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    Value Hive Podcast

    Q4 2023 Investor Audibles: PFH Capital, Sohra Peak Capital, Old West Management

    Fri Jan 19 2024
    InvestmentEmerging ManagersCharlie MungerGovernment DeficitsGoldPolymetal InternationalEnergy EquitiesNuclear EnergySpyRosoftInvestment MistakesPortfolio PerformanceMarket RisksMarket ValuationsDebtU-Haul Holdings

    Description

    This episode covers various investment topics including emerging managers, Charlie Munger's investment philosophy, government deficits, gold and Polymetal International, energy equities, nuclear energy, SpyRosoft, investment mistakes, portfolio performance and capital allocation, market risks, market valuations and debt, and U-Haul Holdings.

    Insights

    Investing with Emerging Managers

    MIT Investment Management Company (Matico) focuses on investing with emerging managers who can earn exceptional long-term returns in support of MIT's mission. Matico created emergingmanagers.org to provide resources for emerging manager stock pickers.

    Charlie Munger's Investment Philosophy

    Charlie Munger was known as the "abominable no man" because he preferred to avoid risks and said no to many investment opportunities. P.F.H. Capital Fund LLC honored him by saying no to most potential investments throughout the year.

    Government Deficits and Debt

    Persistent government deficits have led to an increase in federal debt held by the public. The CBO projects that the ratio of federal debt held by the public to GDP will exceed 180% by 2053.

    Gold and Polymetal International

    Geopolitical factors and decreased treasury holdings by China have influenced central banks' increased purchases of gold. Polymetal International, a gold producer, successfully redomiciled to Kazakhstan and is expected to relist in London.

    Energy Equities and Natural Resource Partners

    Energy equities such as coal, oil, and uranium serve as inflation hedges but are undervalued in today's market environment. Natural Resource Partners (NRP) is a limited partnership with interests in soda ash operations and royalties from mineral rights across the US.

    Nuclear Energy and SpyRosoft

    The demand for nuclear energy is increasing, and there is optimism about SpyRosoft, a Polish software developer. Investing alongside founder management can have benefits beyond minimizing agency risk.

    Investment Mistakes and Portfolio Performance

    Mistakes have been made in settling for "good enough" investments instead of seeking perfection. The partnership recorded a gain of 13.5% for the quarter ending December 31st, 2023.

    Market Risks and Valuations

    There are risks in the stock market that some individual investors may be ignoring. The dominance of certain stocks like Apple and Microsoft is concerning from a value investor perspective. Valuations are questioned given the high Buffett indicator.

    Debt, U-Haul Holdings, and Migration Patterns

    The US government debt has reached unprecedented levels, and U-Haul Holdings is North America's largest do-it-yourself moving and storage operator. U-Haul's pricing has become a useful tool to track migration patterns between states.

    Chapters

    1. MIT Investment Management Company (Matico) and Emerging Managers
    2. Charlie Munger and Government Deficits
    3. Gold, Polymetal International, and Energy Equities
    4. Nuclear Energy, SpyRosoft, and Investment Mistakes
    5. Portfolio Performance and Capital Allocation
    6. Investment Process and Market Risks
    7. Market Valuations, Debt, and U-Haul Holdings
    Summary
    Transcript

    MIT Investment Management Company (Matico) and Emerging Managers

    00:01 - 07:20

    • MIT Investment Management Company (Matico) invests with emerging managers who can earn exceptional long-term returns in support of MIT's mission.
    • Matico created emergingmanagers.org, a website for emerging manager stock pickers, which provides essays and interviews by successful emerging managers and service providers used by MIT's fund managers.

    Charlie Munger and Government Deficits

    07:04 - 14:27

    • Charlie Munger was known as the "abominable no man" because he said no to many investment opportunities. He believed it was difficult to find something truly good and preferred to avoid risks.
    • Charlie Munger passed away at the age of 99. P.F.H. Capital Fund LLC honored him by saying no to most potential investments throughout the year.
    • The fund measures its returns in nominal US dollars and expects to face high and volatile inflation in the future due to persistent government deficits.
    • The US government's deficit increased from 1.4 trillion to 1.7 trillion during fiscal year ending September 2023, resulting in an increase in federal debt held by the public from 24.3 trillion to 26.3 trillion.
    • The CBO projects that the ratio of federal debt held by the public to GDP will cross 100% during 2020 and exceed 180% by 2053.
    • In March 2023, three of the four largest bank failures in US history occurred due to incremental debt added onto domestic banks' books. The crisis was paused when FDIC coverage limits were effectively eliminated by the US government.

