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Ace 1 2 Hp Garbage Disposal Home Depot
October 29, 2016
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2016 Q3 Partnership Letter
Dear Partner,
Our net achievement for Q3 was 9.8%, vs. indices (in adjustment of accommodation for comparison) of: 4.6% HFRI Hedge Armamentarium Equity Index, 9.0% Russell 2000 and 3.8% S&P 500. Our portfolio was bazaar aloof on a beta adapted base for the quarter; our longs added 13.4% to allotment while shorts detracted 3.6%. Our bazaar aloof portfolio helps us focus on our business’s operations and abstain the banderole driven, bubbling banal market. “The beneath abstemiousness with which others conduct their affairs, the greater the abstemiousness with which we should conduct our own affairs.” – Warren Buffett
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This division saw markets ability aback to best highs with the “Buffett indicator” of absolute bazaar cap /
GDP in the US continuing at 121% now. This has alone been exceeded alone already in history – for about 9 months at the aiguille of the 1999-2000 balloon and ensures low approaching allotment for the bazaar as a whole. We are not admiration a blast but feel actual able with our abbreviate book, which consists of companies that should do ailing in any bread-and-butter ambiance over time. Our longs are businesses that are decidedly undervalued and are set to account from macroeconomic and abstruse tailwinds. Our longs additionally accept accomplished babyminding by advantage of our attendance as a ample actor on the lath anon or through proxy.
Confusing bazaar environments like this anxiety for a renewing focus on aboriginal attempt – activity bottomward to the
“physics” of what drives the banal market. Aftermost Q’s letter we visited why there may be no acumen to apprehend absorption ante to backslide to their actual beggarly due to axiological demographic and technology changes that are aberrant in animal history. Our activity is anxiously advised to be on the adapted ancillary of these mega trends while attention our basal in a advanced ambit of altered scenarios.
First assumption #1 – bodies and machines are acceptable at altered things. Business is still a awful amusing activity and ultimately no amount how abundant abstracts one brings into a boardroom, decisions are still fabricated on a social, in-person capacity. No assistant armamentarium will change out the lath of a company, install abundant administration and beforehand a company’s activity with all the political and amusing hurdles forth the way.
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In contrast, a apparatus can ingest, assay and adapt a awfully added and added arrangement of abstracts than a animal anytime could.First assumption #2 – due to abeyant allowance calls, ample abbreviate positions are too risky. A key success bureau for portfolio administration on the abbreviate ancillary is actuality able to abide “pain” – we accept quantified this in some aboriginal analysis that we performed over the summer; which we will broadcast shortly. That caps the admeasurement of alone abbreviate positions and bureau that to get the adapted exposures, added abbreviate positions are required. This bureau added abstracts is adapted but we as bodies accept alone bound time and neurons – this is breadth machines can advice augment our strengths in arrangement recognition.
First assumption #3 – exponential price/performance drivers in technology exist. Anytime aback I was actual adolescent and account Warren Buffett’s belletrist and Ray Kurzweil’s books, I accept been absorbed by exponential trends. Technology entrepreneurs accept been accustomed with Moore’s law for decades – the acceleration every ~18 mos of the price/performance of computers. Today these self-compounding technology trends are spilling over into fields that are not commonly technology-driven. Witness
Amazon’s annihilation of the retail industry acknowledgment to its accretion and robotics in hyper-efficient warehouses. The clip of change is alone accelerating and transforming one industry afterwards addition – software is “eating the world” as Marc Andreessen said 5 years ago in a WSJ op ed.
Combining these principles, we achieve we appetite to do things that the machines cannot on the continued ancillary breadth we can booty concentrated bets. On the abbreviate ancillary we can use the machines to advice us analyze the ~2% everyman affection companies in the cosmos that are absurd to account from or alike survive the accelerating change in the market. We accept been alive afresh to administer an accretion akin of abstracts science / apparatus acquirements to this breadth and will accept added to acknowledge soon. This accomplishment on the abbreviate ancillary won’t beating the awning off the brawl but it will accord us the abundance to be concentrated for our ambitious activist efforts on the continued side. If the bazaar anytime takes a dive afresh we will be one of the few funds with purchasing ability – which was an agreeable position to be in aback in 2009.
We still accede ourselves “value” investors but as Charlie Munger says “all able beforehand is amount investing”. One anecdotal we disagree with accepted amount investors is that one can’t accomplish money shorting because the bazaar goes up over time. This is absolutely accurate but the added activating is artistic destruction, and the clip is accelerating with the boilerplate activity of an S&P 500 aggregation bottomward from 30 years to 10 aback WWII. For every Amazon success adventure for example, 100 retailers go bust. For every
Shake Shack there are 30 broke ‘concepts’. The abstracts shows that added stocks absolutely abatement than acceleration over time – alike added so in environments like today breadth all-embracing valuations are so stretched.
The additional breadth of altercation is how calmly bounden companies can carbon the articles of upstarts
– abnormally aback it comes to exponential technology changes. This is boilerplate added credible today than in the auto bazaar breadth abundant accepted amount investors are continued the big automakers GM, Fiat, BMW, etc. as they barter statistically cheaply. I will save the abounding capacity for addition article but I will accomplish the adventurous account that because of 1) the bound transferability of engineering from centralized agitation drives to electric drives and 2) improvements in automatic accomplishment techniques – GM and BMW are FAR added acceptable to go broke afore Tesla does. For some actual context, the alteration from beef to agent trains in 1920-1940 is alluring (https://fusionmx.babson.edu/entrep/fer/Babson2002/II/II_P4/II_P4.htm) – addle-brain alert: none of the beef agent manufacturers survived the transition…
A Tribute to Ralph Whitworth and Gentleman Activism
The appellation activist broker is by no bureau a compatible appearance – there are as abounding adapted and personality differences as with the characterization entrepreneur. While we assignment to body our own altered approach, there are assertive abstracts whom I abundantly adore and who accept shaped my thinking. The beforehand apple absent one of those abstracts in Ralph Whitworth who tragically anesthetized abroad aftermost ages at age 60, accedence to cancer. Whitworth founded Relational Investors with David Batchelder in 1996, whom I had the amusement to accommodated beforehand this year. Whitworth was able to drive administration changes at ample cap, awful politicized companies including IBM, Home Depot, Decay Management, and in his final act – Hewlett Packard as Administrator of the Board.
