Value Investor Daily #6

How to Invest in Small Companies, Charlie's Mungerisms, 2024 "Surprise" Predictions & Reading List

December 29, 2023

In Today's Edition:

Guy Spier on How to Invest Today

In a recent conversation, author and fund manager Guy Spier shared valuable insights on investing and life.

A few of the covered topics (with time stamps):

04:17 – Guy’s Book & The Attitude Towards Failure

10:58 –Minimizing Regret

16:26 – Key Things To Know About Following Super Investors

18:28 – The Pressure of Managing a Fund

26:30 – Guy’s Advice For Investing Today

31:13 – Discussion on Brookfield & Bruce Flatt

36:17 – Thoughts On When To Sell A Stock

And that was just in the first half. Give it a watch. You’ll learn a ton and become a better investor.

And give his book a read if you haven’t already. It’s a fantastic read.

How Small Companies Become Big Companies

Polen Capital recently published a brief but excellent piece on investing in small companies, which is well worth the quick read.

They highlight compounder stock Five Below (FIVE), which has grown store count and revenues year after year over the last 15 years.

Several factors need to align over time to grow from a small business to a mid-sized or large business.

They outline three essential dimensions of quality: the business, the management team, and the reinvestment opportunity.

Those happen to be Chuck Akre’s pillars, too.

Some key takeaways:

  • Many small-cap businesses are not well-positioned for sustainable growth.

  • Approximately 50% of Russell 2000 Growth Index companies are unprofitable, as defined by negative free cash flow, limiting their financial flexibility.

  • A quality business, characterized by a unique competitive advantage and strong financial flexibility (positive free cash flow), sets the foundation for long-term growth.

  • An effective management team with various reinvestment opportunities can optimize value creation for investors in the long run.

44 Memorable Quotes from Charlie Munger

In honor of Charlie Munger, we've highlighted some of his best quotes to celebrate his life and work. Munger passed away just before his 100th birthday, which would have been next Monday.

On life: 

  • “You don’t have a lot of envy, you don’t have a lot of resentment, you don’t overspend your income, you stay cheerful in spite of your troubles, you deal with reliable people and you do what you’re supposed to do. All these simple rules work so well to make your life better.” — 2019 CNBC interview”

On reading: 

  • “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” — Poor Charlie's Almanack

  • “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than when they got up and boy does that help — particularly when you have a long run ahead of you.” — 2007 USC Law School Commencement Address

On his favorite company:

On investing:

  • “Mimicking the herd invites regression to the mean (merely average performance).” — Poor Charlie's Almanack

  • “There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass: You are paying less to brokers. You are listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2 or 3 percentage points per annum compounded.” —Worldly Wisdom by Charlie Munger 1995-1998

You can read the rest here. Enjoy!

Invest By Focusing on What Never Changes

In another short but worthwhile read, Darius Foroux laser focuses on four timeless investing principles—the things that never change:

  1. Successful investing requires very long periods of extreme patience. Do nothing. It’s much easier said than done.

  2. The best investment strategy is often the simplest one, as demonstrated by Warren Buffett's highly concentrated portfolio. Fancy doesn’t win in investing.

  3. Stick to low costs and fees when investing. There’s never any upside to paying more for less.

  4. The stock market is driven by emotions in the short term, but always reflects the fundamental value of companies in the long term. Let Mr. Market’s emotions play out while you stay focused on the future.

The same philosophy helped Jeff Bezos build Amazon.

Your 2024 Reading List

The Financial Times has published a list of highly anticipated books in 2024.

The list is diverse, covering a range of topics from history and politics to science fiction and memoirs—68 in total!

We can’t wait for:

Apple Watches Go Back on Sale

Apple Watch Series 9 and Watch Ultra 2 were removed from sale due to a patent dispute with medical device maker Masimo and are now back on sale.

The dispute centered around the blood oxygen monitoring feature in all Apple Watches except for the Apple Watch SE.

A U.S. International Trade Commission ruling prohibited Apple from importing or selling the affected models, resulting in Apple removing them from sale.

However, Apple appealed the ruling and won an interim stay on the ban, allowing them to resume Series 9 and Ultra 2 sales.

The Biden administration chose not to overturn the ban, so the appeal was necessary for Apple to continue selling the watches.

It’s unclear how long the iPhone maker will be able to continue selling the models, as the government is set to decide on January 12 whether Apple's proposed redesign is enough to evade the patent infringement.

Morningstar’s Most Undervalued Wide Moat Companies

The Morningstar Wide Moat Focus Index, which tracks companies with wide economic moats, performed well in 2023. The index has outperformed the broad market YTD by nearly six percentage points. It’s also beaten the market over the last ten years.

The most undervalued stock on the list is Etsy, which is trading 44% below its fair value estimate.

Here are the top 5:

  1. Etsy ETSY

  2. International Flavors & Fragrances IFF

  3. Pfizer PFE

  4. Veeva Systems VEEV

  5. Zimmer Biomet ZBH

The full index consists of two sub-portfolios containing 40 stocks each, reconstituted semi-annually. Seven stocks were added in the most recent reconstitution, and seven were removed.

The sectors with the most added stocks were consumer defensive, industrials, and healthcare.

The stocks removed from the index were driven out by stocks with more attractive price/fair value ratios.

The Morningstar Wide Moat (MOAT) is available as an ETF by VanEck.

Doug Kass: 10 Surprises for 2024

Doug Kass issued an annual list of "Ten Surprises for 2024" in the format of, and in honor of, the late, great Byron Wien.

Kass, known for his contrarian views, offers a glimpse into what might unfold next year. Here's a quick summary of his top predictions:

1. A surprising twist in the 2024 Presidential race, with the potential conviction of Donald Trump and the emergence of Nikki Haley or Gretchen Whitmer as contenders.

2. Increased global military tensions as foreign powers escalate confrontations, affecting regions like Ukraine, Korea, Iran, and the South China Sea.

3. Sluggish growth in the U.S. economy, coupled with stubborn inflation, leads to vacillating interest rates and concerns about the federal debt.

4. Modest market performance with the S&P 500 struggling to surpass 4900 and a potential dip below 4100 due to oil price concerns.

5. Apple faces challenges as trade tensions with China escalate, resulting in a significant decline in share price and revenues, causing Buffett’s Berkshire Hathaway to double down and buy more shares.

You can read the rest of the harrowing list here. Enjoy!

Thanks for reading this year—we’ll see you in 2024!!