Giverny Capital Asset Management Highlights
I read Giverny Capital Asset Management's Q1 shareholder letter over the weekend and some quotes were pretty interesting. First, let me give a bit of context on GCAM.
GCAM is a partnership between Canadian investment firm "Giverny Capital" and David Poppe. David Poppe was President and CEO of Ruane, Cunniff & Goldfarb, a RIA that's best known for managing Sequoia fund. GCAM is fairly new as it started in April 1st 2020. Since inception, the company has managed to provide nice returns (32.2% net) although it has not managed to beat the S&P 500 (34.5%). However, the team's prior track record is one of outperformance.
The company tries to invest in high quality companies where founders have significant stakes (of course, this isn't always possible)
Here's a list of GCAM's top 10:
Let's go with some of the quotes now!
On Q1's performance:
It was a rough quarter. I don't say that because stock prices declined. That happens. Volatility, after all, is what creates occasional dislocations in the market that allow long-term investors to buy great companies at attractive prices.
On commodities or energy cos:
GCAM doesn't own any energy or materials stocks. That's intentional. About 15 years ago, I did a fair amount of work on the emerging Canadian oil sands companies. I learned three lessons from this project that inform my investing at GCAM. First, never bet on any kind of Malthusian thesis about scarcity, as this is essentially a bet against human ingenuity. Second, no one in the oil industry knows what the price of oil will be in a year. Thus, oil companies spend tends of billions of dollars on capital investments with limited visibility into what the future return will be.Third, oil companies are like derivative securities: their success or failure depends more on the price of an underlying asset than it does on their management teams. Are these companies all run by subpar management teams? Of course not. But they are all ultimately hostage to the oil price.
On predictability of returns on capital and management:
What I am trying to do at GCAM is align with fantastic managers who control their own destiny. Or at a minimum, have more control of their own destiny. I would much rather invest in a business that earns predictably high returns and has a clear growth trajectory than in a business that could earn a superior return if a commodity price remains elevated.
My crystal ball is not better than anyone else's but I'd rather invest in obvious structural growers than probable structural decliners.
On Fed's actions:
The Federal Reserve seems reluctant to do its job, but it is clear that interest rates are going to have to rise at a a much faster rate to tame inflation. The next year or two likely will be bumpy.
On the worst performers of the portfolio:
If there is any good news, I don't believe this group suffered material impairments to their long-term earnings trajectory. Rather, relatively small earnings misses or reductions to ST guidance led to large stock declines.
On $FB spend on RL:
I can't say yet that these investments will pay off, but sales of Meta's Oculus headsets are healthy and reviews are enthusiastic. I feel certain that Meta CEO Mark Zuckerberg won't continue to spend so heavily on R&D if it produces no results.
On $FB health on ad market:
I've heard comments from two large advertising agencies recently that their budgets for Meta Platforms' properties are growing by double digit percentages this year, a signal that Meta remains an important advertising vehicle.
Roughly 2.8 billion people log onto a Meta-owned social media site everyday, and they stay for a while. That makes Meta the best advertising vehicle in the digital world.
Five Below arguably has the strongest growth profile in bricks-and-mortar retail and the stock is more reasonably priced after the recent correction. We're very confident in this business and expect to own it for a long time.
Owning lots of airplanes to support a marginally profitable retail business does not seem as promising to me as trying to build the metaverse.
On portfolio management:
I don't like owning 1% positions as they consume research time and don't add much value to the portfolio when they do well.
On selling Topicus $TOITF:
It was less than 1% in our portfolio and not very liquid, partly because Constellation continues to own 60%. The company had a great first year, trading at a premium to its parent. We didn't think it was more valuable than $CSU.TO so we sold it.
On volatility going forward:
Given the war in Ukraine, soaring inflation, supply shortages and the expectation of sizable rate hikes by the Fed, I expect volatility to continue.
On timing the market:
The war in Ukraine is deeply disturbing, but market timing does not work and geopolitical events rarely create lasting market impacts. In any case, the best defense against economic uncertainty is to own high-quality, productive assets.
My portfolio evolution over the last months
3 Reasons to own $CNSWF / $CSU.TO
Fifth day of my "3 reasons to own" series, today with one of my favorite companies: Constellation Software.
1st reason: THE BEARD! Do I need say more for you to invest ? Just look at it!
On a more serious note, Founder and CEO Mark Leonard is a textbook Outsider CEO(from William Thorndikes Outsider Framework). This 2 meter giant worked as a gravedigger and was a rugby player before going into Private Equity. He then realised that PE isn't for him and wanted to persue the very attractive VMS opportunity and founded Constellation Software with a $25 million dollar investment. Since IPO in 2007, Constellation has been over a 100-bagger. Mark Leonards letters to shareholders are some of the best pieces of investment literature out there and I highly encourage reading all of them.
2nd reason: $CNSWF is a serial acquirer of Vertical Market Software companies. This means they are after monopolistic market leaders in very small niche markets (under $50 million TAM most of the time), with sticky products and high cash flows. These companies don't grow much, but they don't have to. Constellation scaled their M&A activities to unheard of levels. At a $35 billion dollar valuation they STILL acquire companies with 10 employees! They own over 500 VMS companies and intend to own them FOREVER. Last year they acquired over 100 companies and this year in Q1 they already invested around $1 billion into new acquisitions.
3rd reason: Constellation recently announced a new venture capital fund that focuses on giving existing CSI employees the opportunity to start a VMS company and get seed funding from CSI. They noticed that some of their best people tend to leave, because they have a higher drive than just working in a company. They want to build something from the ground up. So rather than letting those people go, CSI can give them the opportunity to grow as part of CSI.
I hope I could outline why I put a good chunk of my money with Canadian Wallstreet Gandalf. I'll be back tomorrow with "3 Reasons to own $DHR". Cheers!
If you were to put together a never-sell portfolio what would it include?
Here are some of my picks:
Facebook $FB - Social Media/Advertising Toll Roads
Microsoft $MSFT - Business Toll Road
Equinix $EQIX - Data Toll Road
Constellation Software $CSU.TO - Broad Software Beta
Costco $COST - Specialty Retail
What names am I missing here?
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