This article is authored by MOI Global instructor Matthew Sweeney, founder and managing partner of Laughing Water Capital, based in New York. Matthew is an instructor at Best Ideas 2018, the fully online conference featuring more than one hundred expert instructors from the MOI Global membership community.
“All man’s miseries stem from his inability to sit in a room alone and do nothing.” –Blaise Pascal, c/o Mohnish Pabrai
The above quote has been popularized in investing circles by super-investor Mohnish Pabrai. It is especially relevant to our portfolio at the moment due to the previously referenced increased level of activity. Our strategy is largely based on buying good businesses during moments of weakness, and giving our skilled management partners the time they need to work through their problems. Focusing on price is extremely important during the buy process, but once we have purchased shares, the stock price can do whatever it wants to do in the near term as irrational sellers weigh on shares. Our ultimate success will be based on our ability to weather the short term volatile stock action, and patiently wait for the true economics of our businesses to shine. Patience is key to the strategy: frequently trading in and out of businesses will not help our long-term results.
While our “busy” quarter would represent a slow hour on most hedge fund trading desks, relative to 2016 when we made one meaningful investment all year, the 3rd quarter was a flurry of activity. This activity level meant that entirely too much time was spent staring at screens thinking about price, and not enough time was spent simply thinking about our businesses, their management teams, their problems, and their opportunities. In order to help tip the scales of my focus away from short term market action, and back toward the fundamentals of our investments, I spent a week in September “off the grid” on a backcountry archery elk hunt.
From my perspective, spending a week in the middle of no-where is perhaps the best way to conduct a portfolio review. With no access to the internet or cell phones, and no possibility of getting distracted by new ideas, one is forced to focus entirely on the present opportunity set. Additionally, there are a lot of parallels that can be drawn between hunting in the backcountry and concentrated value investing.
For starters, it is not for everyone; in fact, it is basically anti-social. There is a certain confused/skeptical look that most people give when they learn that our strategy is based on the belief that one person with limited resources willing to dig through the hidden corners of the investment universe searching for anomalies has massive advantages over Wall Street and its infinite resources. This look is basically the same look I get when I explain to people who are panicked by the idea of a dead cell phone battery that my idea of a “mental-reset” is not a trip to some exotic beach location. Rather, I much prefer spending a week by myself sleeping in a tent in bear country while hiking through the mountains 10,000 feet above sea level, hours from the nearest paved road and wi-fi signal.
Second, well known hunting personality and author Steve Rinella often comments that successful backcountry hunting is dependent on, “being comfortable with being uncomfortable.” This quote bears a striking resemblance to two of my favorite investing quotes. The first, “you can have comfort, or you can have value. You cannot have both,” and the second, “the capacity to suffer is essential for successful investing.” The point is the same whether you’re talking about hunting or investing; if you want to seek out the best opportunities, it is not going to be easy.
Third, whether you are talking about backcountry hunting or investing, the proper approach is to spend 99% of your time planning, preparing, and waiting, and 1% of your time taking decisive action.
Fourth, in both hunting and investing, it pays to be very selective. If you take your shots at middling opportunities, you will never have the opportunity for tremendous success.
Lastly, and perhaps most importantly, in order to be successful in either hunting or investing, you have to enjoy the process, not just focus on the endgame. Just like most hunts end without a shot, almost all research ends without a buy decision. The only way to eventually succeed is to continue to iterate the process.
The Importance of Process
“Gamblers bet on possibilities. Pros bet on probabilities.” –Bob Dancer, Professional Gambler
Our investment process entails identifying companies that pass a four-part framework before we ever consider the fifth piece, which is price. The four questions I seek to answer are:
1) Is it a good business? (what will it look like in 5-10 years)
2) Who are we partnering with? (is management capable and properly incentivized)
3) Why does the opportunity exist? (are sellers irrational or shortsighted)
4) What happens when something goes wrong? (because it will eventually)
Each of these questions is deliberately open-ended, and meant to encourage careful analysis and deep thought, not quick answers. When followed properly, this process should lead us to better than average companies, with better than average management teams, that we buy at better than average prices, that will do better than average when the economy hits a rough patch. While nothing is guaranteed, if we can simply stick to this process, the result should be a portfolio that has a high probability of performing better than the averages (ie the SP500 or R2000) over time.
This document, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified offeree receives a confidential private offering memorandum (“CPOM”) / confidential explanatory memorandum (“CEM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the CPOM/CEM, the CPOM/CEM shall control. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. While all the information prepared in this document is believed to be accurate, Laughing Water Capital, LP and LW Capital Management, LLC make no express warranty as to the completeness or accuracy, nor can they accept responsibility for errors appearing in the document. An investment in the fund/partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio is under the sole trading authority of the general partner/investment manager. A portion of the trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. The portfolio is concentrated, which leads to increased volatility. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. There is no guarantee that the investment objective will be achieved. Moreover, the past performance of the investment team should not be construed as an indicator of future performance. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund/partnership. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of LW Capital Management, LLC. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Laughing Water Capital LP, which are subject to change and which Laughing Water Capital LP does not undertake to update. Due to, among other things, the volatile nature of the markets, an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment. The fund/partnership is not registered under the investment company act of 1940, as amended, in reliance on an exemption there under. Interests in the fund/partnership have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws. The S&P 500 and Russell 2000 are indices of US equities. They are included for informational purposes only and may not be representative of the type of investments made by the fund.