I’ve got auditors sitting in my office here in Santiago right now.
No, not those auditors. Not the kind from the IRS that strike fear in the hearts of taxpayers.
The auditors in our office are from one of the big international accounting firms, and we invited them to review our agriculture company’s 2016 financials.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
This is something that nearly all large, responsible businesses do in order to provide their shareholders with a comprehensive annual report.
I wear multiple hats; as an entrepreneur who has started a few large companies, I have shareholders that I need to keep updated.
But as an investor, I’m a shareholder in a multitude of businesses, and I need to be updated about how those investments are performing.
So this is an especially busy time of year… writing and reviewing multiple reports and business plans.
If that sounds boring, I assure you it’s not. There are few things more interesting to me than creating something valuable and tangible out of nothing.
And that’s ultimately what business is: value creation.
Great entrepreneurs come up with big ideas to solve problems for their customers.
And through sheer willpower, talent, and persistence, they birth their ideas into existence. If enough value is created, the rewards can be incredible.
The same goes for investors.
If a company performs well, the shareholders who invested in it can realize phenomenal returns.
The other day I was on the phone with a few CEOs of some of the companies we’ve invested in, listening to them discuss their progress.
One is a Colorado-based financial technology company, and the other is a Colombia-based medical cannabis producer.
Both businesses are doing exceptionally well and run by extremely talented people that I trust.
As an investor, I couldn’t ask for a better deal. All I had to do was write a check.
In exchange, I’ve got these two guys… some of the most successful and highly skilled entrepreneurs I know, busting their butts every day to add two zeros to the amount of money that I invested.
Obviously there’s risk in any investment… even if you buy government bonds or a bank certificate of deposit.
But an astute investor will reduce this risk by assembling a diversified portfolio of great businesses.
That way, if something goes wrong with a business, the rest of the portfolio will make up for it.
I’ve long argued that a great business is one of the best “real” assets to own.
It can provide so much benefit– cashflow, tax deductions, estate planning vehicle, asset protection, etc.
Plus, in times of inflation, a great business increases in value, so it’s a fantastic hedge.
In times of deflation, a great business generates highly valuable cashflow.
In good times, a great business expands and makes big profits.
In bad times, a great business weathers the storm and increases its market share as its phony copycat competitors get flushed away.
There aren’t a whole lot of asset classes that provide such diversity of benefits.
Now, there are ultimately three ways to own an asset like this.
First, you can start a business yourself. This isn’t as scary as it seems.
Like learning Chinese or public speaking, starting a business is a skill… and one that can be acquired with time, education, and experience.
(We hold an annual entrepreneurship camp every summer designed precisely to help people build those skills.)
Second, you can buy someone else’s business.
It may surprise you, but businesses are bought and sold every day, just like real estate or antique cars.
In 2015, for example, our holding company purchased a retail apparel business in Australia that has been in existence for about 20 years.
It’s a well-established brand, and the business is highly profitable.
Now we’ve hired new management and made several changes to increase those profits even more.
There are ‘business brokers’ around the world who specialize in finding buyers and sellers of private businesses, just like real estate agents match buyers and sellers of property.
But for people who don’t want to buy an entire company, the last option, of course, is to buy -shares- in a business.
When it comes to buying shares, most people naturally tend to think about the stock market.
The shares of large companies traded on major stock exchanges are extremely liquid; it only takes seconds to buy or sell shares of Apple.
Conversely, if you own 5% of a local sandwich shop, those shares are harder to liquidate.
The benefit is that shares in private companies tend to be MUCH cheaper.
As an example, I wrote a check for $1.5 million to purchase the Australian company I mentioned.
It makes that much in a year.
So the effective price was basically 1x annual profit (or a “P/E ratio” of 1), meaning my money is recouped in a year.
Large companies traded on major stock exchanges tend to have irrational valuations.
Consider Netflix, whose stock price is valued at 360 times its yearly profit.
So Netflix investors theoretically have to wait three centuries to recoup their investment.
This difference is phenomenal… and that’s why I generally tend to stick to private companies: you can get much more VALUE for your money.
There are exceptions, of course.
Just like a public company’s stock can sell for an absurdly high price, it’s also possible to sell for a ridiculously low valuation.
My analysts are always looking for profitable, well-managed companies in hidden corners of the market where the shares are so cheap they’re selling for less than the amount of money the company has in the bank.
It’s very hard to lose money when you’re able to buy $1 for 75 cents.
The great thing about these types of investments– cheap, undervalued shares traded on public exchanges, is that they’re available to ANYONE.
You just have to be willing to do the work to find them.
Later this week I’ll show you how my team spots these investments.