附录F-Semper Augustus Investments Group历史回报
One short year seems like a decade ago. With the 2019 letter put to bed, I had the good fortune to speak to the finance and economics students at my daughter’s school in Southern California over parent’s weekend. From there, a couple of quick business trips to the hearts of auto country and horse country. The second weekend of March was circled in anticipation of seeing said daughter tee it up in Phoenix for her first collegiate spring tournament. Who would have known that instead, she and I would be driving her Jeep back from L.A. to St. Louis, with me riding shotgun spending the entire drive on the phone and iPad, navigating the early financial stage of a pandemic?
Just east of the junction of I-15 and I-70, Salina to Green River is a desolate 110-mile stretch across Utah with no motorist services, the longest in the U.S. interstate system. There is a point beyond which your remaining fuel is insufficient for a return to the “last chance for gas” station that you decided to breeze by. The economy is low on fuel and past such a point.
Thanks to the gents from Topeka for inspiring the theme of this year’s letter. Who knew that a pandemic would send interest rates back to zero and monetary and fiscal policy past the point of no return? Triple entendre right there – interest rates being the point, no return being the yield for the indefinite future, and the point of no return being the inability of central bankers and policy making legislators to ever walk back the path to financial ruin laid by their own hands.
The job description reads capital allocation with professional worry skills required. I try to have fun with the annual letter, making light when possible of dry finance, accounting and economic theory. The “intelligent investor” is conditioned to focus on the first two, ignoring the dark art of economics for the betterment of the investment result. The process at Semper is very bottom up with a majority of time spent under the hood and in the footnotes of businesses, trying to mesh business quality and price. A dual margin of safety approach we call it. The majority of my career spent ignoring the “macro” has proven the wise course. However, a wary eye on a growing debt bubble compels worry and forces strategic thought on how to best deal with the issue that’s now front and center.
The Point of No Return examines the history of how we got to this point and the likelihood of dealing first with deflation and ultimately hyperinflation, perhaps…2021 marks the 40th anniversary of record high interest rates in the United States. For four decades we have become a society conditioned on immediate gratification. The entirety of the industrialized global economy is in the same boat. We are a society living beyond our means, governed by none willing to sacrifice today for a better tomorrow. A willingness to spend with no governor and a false belief that no level of debt is too great if interest rates can be set at a low enough level comes with consequences. The role of central banks is apparently to finance unlimited deficits. Whichever direction the monetary and fiscal paths take us, austerity is coming. Our role as stewards of capital only grows more complicated. Owning proper assets, at the right time, will require every ounce of focus and every bit of cumulative experience. COVID-19 pulled forward in a short span so many trends and disruption already unfolding, accelerating the timeline on dealing with the coming fallout of the debt bubble On a cheerier note (thank God), the portfolio trades at a wide discount to intrinsic value. The section in the letter titled Intrinsic Value Update – Opportunity Knocks and Opportunity Cost is a portfolio-specific discussion of portfolio activity and rationale for prospective expected returns. Despite stock market returns outstripping underlying business fundamentals, our ability to shift capital around – adding and eliminating a few positions from the portfolio and adding to and trimming others – kept quality high and price low, yielding substantial earning power and prospective accretion to fair value. The quality and valuation gap between world markets and the Semper portfolio widened considerably, and we again compare fundamentals and valuation against the market.
Regarding the market, valuations are consistent with those seen at major historical secular peaks. Expedition Everest, a nod to Disney’s famous rollercoaster, compares current valuation and economic yardsticks against those at various inflection points in the past. By several measures, prices have never been more expensive. Others, such as durably higher profit margins than in past cycles and low interest rates perhaps temper some of the excesses. But in the context of a debt bubble, overall capital market valuations are troubling.
TAMs are the New Eyeballs continues the valuation discussion and specifically drills down on price-to-sales as a valuation metric. A working hypothesis that paying high prices portends weak investment returns is tested. The investment derby in 2020 was led by unprofitable companies, stocks with a high proportion of shares sold short and those with prices at more than ten times sales. The number of companies trading at very high multiples ballooned, bringing back memories of the late 1990s. A brief discussion about Tesla is included in this section. The reaction by Tesla shareholders to a fundamental case that future returns stand to be poor because the stock is way ahead of the business is the same visceral response we confronted when making the same case about many tech and Internet stocks in 1999 and early 2000. One chap suggested I return my degrees and CFA charter because clearly, I learned nothing. Social media provides endless entertainment value.
A great privilege is spending time on campus with aspiring investors each year. Opportunities available to business students today are just awesome. Most institutions of higher learning have endowments and foundations, a growing number of which have carved out small (in some cases not so small) pieces that students directly manage. I can think of no better teaching tool, and no reason why schools that have, A) an endowment, and B) undergraduate and/or master’s programs in business, finance, investing or economics, would not have a student-run “fund.” Back to School highlights some “best practices” that I’ve encountered among some of the funds with which we are familiar. We added a tab on the website in hopes that sponsors or students themselves will contribute data points about their respective programs, which will be summarized in next year’s letter. The purpose of the exercise is to share best practices among student funds that they may adopt or incorporate, and also to encourage schools that either don’t have funds, or do but don’t give them proper emphasis, to get it in gear. My hope is that each of you will look into what’s being done at your respective alma maters and get involved. In addition to being a great teaching tool, a well-organized student-run fund showcases the schools that do it right. They serve to strengthen the alumni base and open doors for participating students.
A small handful of reading recommendations are listed in To Read or Not to Read, as well as a couple music recommendations. My time spent annually with the letter is done with music in the background, and I’m always happy to find new stuff. I’m trying to listen to more investing podcasts. There are some exceptional ones out there. My struggle is carving out the time. A good conversation requires focus, and I can’t write and listen well at the same time. I usually listen when working out, which for whatever reason I didn’t do as faithfully while locked down as I do in more normal times. I’ve taken to walking the dog, Big Oil, where I put the earbuds in while he sniffs and marks his territory. The moderate exercise is good for us, both overfed by the same master.
Finally, and as usual, a few comments are reserved for Berkshire Hathaway. By far our largest holding, the shares have fallen out of favor. It reminds me of 1999 and early 2000. Berkshire was “out of step” and the stock had declined while the tech darlings surged. Berkshire’s shares finished 2020 up only 2.4% for the year, again trailing the more fashionable. Meanwhile, underlying value clips along per expectations, making the shares incredibly inexpensive. The stock spent much of the year underwater, affording the GOAT the opportunity to practice some masterful capital allocation. Meaningful share repurchases at extraordinary discounts to intrinsic value may mark another of Berkshire’s famous and shareholder-friendly pivots.
In the win column, you will see that the letter is FOURTEEN pages shorter than last year. For the first time in a long time, perhaps ever, I kept my promise on that front. It remains a labor of love and I’m always humbled by the response. For the handful (small) that encourage me to make the letter longer each year, I’m sorry to have failed you this year…
Huge thanks to everyone I was lucky to spend time with in 2020. Between Zoom, Teams and the old-fashioned iPhone, it was an unusual year for sure. I’m grateful to all of you so generous with your time and perspectives on the pandemic and in your respective fields and endeavors. We are blessed with great friends and clients. Navigating the investment seas with such engaged, supportive, remarkable people makes our job fascinating, humbling and utterly enjoyable.