Donville Kent Asset Management’s Capital Ideas Fund and Capital Ideas Trust letter to investors for the first quarter ended March 31, 2015.
Donville Kent: Double Goal Coach
In the first quarter of 2015, The Capital Ideas Fund and Capital Ideas Trust were up 12.50%1 and 12.47%1 respectively. As we enter the second quarter, the portfolio continues to perform well, but our sense is that storm clouds are on the horizon. As such, we are holding relatively high cash balances and have recently increased the size of our portfolio protection.
As many of you are aware, a few years back we lightened our positions in commodity-related stocks and began increasing the number of positions we own in knowledge-based industries (pharmaceuticals, software, IT services, etc.) Most of those investments have performed exceedingly well, but, as a result, many of these stocks are trading at valuations with which we are uncomfortable. As such, market valuations in general, and the valuations of the kinds of stocks that we like to own in particular, are making us nervous.
Offsetting this concern about market and stock-specific valuations is the reality that interest rates remain very low and inflationary concerns are virtually non-existent. Deflation is therefore probably a bigger issue, and the global economy may very well be in for a sustained period of low growth. If we are in fact entering a sustained period of low global economic growth, then valuations may indeed get richer. I won’t bore you with the financial mathematics here, but suffice it to say that a risk-free rate of less than 2% could result in market valuations of 25x-40x. These kinds of valuations make me nervous, but I want you to know that I will do my best to negotiate this valuation landscape on your behalf by focusing on companies that deliver enduring returns on capital and which are run by people who are both competent and honest.
The things you can learn from 9 and 10 year old boys
Each year, sometime around the end of January or early February, I begin to think about lacrosse. I have played lacrosse since I was six and I continue to play to this day. I am also a lacrosse coach and have been so for close to fifteen years. My bookshelf is full of books, manuals, and videos that I have studied that focus on various parts of the game. There is only one book however, that I re-read each spring.
The best book on coaching that I have ever read was written by Jim Thompson, an academic at Stanford University: The Double-Goal Coach: Positive Tools for Honoring the Game and Developing Winners in Sport and Life. The book claims to present the best-practices of elite coaches and the latest research in sports psychology. In my words, the book examines the trade-offs we think we need to make between winning and being a positive and ethical coach.
I started coaching lacrosse in 2000 in Calgary. I think I did a decent job in my first couple of years coaching 7-and 8-year-olds, but if I had one major flaw, it was that I was prone to being too intense, and indeed angry. I think I really wanted to be a great coach, but, like many young coaches, I was too focused on winning.
In my third year of coaching, I found myself in the following situation. I was coaching Novice lacrosse (age 9-10), and our association, the Sabercats, had enough players for 12 teams. The problem was that the head of the association was also coaching in this age group and he assigned the best 15 players in the association to the team he was coaching, randomly distributing the rest of the players to the other 11 teams. Like most of the other 11 coaches, I was furious. In my rage, I turned to my two assistant coaches and said in a seething voice “We may not win a game, but we are going to teach these kids everything we know about lacrosse. And because it’s unlikely that we are going to win many games, we are going to be as positive as possible with these kids.”
So, I wasn’t going to focus on winning because we had no hope of winning. The cycle would be that we would teach, then praise, then teach, then praise, teach, praise, etc. But this approach was not coming from an enlightened perspective. I felt that I had been screwed by the head of the association, and so I gave up on the prospect of winning. In a sense, I was quitting on my team without telling anyone. But I would teach these kids how to play lacrosse. I knew how to do that, and now that the pressure of winning was out of the way, I would just stay as positive as possible.
See full PDF below.