Interesting letter on Facebook from Robert Vinali of RV Capital.. his fund has returned 335% since inception vs benchmark 97% ..
I liked his commentary on adapting/expanding your circle of competence .. [notice Buffett recently bought Apple and airlines!!]
“Expanding your circle of competence whilst at the same time staying within your circle of competence is a delicate balancing act for all capital allocators.”
“I would however highlight that whilst value investors have traditionally been sceptical of tech in general and China in particular, this is no longer a tenable standpoint in my opinion. A large part of the value creation in our society is coming from tech, and this will continue to be reflected in stock market valuations. Forgoing these returns will make the challenge of beating market indices even harder than it already is.”
“Furthermore, even if you decide to give tech a miss, it is still necessary to study it. Innovations from the tech sector are impacting and, yes, disrupting nearly all other sectors. I can make a plausible argument why virtually any company might be disrupted in the medium to long term. If you are not aware of these risks, you are not underwriting them. And if you are studying a sector, you may as well invest in it.”
He talks about Moats vs Innovation
“In my view, far greater attention needs to be paid to a company’s ability and willingness to innovate. Value investors may prefer not to give too much consideration to innovation. However, no matter how wide a company’s moat is, it is unlikely to be sustainable unless it goes hand in hand with innovation.”
“Whilst the scorecard I measure myself against is the fund’s performance, I strongly believe that that performance needs to be driven by investment hypotheses playing out. Otherwise, it is the result of nothing more than pure luck.”
“In my view, widening the moat is more important than the width of the moat. Everyone is attacking a company’s moat, so the question is not how wide it is, but whether it is
widening at a faster pace than competitors are filling it up. Innovation is central to the idea of widening a moat.”
“A tweak in investment style:
How does this change how I allocate capital?
My intention is to pay far greater attention to innovation. Reflecting this, I am modifying the question on competitive advantage from:
“Does the company have a long term sustainable competitive advantage?”
“Is the company building a long term sustainable competitive advantage?”
It is a subtle change, but, in my view, an important one. The new question better captures the idea of moat as a dynamic rather than a static concept.
The responsibility for creating and maintaining an innovative culture ultimately rests with management. As such, when underwriting management ability, I intend to focus more closely on what the leadership is doing to foster a culture where innovation can flourish.”
New Position Facebook…
Over time, I have become more comfortable with the sustainability of Facebook’s moat for at least four reasons.
Facebook unlikely to repeat mistakes of Friendster and Myspace
Moat extends well beyond network effect – timeline features increases switching costs
Ecosystem includes news, videos, services and apps
Dataset is a growing source of moat – likely dominates the field of AI the next big tech shift
Zuckerberg’s character and motivation articulated in letter to new born daughter in 2015 ..
“Certainty about an important yet difficult-to-evaluate factor, is exceptionally scarce in financial markets. It would be madness to ignore it.”
Thinks buying FACEBOOK at 25X [ex cash on balance sheet]…
Interestingly the FANGS’s have started to outperform again..
His comments remind me a little of comments from Shad Rowe of Greenbriar Partners who made the following comments in an interview in June last year ..
“Great companies delight their customers, suppliers, shareholders and have culture of fulfilment for employees – typically have some sort of social/economic tailwind and generate a lot of free cashflow to reinvest at high rates. Ceo’s are smart.”
“I’d say more accurately that we’re trying to be buyers of the leading companies of our era, after they’ve prevailed over their competition but before their full potential has been realized. Ten to 15 years after the automobile age began, the industry in the U.S. had narrowed from hundreds of companies down to maybe six or seven by the mid-to-late 1920s. General Motors had already distinguished itself as a clear winner, but you could have still invested profitably in it for another 50 years. You don’t have to be there at the very beginning.”
On Facebook [classic network effect business] … “I think digital real estate is the most valuable real estate out there, and Facebook owns the Panama Canal, the Suez Canal, Central Park and Fifth Avenue all rolled into one”