Interesting words from the quarterly newsletter at head of equity research at the Guardian Fund. Some excerpts I pasted below.
My take:
Institutional investors have disadvantages and advantages compared to us here.
They can’t be as quick in buying in or exiting positions.
They can’t keep a super concentrated portfolio - not able to hold only purely the best of the best hypergrowth. For example this fund continues to hold SHOP, SEA, ROKU, PLTR, SPOT but also holds NET, CRWD, SNOW.
(The consensus on the board is that the former list of companies are definitely NOT the “best”)
But they can invest in privately held companies (databricks).
Here we see their fund performed largely the same as many of us (but mostly worse, I think) in Q1 2022 at -34% despite a more “diversified” portfolio.
Yet they TREMENDOUSLY underperform in good times!
Guardian Fund:
2020 +52%
2021 +3.27%
2022 YTD -34.21%
Saul:
2020 +233%
2021 +40%
2022 YTD -29%
I think this example shows the advantages of running a super concentrated and nimble hypergrowth portfolio like Saul - but ONLY if you have the stomach for it, this is not a style for everyone, as evidenced by the many trolls who came out of the woodwork the last few months.
In 2022 Q1, the Guardian Fund returned -34.21% (net) while the Knight Tech Fund, our crossover fund that owns private shares in Epic Games and Databricks, was down -28.36%.
The daily quote of listed businesses can be a humbling experience. Since the inception of the Guardian Fund in 2010, we experienced several material drawdowns in the price of the fund. The recent sell-off felt especially intense because it was concentrated in tech while non-tech sectors did well.
The current drawdown invites us to comment about monthly or quarterly prices which would mostly be a pseudo-intellectual utterance of thoughts about macro-economic variables that are impossible to predict. Nobody, not even the Federal Reserve, which has access to more real-time data than anyone, has much visibility beyond a few months.
We will invest in any economic environment based on our vision of where an individual business is headed. Price swings are the mental fee that the investor in public businesses must pay multiple times over the course of a lifetime in order to get attractive returns.
Owning an asset with no daily quote may feel pleasant yet there is no difference as valuations of all assets are influenced by the level of interest rates. We believe that the public equity investor who possesses the ability to cope with price swings has an advantage over the private investor with no appetite for daily feedback. Yet, it is precisely the private mindset that the public investor needs in order to have an investment horizon that provides a totally different definition of risk.
Great businesses are rare and if we find one, we like to err on the side of not selling. What matters is where a business is likely to be in 3+ years. If we are right about the business, then the recent price declines are a minor glitch in a long ascent of intrinsic business values. If our judgment of the quality of the businesses is wrong, then it will take a long time for prices to get back to the levels seen in 2021.
While the market is figuring out what a reasonable multiple is for a thriving business in a world with higher interest rates, the outlook for our businesses remains solid and basically unchanged from how we perceived it in late 2021.
The price of a security should not affect the logic of underlying fundamentals.
We remain focused on the tech field because we think this is where the best long-term investment opportunities are to be found - technology has become the defining field of our era. Consensus has underestimated the earnings power of many leading tech businesses for more than a decade, and we believe that this continues today.
Recent geopolitical events are providing an additional long-term boost to businesses that offer essential cloud and cybersecurity solutions like Palantir, Snowflake, and Cloudflare. The tailwinds driving the earnings power of those businesses are strong. Global cloud spending is estimated to quadruple by 2030.
Wild price swings do affect the relative attractiveness of stocks. After the recent sell-off one would expect to see several no-brainer investments in the tech space and therefore see changes to our portfolio. Yet, this time reallocating capital does not look so obvious to us. The market seemed quite balanced in the way the sell-off happened. While all valuations came down due to lower prices and/or revenue growth, prices of the ‘AAA quality’ B2B software businesses like Cloudflare, Snowflake, Adyen, and Crowdstrike, stayed relatively stable compared to the high-quality more consumer-oriented platforms like Roblox and Spotify that deserve a slightly lower valuation.
We feel that the most ‘undeserved’ rerating happened in some of the ‘commerce covid winners’ like Shopify. We see an asymmetric return which is also driven by the fact that our horizon is simply longer than that of most market participants.
Over the past few weeks, we have constantly been thinking about how we could opportunistically take advantage of relative price volatility. In the end, we largely own the same businesses as in December 2021.
The lower valuations of listed tech businesses are gradually spreading into the private market as price discovery happens when companies need to raise funding or seek a public listing. Although we think that buying more shares of Databricks at the valuation of the last funding round would still result in a good return, we are now focused on public equities because prices here are more attractive.