Mutoro Group Partners, LP
“That summer he came home and visited with his boyhood friend Mark Fredland and told him he had found the key to success: It was in being organized; the more organized you were at all times, the more you knew at every minute what you were doing and why you were doing it, the less time you wasted and the better a coach you were.” – David Halberstam on Bill Belichick
“I was lucky to come off no worse than I did. None of this would have happened if, as I wish I had done, I had asked myself beforehand, ‘If you do this, what do you want to happen?’ and ‘If you do this, what do you think will happen?’ I wouldn’t have liked either answer. These two questions became valuable guides for me in the future.” – Ed Thorp
"Common sense is not a simple thing. Instead, it is an immense society of hard-earned practical ideas, of multitudes of life-learned rules and exceptions, dispositions and tendencies, balances and checks." – Marvin Minsky
Dear Partner,
Since our partnership began making investments at the beginning of 2015, we have tended to look for businesses that have three characteristics. While these characteristics suggest a quality hunting ground for business’s worth owning for the long run, to be clear, they are not the only characteristics for which we search. The journalist Justin Fox has a very shrewd quote on this topic; I began this letter last year by quoting it: “You shouldn’t buy a company’s stock because you like its prospects; you should buy it because you think the current market price is lower than those prospects warrant.” I agree with that thought. That said, I have had much more success as an investor buying the stock of great businesses available at prices below what their value warrants than I have buying the stock of horrid companies available at relatively more attractive discounts relative to their value.
The three principle characteristics we look for are as follows. Companies we like to own tend to be (1) highly cash generative; (2) the dominant or a key player in their industry (whether that industry be local, regional, or global and whether that industry be small or large); and (3) priced such that the probability and payoff of making an investment far exceeds the likelihood and loss from doing so.
Last year, we added four holdings fitting this description, each of which had seen its share price drop dramatically either in tandem with the broader market or for reasons particular to the company. We have added two new positions early in the first quarter of this year. They are Companies K and L. Company L meets the above criteria for what we find attractive in an acquisition, it being highly cash-generative, dominant, and priced at a discount. Company K is of a different sort. I would be delighted to find more investments like it.
While Company K is cash generative and, at the time of our purchase, priced at a discount to my estimation of its fair value, it is not currently a dominant business. Unlike nearly all of our other seven holdings, it is in a highly fragmented industry. It is also at the vanguard of consolidating that industry. As such, this company, which today is small and not covered by mainstream press or many investment analysts, seems poised for future market dominance and the attendant cash flows this typically brings. I hope to buy more businesses like this, which today are in the early stages of planting the seeds of their future leadership. To this end, I have a small shopping list of such companies. Company K was on this list. I first learned of Company K in the summer of 2017, though I did not find it available at an attractive price relative to its value until the beginning of 2019. Because it is a small-cap company and its publicly traded stock is illiquid, I had trouble buying more of it at the prices then available.
The exhibit below displays our portfolio composition at quarter-end. We completed the quarter with a cash balance of 48.3%. For your reference, cash as a portion of our total portfolio was 56.7% at year-end and 76.5% one year ago at the end of the first quarter of 2018:
Portfolio Holdings
Our lowered cash balance reflects investments in new opportunities but remains at relatively high levels versus most of our peer funds. Should market prices tumble again as they did in the fourth quarter of 2018, which featured the S&P 500 temporarily entering its first bear market in over a decade, I think we would have a lower probability than others of being caught flatfooted. Our cash, habits, and attitude allow us to take advantage of discounts available in such a scenario.
For the first quarter of 2019, the Fund finished up 9.53% net of fees and expenses. In my Full Year 2018 letter, you might remember I mentioned how Company G had contributed the most of any of our holdings to the temporary loss we posted for the full year. I have previously described Company G as “a holding company for several leading digital brands that sell online recurring subscriptions in what is a relatively nascent market but an evergreen field of human activity.” I described it at length in my Q2 2018 letter, and you can see my original investment thesis on the business in the addendum to this letter. Company G declined 24% during the fourth quarter alone. I wrote at the time, “Despite its share price fluctuations, the underlying business [of Company G] continues to increase its earning power.” Since then, Company G has risen 32% off its year-end pricing and well above our cost-basis for the stock of the business.
Thank you for your partnership and confidence. Should you have any questions or comments, please feel free to email me or call. This coming weekend, I will be attending the 2019 Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska. I would be delighted to meet up for a meal or coffee if you plan to be there as well.
Sincerely,
Godfrey M. Bakuli
Managing Partner