My own view is that every company requires a long-term view.

I don’t think that you can invent on behalf of customers unless you’re willing to think long-term, because a lot of invention doesn’t work. If you’re going to invent, it means you’re going to experiment, and if you’re going to experiment, you’re going to fail, and if you’re going to fail, you have to think long term.

Jeff Bezos
Superior investors know -and buy- when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit.
Howard Marks

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Dear Investor,

Generic Capital Management was down 15.3 percent during the third quarter of 2017. As of September 30, we have achieved returned -28.9 percent year-to-date compared to the S&P 500 and MSCI World Indices at +14.2% and +17.6%, respectively. When discussing returns, many like to cite the performance of indices such as the S&P 500, however, as contrarian value bottom-up investors we look for bargains and ignore the overall market sentiment.

In markets dominated by FAANGs we are more prudent than ever. As always we are ready to deploy cash and try to ignore the macro and FANG dominated markets, being pure value investors at heart. We can succeed in this enviroment by taking our usual  contrarian view and going to find value where others are too fearful to look. We are strictly bottom-up fundamental investors and focus on quality companies trading at a cheap valuation, while ignoring market sentiment, CNN pundits headlines about North Korea or interest rates. In times like this, we appreciate our clients who understand that we take a long-term view and ignore the fluctations of Mr. Market.

The market seems to ignore the constant tensions with China, Russia, North Korea, Syria, as well as potential impact from the Fed winding down its balance sheet and raising rates. We ignore this noise and the fluctations and cycles dominated by central banks and macro forecasters. We also continue to worry that investors are mispricing risks from bubble induced pockets in China, The US, Canada and other countries. Additionally, as investors flock into passive products like ETFs the potential for a sharp correction requires a deep value investor to be on alert and ready to purchase dollars for 50 cents. Indeed, given a vast array of geopolitical concerns, we remained cautiously positioned with modest net long exposure at the moment and throughout the past quarter and year.

This is evidenced in frothy asset classes such as cryptocurrencies which have no intrinsic value and continue to soar in price. Eventually, the market will turn and those who gambled on "assets" like Bitcoin or Ethereum will pay a heavy price as the Fed removes the koolaid from the economy..

As Ben Graham said:

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

So too at Generic Capital Management we take opportunity of Mr Market and ignore him when he offers silly prices. Indeed, in a bull market, negative stories take a back seat to the positive.

We remain positioned to take advantage of any sudden volatility spikes or changes in the market. We like companies that have pricing power, ethical and competant management, easy to understand business models, cheap valuations, high returns on invested capital which are being mispriced by growth, macro and momentum oriented investors.

We feel surrounded by widespread euphoria that typically represents the final stage of a collapsing bull market, but where is the  canary in the coal mine?

Our current top positions are

  • Google
  • Berkshire Hathaway
  • Leucadia
  • Liberty Global
  • Apple
  • Altice

We remain short shares of Tesla Motors, Under Armour, Amazon, Netflix and other businesses with high expenses, low margins, questionable acconting and business strategies and trading at extremely high multiples. Patience is the key as markets and indvidual stocks can remain irrational for years before the innevitable crash.

As the saying goes "a bird hand in the bird is worth two in the bush."

The current environment of high valuations and rapid technology change should provide tailwinds for us. Increased competition and technological disruption is making the lifecycle of poorly run companies shorter than ever. The inflated valuations across the market allow for attractive short entry points, decreasing upside risk for companies such as the shorts we listed earlier.

Choosing a stock is no different than picking the perfect mit; each has certain positive and negative attributes and despite the fact that pro baseballers may tend to play with a certain type of mit, it doesn’t mean that type is the most forgiving for a novice. This idea sounds simple but is actually complex in execution.

As Charlie Munger stated so succicently:

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you."

Our incentives are precisely aligned with investors: Indeed, we are the largest investor in the fund, and we have the bulk of our personal wealth invested in the fund.

The quality of our investor base remains key even as we seek potential new allocations. We will continue to email our quartlerly updates to investors and K1 filings will be sent by our administrator.  If you or someone you know would be interested in seizing one of the remaining spots in Generic Capital Management, please reach out to me directly for offering memerendum. As a reminder, all partners must be accredited investors per SEC regulations.

I hope you will make plans to join us on Thursday, November 24th, 2017 for our 2nd Annual Meeting. There will be free food for all potentials and potential investors.

As always, we can be reached by email or phone at any time.

Thank you for your confidence as it helps us achieve the best risk adjusted returns for all of our clients.

Sincerely,

Jacob Wolinsky

CIO Generic Fund Management