Every now and then you get a glimpse into the inner workings of a privately held company. It’s unfortunately not always inspiring.

Patek Phillipe is one of the world’s leading watch manufacturers, and is owned and managed by the Stern family. Morgan Stanley estimates they did over $2b in sales in 2023, despite selling only ~70k watches. (As reported here: usa.watchpro.com/rolex-sales-to…) Patek is to watches what Ferrari is to cars.

They are a big deal. There was a Business Breakdowns on them: joincolossus.com/episode/reardo…

“The Fund” was a fun read.

Folks always joked that people invested with Bridgewater just to get the macro commentary… but I was not aware that Bridgewater got its start with that sort of writing. Dalio is not just the founder of the world’s largest hedge fund.

He’s also the creator of the world’s most successful financial newsletter business.

It is interesting how few banks have outperformed SPY over 10 years. Even if you measure 1/1/2013 - 1/1/2023.

You can say rates depressed earnings. And that's true. But it didn't stop companies like SCHW. And some banks were able to create value: And if you restrict that to banks that were actually large enough to be investable 10 years ago... it's a pretty short list.

16 beat. 2 of which went to zero shortly thereafter. And quite a few are not exactly banks (LPLA, SCHW, IBKR etc.)

I appreciated this introspective piece from Oakmark on the underperformance of Oakmark Select relative to Oakmark.

oakmark.com/news-insights/… I've been running a (small) concentrated portfolio for ~5 years. That's not a long time. But I have come to appreciate some of the challenges associated w/ concentration. Things that weren't necessarily obvious to me when I was idolizing Chieftain, TCI, etc. earlier in my career

One of your analysts comes to you with a turnaround pitch -

“Yes, I know [ Citigroup / Advance Auto / Expedia / etc.] has underperformed in the past, but this time is different! Look at all these new plans, they’ve got new mgmt, I’ve done a bunch of checks and…” The pitch seems plausible and well researched. But that was true the last half dozen times you heard it as well.

Again, your guy has done a bunch of work substantiating his thesis… but experience suggests the company will find new and innovative ways to disappoint you.

That GS Prime Brokerage report on multi-managers... I think I've looked at it a half dozen times over the past week.

Quantifies what I felt to be true (that multi-managers account for nearly 100% of industry growth). The ultimate product is very good! Yes, they are levered and the fees are high... but the net outcome is great.

The reduced liquidity on new share classes could even be a positive for some institutions (although they'd never admit it).

I've been thinking about this a lot the past year or so:

Does the Capital Cycle work differently in intangible-driven businesses?

It's fun to think about, even if it doesn't really help you make money near term. The capital cycle isn't a new concept. We've lived it, repeatedly. Telecom, shale, etc.

High returns drive capital inflows, which then lower returns. We often overshoot in both directions, because we extrapolate recent results and returns manifest with a lag.

Thinking about some of the guides this quarter -

$PYPL is a good example. Ok, so it looks like they at least aren’t losing share in checkout.

And they’re guiding 4Q below expectations on topline. Because October trends have been soft. Like… ok… more of a macro issue than a $PYPL issue.

And certainly better than the alternative (if they guided high, nobody would want to own the thing into negative revisions).

But they don’t have great visibility either.

Thinking this through a bit more -

While consumption models are first to be cut, customers probably don’t cut them entirely.

Price-to-value is fairly explicit.

And if there’s a low minimum spend, the companies might even continue to land new accounts.

https://twitter.com/shortsightedcap/status/1586034413787570177

This is in contrast to pure subscription models, which could decelerate far more sharply if the downturn persists.

So, once expectations are reset, don’t you buy these things? They should become relative outperformers as belt tightening drags on.

Not sure what my takeaway should be from $META -

Don’t assume management is aligned with shareholders, especially when shareholders have no rights?

Cut faster on misses? Or just be more paranoid with respect to “value” tech stocks? I did, after all, fall into the value-guy-buying-tech trap here. Like it's a stereotype for a reason.