    Gold, Polymetal International, and Energy Equities

    14:01 - 20:46

    • China decreased its treasury holdings by 14% during the 2023 fiscal year, and net exporters are investing trade surpluses into alternatives like gold.
    • Geopolitical factors, including threats from the West and frozen Russian reserve assets, are influencing central banks' increased purchases of gold.
    • Gold's share of global international reserves declined from 72% in 1950 to 14% in 2020 due to the dominance of US dollars and euros. However, this trend may reverse as we move towards a multipolar world.
    • Polymetal International is a gold producer that successfully redomiciled to Kazakhstan after Russia's invasion of Ukraine. This move reduced the risk of asset confiscation and allowed for potential sale to Chinese buyers before relisting in London.
    • Polymetal's equity re-rated higher after moving to Astana International Exchange and is expected to increase further upon relisting in London.
    • The current trading price of Polymetal shares is around $4.50 per share, which could align with its net cash value after selling Russian assets.
    • Lack of investor visibility and access on the Astana International Exchange presents an opportunity for non-fundamental reasons in Polymetal stock.
    • Energy equities such as coal, oil, and uranium serve as inflation hedges but are undervalued in today's market environment.
    • Natural Resource Partners (NRP) is a limited partnership with interests in soda ash operations and royalties from mineral rights across the US. They have refocused their business and eliminated debt from their balance sheet under the leadership of Chairman CEO Corbin Robinson Jr.

    Nuclear Energy, SpyRosoft, and Investment Mistakes

    20:26 - 27:04

    • The demand for nuclear energy is increasing as countries like China, India, and Russia expand their nuclear programs.
    • Currently, operating nuclear reactors only meet 4% of the world's primary energy demand.
    • There is a possibility that the world may want nuclear energy to meet 30% of its primary demand in the future to reduce reliance on fossil fuels.
    • To stimulate enough uranium supply growth for this increased demand, a higher long-term price would be needed.
    • The speaker expresses optimism about SpyRosoft, a Polish software developer that has been outperforming its competition in terms of revenue growth.
    • Investing alongside founder management can have benefits beyond minimizing agency risk.
    • The speaker closed positions in PACS Global, Faisal Islamic Bank of Egypt, and Tethys Oil due to various reasons such as discrepancies in accounting profits, revaluation of book value, and uncertainty in oil exploration success.
    • Mentors are valuable tools for preparing the mind and recognizing good ideas. Charlie Munger and Benjamin Franklin are mentioned as examples of influential mentors.
    • The speaker expresses gratitude for Charlie Munger and hopes to pay it forward by being a mentor themselves.
    • The partnership recorded a gain of 13.5% for the quarter ending December 31st, 2023, while the S&P 500 gained 11.7%.

    Portfolio Performance and Capital Allocation

    26:51 - 33:50

    • The partnership recorded a gain of 13.5% for the quarter ending December 31st, 2023, while the S&P 500 recorded a gain of 11.7%.
    • The partnership's portfolio composition metrics as of December 31st include: number of holdings - 13, top 5 holding concentration - 74.5%, average market cap - $269 million, investments in non-US companies - 71%.
    • The partnership delivered a net gain of 82% for the full year 2023, driven by strong share price appreciation in core holdings.
    • The speaker was not surprised by the appreciation of individual holdings but did not expect four core holdings to appreciate close to or greater than 100% in a single year.
    • Timing the convergence of share prices with intrinsic value is difficult and unpredictable.
    • In pursuit of exceptional long-term returns, volatility is expected with both bad and good years.
    • The portfolio is currently comprised of content holdings and has seen an increase in investor interest.
    • The partnership is open to new introductions and may accept an additional $30 million dollars at some point before stopping new capital acceptance.
    • Preserving the quality of partners is a top priority for the partnership.
    • The ideal portfolio company seeks high-quality business operated by high-quality management teams with growing revenues and profits at an attractive price relative to intrinsic value.
    • Opportunities are sought in companies that are deeply out of favor or undiscovered by the investing world.
    • Correctly identifying these opportunities can lead to significant upside with limited downside risk.
    • Mistakes have been made in letting good enough get in the way of perfect when seeking outstanding investments.

