Value Investor Daily #3

How to Survive Drawdowns, Apple Needs a New Growth Driver, Brad Jacobs Targets Next Multibagger Industry

In Today's Edition:

Could you sit through a 35% drawdown without flinching? That’s what QQQ investors faced last year. The S&P 500 was down almost 25%.

Ben Carlson reminds us that sitting through tough times is never easy.

In the last 4 years, investors have had to sit through a pandemic, multiple market crashes, supply shocks, inflation, interest rates dropping and rising at record rates, and much, much more.

Congrats to those who held through all the tumult.

The late, great Charlie Munger has some sage advice for the next time.

Conduct your life so you can handle [the next] 50% decline with aplomb and grace.

Charlie Munger

“How to Make a Few Billion Dollars”

Billionaire Brad Jacobs’ new book “How to Make a Few Billion Dollars” comes out in January. You can pre-order a copy now.

Great investors study great managers, and Brad Jacobs is among the best. From his bio:

To date, Jacobs has founded seven billion-dollar or multibillion-dollar businesses, completed approximately 500 M&A transactions, and raised 30 billion dollars of debt and equity capital, including three IPOs. He began his career at age 23 when he founded Amerex Oil Associates, followed by Hamilton Resources, both privately held. He subsequently created five publicly traded companies—United Waste Systems, United Rentals, XPO, and XPO’s two spin-offs, GXO Logistics and RXO.

Jacobs has demonstrated a Midas touch with value creation. He grew XPO into a top ten global logistics provider and the seventh best-performing stock of the last decade in the Fortune 500. XPO’s stock became a "32-bagger"—initial investors in 2011 made more than 32 times their money. United Rentals was the sixth best-performing Fortune 500 stock during the same period and is now more than a “100-bagger.” United Waste’s stock outperformed the S&P 500 by 5.6 times over five years, from the time Jacobs took the company public to when he sold it for 2.5 billion dollars.

Now that’s a manager who understands shareholder return.

He gave a recent interview about his next billion-dollar venture in the construction materials space.

Jacobs will infuse a billion dollars of capital into SilverSun Technologies stock, to create a publicly-listed shell company. He’ll use his roll-up playbook that’s worked like a charm for the last 30 years.

Apple Stock Soaring, but Where's the Growth?

Buffett's largest holding, Apple stock, has been soaring, reaching record highs and growing by over 50% in 2023. However, the company is facing a struggle to grow as its sales have declined in each of the past four quarters and are likely to continue in the current quarter.

Apple's most important hardware products, such as the iPhone, Mac, and iPad, are still generating significant sales but their growth is tapering off. The company hasn't had a hit new product since 2016, making the success of its upcoming mixed-reality headset crucial.

Joel Tillinghast Steps Down

Joel Tillinghast, the manager of the Fidelity Low-Priced Stock fund, and author of Big Money Thinks Small, is retiring at the end of 2023 after a successful career spanning several decades. His investment approach, which focuses on low-priced, quality companies with enduring advantages with reasonable valuations, is still relevant.

Tillinghast's strategy has expanded over the years to include larger companies and those with growth potential. The fund has performed well, returning an average of 12.6% since its inception.

In a recent interview, he shared his decades of investment wisdom, including this gem:

I’ve always focused on the same five central points. First, know yourself and where you’re most likely to make mistakes—manage your emotions. Second, identify the key drivers of future profits. Third, invest with capable and honest management teams. Fourth, invest in businesses that can excel competitively. And fifth, don’t overpay.

Joel Tillinghast

A Cautionary Tale: Straying from Value Investing

Spruce House Investment Management, a hedge fund founded by Benjamin Stein and Zachary Sternberg, veered away from their value-driven approach and started focusing on growth stocks.

Stein and Sternberg were inspired by Warren Buffett's value-driven approach to investing during their college years.

However, a shift in strategy to high-growth stocks and a lack of diversification led to devastating losses when the Federal Reserve raised interest rates.

The fund reached a peak of $4.7 billion by 2021, only to lose two-thirds of it in 2022.

What can we learn from their downfall? Stay rational, never chase returns.

Stein and Sternberg are now attempting to recover and have promised to prioritize consistently profitable companies in the future.

Nike Faces Sales Slump, Sending Shares Down 11%

Nike adjusted its annual sales forecast to account for cautious consumer spending, weaker online business, and increased promotions. As a result, the company plans to cut supplies of certain product lines and implement a $2 billion cost-saving plan over the next three years.

Nike's wholesale business has been struggling due to lower retailer orders and weak demand. The company also saw a slowdown in sales in China.

Despite these challenges, Nike plans to release new products to attract consumers and hopes that innovation and newness will help it navigate through a promotional market.

Long Equity Annual Letter

Long Equity (a private portfolio manager focused on quality of earnings) published its 2023 annual letter. It’s worth the short read.

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Thanks for reading, happy investing!