David Kim’s Forage Capital letter to partners for the month ended July 31, 2016. Also check out Kim’s unrelated site on industry summaries at scuttleblurb
Forage Capital inaugural letter
“Reynolds’s dictum was that reality was a fact-pattern the bulk of which was entropic and random. The trick was homing in on which facts were important…” – David Foster Wallace, The Pale King
Before putting your money to work, I’d like to broadly iterate our Partnership’s investment philosophy and frame expectations. The Fund’s primary purpose is simple: to purchase, at reasonable prices, competitively advantaged businesses with ample moat-enclosed growth opportunities, steered by capable management teams.
As is true of so many consequential things, thoughtful investing is largely determined by the choices we dismiss, and in that spirit, our portfolio will own no more than 15 stocks at any given time. While low turnover is not a targeted goal, it is the most likely outcome of an investment process firmly rooted in fundamental research and directed at uncovering long-term winners. Given the concentrated long-only nature of the portfolio, our returns will likely be more volatile than those of broader equity indices, at times significantly so. Exploiting that volatility will be important to compounding our capital at a rate that modestly exceeds the total return of the S&P 500 over many years.
A multi-year time horizon is a luxury that most investors, either due to external circumstances or personal constitution, cannot claim. The average holding period of a US stock has declined from about 7 years in 1940, where it pretty much hovered over the next 35 years,1 to just 6 months over the last decade.2 While the reasons underlying this compression are varied and complex, I’d bet it’s at least partly due to the indefatigable blossom of institutional money management.3
The professional pressures promoting short-term, career-preserving action at the expense of thoughtful, long-term decision-making have been well-documented.4 I suspect that institutional demands themselves dually reflect and influence a shift in the very notion of investing we hold in our minds and the language5 we use to describe it. Compared to the artisanal days of investing, today it’s far easier to think of stocks – permuted by fund complexes from a buffet of geographies, sectors, and strategies, metastasizing in some cases into leveraged ETFs and vehicles explicitly conceived to blindly mimic the trades of other funds – as abstractions, neatly arrayed and ready for trade, rather than ownership stakes in actual businesses.
But as Steven Strogatz once said of mathematics, “we invent the concepts but discover their consequences,” and amidst the frenzied whorl of fund product and activity, resides the invariant truth that enduring value is anchored to real-world decisions that companies make every day. For an investor, assessing the risks and payoffs to those choices – in the thick of ever-present uncertainty and competitive intensity – is an exercise in personal judgment. I’m honored that you’ve placed that responsibility with me.