    Investment Process and Market Risks

    33:23 - 40:04

    • The speaker believes that presenting a standalone investment framework overlooks other important aspects of the investment process.
    • The speaker reflects on their own mistakes as an investor, particularly the tendency to settle for "good enough" investments instead of seeking perfection.
    • There are several reasons why settling for "good enough" investments can occur, including difficulty in sourcing excellent investments and commitment bias.
    • Despite not being ideal, a portfolio of "good enough" companies can still deliver above-average returns.
    • Recognizing one's specific set of reasons for settling for "good enough" investments can lead to improved capital allocation over time.
    • The speaker emphasizes the importance of patience, persistence, and discernment in the investment process.
    • Buffett's analogy comparing investing to baseball is mentioned, highlighting the need to wait for the right opportunities.
    • The speaker expresses confidence in their partnership's future and states that they will only accept partners who align with their objectives.
    • The stock market had a strong performance in 2023, but there are risks at home and globally that some individual investors may be ignoring.
    • Old West Investment Management LLC underperformed its benchmarks in 2023 but has strong long-term performance numbers.
    • The dominance of certain stocks like Apple and Microsoft is concerning from a value investor perspective. These stocks have had a significant impact on market gains but are trading at high valuations compared to historical averages.
    • The concentration of performance among a few stocks is uncommon. Apple is the only Magnificent Seven stock included in the Dow index.
    • Valuations are questioned given that the Buffett indicator is currently 50% higher than its historical trend line and higher than during the dot com bubble.

    Market Valuations, Debt, and U-Haul Holdings

    39:36 - 45:54

    • The indicator is currently 180%, which is 50% higher than the historical trend line and higher than the peak of the dot com bubble.
    • Apple, the world's most valuable company, is trading at 31 times earnings, double its historical average. Its revenue has fallen for four consecutive quarters and profit growth is negative.
    • Microsoft, the world's second most valuable company, is trading at 36 times earnings. Its revenue grew by 3.7% last year and net income grew by 3.5%.
    • Currently, 42% of all public companies are losing money, a phenomenon usually seen during recessions.
    • Trillions of dollars have been invested in mega-cap tech companies through passive index funds that are market weighted.
    • The US government debt has reached $34 trillion, surpassing the size of the banking system. China and Japan can no longer participate in US debt offerings due to their own debt problems.
    • There is concern that the Federal Reserve might lose control of interest rates as massive government debt issuances cause rates to stay higher for longer. This could lead to the Fed becoming the buyer of last resort for US debt.
    • Golden commodities are expected to benefit from a weakening dollar and pending commodity support.
    • The current federal debt relative to GDP is unprecedented, with high interest expenses relative to the budget.
    • U-Haul Holdings, run by owner/manager CEO Joe Showan who owns 55% of the company valued at nearly $6 billion, is North America's largest do-it-yourself moving and storage operator.
    • U-Haul operates 23,000 locations in North America with a rental fleet consisting of trucks, trailers, towing devices, and self-storage units.
    • U-Haul's pricing has become a useful tool to track migration patterns between states based on rental costs.
    • For fiscal year 2023, U-Haul had $5.75 billion in revenue and $923 million in net income. Revenue has grown 70% over the past five years.
    • U-Haul's share price has doubled over the past five years, trading at 14 times earnings, and pays a modest dividend.
    • U-Haul has a strong balance sheet with net debt at 2.1 times EBITDA and interest coverage of 8.5 times.
    • Joe Showan, CEO of U-Haul, is known for his long-term focus and reluctance to engage with Wall Street analysts.
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