Buying large dislocations on growth hiccups can work pretty well. But if there are terminal value questions...

Inspired by a locked account, thought it would be interesting to track the performance of a couple cohorts of software stocks going forward. 1) Bravo Bundle - takeout candidates. Despite the group name, some (e.g. TWLO, OKTA) would almost have to go to strategic buyers.

A lot of these have been rumored at some point, but not much takeout premium in the group.

Again, I'm annoyed. And that is not good in and of itself. It's bad for decision making. You shouldn't let yourself get annoyed.

Never want to be in a spot where your thesis is in question (arguably broken) and a small position is consuming disproportionate mental bandwidth.

https://twitter.com/ShortSightedCap/status/1580117378062426112

I want to say, "worst case it trades like IBM".

On an EV / EBITDA - CapEx basis, that would imply $90...

(Yes, I know, CapEx is above trend / I should be using EBITA... but this is easier to pull w/ FactSet).

So you thought FB / META would start to reaccelerate because they were lapping IDFA, but now they have:

1) Reels transition (probably a MSD % headwind)

2) FX (6% headwind in 3q)

3) Macro (definitely something)

And these issues probably don’t get better overnight. Like the quarter itself was broadly as expected. Some of the commentary was actually encouraging; for instance, Reels is working.

And guidance seems safe. Think it would be very difficult for them to miss the low end.

Wouldn’t say there was an actual thesis break.

So I was thinking about $SHOP today.

It's tempting to judge managers who rode it up and then down... but I think it's actually a rather challenging problem. Let's say you bought Shopify in early 2016. You looked at Tobi and said, "That guy's the German-Canadian Jeff Bezos. There's a brilliant executive under that newsboy cap."

So when would you have sold it?

Huh, $SHOP trading below $SPSC on EV / NTM GP. Never thought I'd see that.

For context: SPS Commerce is an electronic data interchange (EDI) software company. SPSC is good at what it does, and can outgrow its end markets... but still: it's a fairly mature technology Can't really see it in the prior Chart due to the Y-axis:

I've been spending a lot of time on software the past couple months. For context, I am not a software guy. I didn’t really ramp on SaaS until late 2016 / early 2017. If I’m being honest, I didn’t give the companies a fair shot.

Curious if there is research on this -

Seems like betting on a cycle's duration doesn't work nearly as well as its direction.

E.g. At a cyclical peak, accurately forecasting that the peak lasts longer than expected probably doesn't translate to share price outperformance. As long as investors are convinced that there is a cycle and the next move is lower... the stocks don't really work. Even if they are generating a ton of cash.

I was asking myself today, at what point do you reassess a strategy? I am sensitive to underperformance over even short durations for 2 principal reasons:

1) Most importantly, I probably see my (miniscule) capital base disappear after a bad 12-18 month stretch. So there's that.

But also...

The way we talk about inflation seems so wrong / simplistic.

The market is fixated on a headline number... but the underlying components have huge dispersion. And don't respond to rate hikes in uniform ways. Some components are way worse than CPI. Like wheat, for instance. It's a real problem.

But what can the Fed really do about the price of wheat?

(Nevermind how certain components are calculated e.g. OER)

Think qualitative factors get incorporated into valuations faster than in the past.

Kind of an obvious statement... but have noticed these soft factors playing a greater and greater role in pitches. Not too long ago, you could stick some PE / MBA type in a CEO role, and he could juice numbers through cost cuts - even if he cut into bone.

And it wouldn't really be an issue until the stock started missing. Which could take years. Maybe even longer if he covers it with deals

To my surprise, there were a couple useful stats in this Capital Group podcast. Rare to get something interesting from a large asset manager podcast.

capitalideas.libsyn.com/is-software-re… The analyst, Julien Gaertner, highlights the unusual "growth endurance" of software: 80% (in other words, if a software company grew 50% in year 1, you'd expect it to grow 40% in year 2)

He mentions that this is roughly double what the software industry exhibited 10 years ago