I recently wrote my annual investor letter to my clients at Saber Capital Management. I thought I’d share that letter with readers, since I posted it to my firm’s website. If you’re interested, you can view the letter here:
I am also in the process of updating my firm’s website. This page will occasionally be updated with investor letters and other write-ups, notes, and commentary: Saber Capital Letters and Commentary
If you’re interested in receiving future Saber Capital investor letters, you can also get on Saber’s email distribution list using the form on the sidebar of the site. I use this list to send out some of the content that gets sent to my investors at Saber Capital Management, including letters and other occasional notes.
I typically will send one or two emails each quarter to this list, but definitely not more than one per month.
Thanks for reading!
P.S. I will be in Los Angeles this week for the Daily Journal annual meeting with Charlie Munger. I’ll have some notes on this event in the next couple weeks. Feel free to contact me if you plan to attend.
Dear Investment Partner:
For the full year 2016, the Saber Capital Management portfolio* gained 23.8% gross (and 19.4% net of all fees). The S&P 500 gained 12.0% including dividends in 2016.
Your Interactive Brokers account statements should have arrived in the mail. Those statements contain your 4th quarter results as well as the current positions and account value as of 12/31/16. You can see your yearly results as well as other relevant details for your account online on your Account Management page at Interactive Brokers. Please contact me with any questions regarding your account.
Performance Comments-It’s a Marathon
Regarding our performance in 2016, I want issue a reminder that I really place very little weight on any one year’s results. Our results this year exceeded the return of our opponent (the S&P 500), but my expectation is that this variance could be much greater in future one-year periods, both in the positive or the negative direction. I consider results in one year to be more or less random, and our performance measuring tools should always be calibrated for multi-year periods.
Investing is a marathon, and each year can be thought of as just one mile marker along the route. Some years will feel like Heartbreak Hill, the grueling 21st mile of the Boston Marathon, while other years will be more akin to the 2nd mile in New York, where, from the crest of the Verrazano-Narrows Bridge, you glide downhill all the way into Brooklyn.
We should all fully expect to have our fair share of both uphill and downhill years, but to complete a marathon you first must concentrate on the pavement in front of you, putting one foot in front of the other. That’s what I’m fully focused on each day when I come into the office. I hope and expect that by adhering to our investment process regardless of the current terrain, excellent long-term results will follow over time, and I hope to be judged not on each mile split, but over the full 26.2 mile course.
Our investment approach is squarely focused on producing the best possible long-term results with a minimum of risk. This involves an unconventional (but—I firmly believe—less risky) approach to portfolio management. The byproduct of this approach can lead to results that vary much more widely than the market in any given year.
Of course, I’d prefer our results to always vary widely in the positive direction, but unfortunately, the market gods didn’t design their stock market universe with my wishes in mind. Human nature and the impact it has on markets creates volatility, which can be a tool that we use to our advantage rather than an obstacle that we attempt to avoid. As Ben Graham said, Mr. Market can be our servant or our master. I’ve always liked being my own boss, and so on behalf of all of us, I’ll choose the former.
Saber Capital Investment Approach
Every so often, it’s helpful to outline Saber’s basic philosophy. Since we have a number of new investors who have yet to be indoctrinated, I thought it would be a good time to make a few comments on our approach.
Saber’s investment strategy focuses on making carefully selected investments in high-quality businesses at attractive prices. This ubiquitous description of a well-trafficked investment philosophy does not take away from the soundness of the approach, nor does it compromise our ability to capitalize on its merits, for two main reasons that I’ll describe below.
Some of the key tenets to my investment approach are:
- Understanding the business model and how the company makes money
- Considering the value that customers place on the company’s product or service
- Focusing on durable businesses with predictable cash flow
- Preferring a management team that thinks and acts like owners
- Demanding an obvious gap between price and value (margin of safety)
When it comes to stocks, simplicity and common sense work well. I try to focus on restricting our investments to companies that implement a business model that makes sense to me. I want to not only understand how the company makes money, but I want to understand the value proposition it offers its customers. Good businesses have good economics such as high returns on invested capital and consistent free cash flow, but they also provide a product or service that offers value to the buyer on the other end of the transaction (the customer).
As I’ve learned over the past few years watching debacles such as Valeant and SunEdison, a business with good economics that is coupled with a business model that extracts value from its customers (rather than adds value to its customers) is not a good business. The financial metrics might appear attractive, but a parasitic relationship with customers usually ends up destroying shareholder value at some point. So guarding against this type of business risk is a major focal point at Saber.
Also, while my twin two-year olds would quickly challenge this assertion, sleeping well at night is a must, and so I like businesses with strong balance sheets and preferably without much debt.
And since my economic crystal ball has never worked well, I look for durable businesses that can withstand a variety of economic headwinds, which are certain to occur over time.
Two Important Advantages (Our “Edge”)
Finally, I believe there are two requirements in order to implement this approach successfully:
- Maintaining a long-term time horizon
- Focusing on only the very best investment ideas
Both principles are often preached, but very rarely practiced. Institutional constraints and good old fashioned human nature can make it very difficult to actually utilize those two advantages. This difficulty is the reason the advantages exist, and I believe—since human nature is here to stay for a while—these advantages are permanent for those who can capitalize on them.
The Long-Term Advantage
The first is to maintain a long-term time horizon, which I believe is now a bigger advantage than ever. Fifty years ago, the average stock was held for 14 years—today it is disposed of after about 11 months. The short-termism that