S&M to update software versions, subscription vs usage revenue models) So in 3 years, with 100,000 customers, $180 * 100,000 = $18 million of value on $12 million of revenue or $3.6 million of earnings on a 10% churn rate. It would be more valuable if they can reduce their churn rate over time (if they can drop their churn rate to 0%, then maybe you can think about a value of 10x $3.6 million earnings = $120/0.1 *30% x 100K customers = $36 million) If there is a possibility that the churn rate increases significantly after Y3, then the product is no good, led by an incompetent management team and it would become un-investable. SAAS should be inherently sticky because it allows businesses to see how their clients are using them and give them the ability to layer on needed/desired features. If they can't do that, then trying to sell their poorly functioning intangibles is likely an impossible task. Figuring out their growth rate is more difficult and probably more qualitative than quantitative. This is where I think about the quality of leadership, focus on experimentation, innovation, solving difficult problems, customer focus and delight, open source innovation vs proprietary, degree of industry collaboration, ability to not only grow vertically in their software stack but also to adjacent markets, ease of customer adoption, organizational structure, very large TAM etc. So if I can buy it at $18 million discounted back by 7.5-10%, or at $13-15 million today coupled with a judgment about their ability to reduce their churn rate and skill to grow in a manner that it unexpected (via the above qualitative features) as the free option beyond year 3. Then there is a greater probability of having a reasonable return. (aka Shopify --> Shopify Capital, Amazon --> AWS) Welcome any push-back on my logic.

CCO.to

I'll take a stab at this: Assuming for each customer, the first 2 years of revenue is $120 each, with a 90% decrease after that. It would take ~ 25-30 years to lose that customer. The PV10 for a customer would be ~ $600. If in 3 years, there are 100K customers, the approximate value (using 30% Net margins) of the business is $18 million. This # doesn't account for any customer acquisition costs. If my personal hurdle rate is 10%, then the max value I would purchase it at would be $13 million or 11x current sales. To make the math easier, I would eliminate it (deal-breaker) if there is a potential of increasing churn rate after year 4 by filtering out maligned management teams.