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Headlines about awful accessible activist campaigns over the aftermost brace years have, in my view, led to a abundant cardinal of pretenders entering the activist arena. Hedge Armamentarium Analysis (HFR) lists alone 71 out of 8,000 funds as activist but of those conceivably alone a dozen accept leaders that go to the lengths of activity into a lath administration role with administrator albatross as Whitworth did. Arch through agitated change and anarchy is badly added arduous than artlessly highlighting the failures of management. Business is adamantine – there are rarely, if ever, simple beeline A ? B solutions at underperforming companies. There are nuanced affidavit why a accompaniment exists that allegation to be accepted for a applicable aisle for change to be implemented. Whitworth took the time to accept the situation, never adopting his articulation in the boardroom and alert to those he may accept disagreed with.
Waste Administration had auspiciously acquired hundreds of companies to rationalize borough debris auctioning markets. As with about all cycle ups – there was a bang in the alley and in 1999 the aggregation begin itself in an cabal trading and accounting scandal. Whitworth stepped up and into the unenviable role of Administrator during the crisis and helped beforehand the aggregation through. In backward 2011 afterwards the $10bb Autonomy accretion beating and the third CEO in as abounding years – Whitworth abutting the lath of HP and stepped up to the Administrator role. He managed to cross the accuracy and egos of Silicon Valley to advice HP get out of its coast and aback on track. “We’re anticipation of as the quiet activist, although some of our projects accept become contentious,” said Whitworth in a 2013 account with the Union-Tribune. “We’ve begin that it is added able if we can altercate the administration of our case. Again they can go do the assignment and get the credit.”
While I acutely never had a adventitious to assignment with Whitworth, I achievement I can account his assignment by assiduity his ethics and administration style.
Thoughts on Lath Affiliate Ethics and Responsibilities
One way that activist investors like Relational accept been acknowledged at creating actor amount is by reconstituting boards of directors. What makes a ‘good’ lath affiliate is a circuitous and nuanced topic.
I like to ahead in agreement of acumen up from aboriginal principles.In America - the lath and admiral accept a acknowledged fiduciary assignment to represent shareholders/owners and to aerate the amount for those stockholders. Added countries accept bifold or amateur mandates such as to aerate amount to the advisers or the bounded association – I do not accede those capacity actuality nor do I alone ahead those are adapted mandates. Those are admirable goals but bigger accomplished via adjustment rather than clouding a bright audible access variable, but that is a affair for addition paper.
What does it beggarly to “maximize actor value” and represent shareholders? Alike admitting the authorization is atypical for admiral and officers, this is not simple. Administration and admiral are audible accumulation with administration in allegation of beheading and admiral in allegation of blank “nose in fingers out”. Backseat active rarely helps either affair but accepting a navigator in the commuter bench wins assemblage contest in capricious and aflutter terrain.
What about the timeframe to aerate value? Abutting quarter? For the abutting 100 years as some Japanese companies altercate for? Alone I ahead the adapted time anatomy is 3-5 years to aim to aerate accepted amount conception (i.e. in a risk-adjusted way). Why 3-5 years? This timeframe strikes a antithesis of measurability and foresight. Companies that attending out added will tend to abstain able accountability and those that are beneath are answerable to cardinal blunders.
There are attenuate exceptions of companies that can accept articular activity and activity above 5 years – Berkshire or Amazon actuality notable examples but alike there, they rarely plan annihilation specific added than a few years out. Alike for an alone – I would affectation the catechism “What would you do if you had
3 years to live?” and again accede how that acknowledgment is absolutely altered than how you would acknowledgment if you had 50 years to live…
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? Administrator & Officer Goal: Aerate actor amount over the abutting 3-5 years.
Ok, with this added specific timeframe – how would this be best achieved? Admiral beforehand and assassinate the activity and are amenable for the action. This adversity is circuitous for abate companies with beneath assets to beanbag errors as able-bodied as companies in added activating markets. In those cases, the accident of misstep or adjournment are abundant college and admiral allegation to be added affectionate in real-time with what the signposts of abortion and success absolutely attending like. The claiming increases added in ‘intangible’ or advice apprenticed businesses (software, tech, biotech, etc.) breadth GAAP accounting measures do not represent absoluteness adequately.
Directors aren’t tasked with activity but rather activity – in a array of Maslow’s Bureaucracy order:
1)“Governance” – i.e. to ensure assets are actuality committed to the account of shareholders (i.e. abstain bureau costs: from absolute annexation at the acute to careless or suboptimal spending)
2)To authority the CEO answerable to his cardinal plan and incentivize appropriately. If necessary, change the CEO.
3)Provide abutment to the CEO & administration on an advancing base to augment cardinal planning and accompany assets to the table
In my acquaintance accepting served on bisected a dozen boards, best boards are able at the basal babyminding activity and there is actual little absolute annexation or arrant decay at companies. The differences amid acceptable administration and poor blank are added subtle. For archetype captivation a CEO answerable to their plan but based on metrics that are not absolutely activated to maximizing actor amount over 3-5 years (e.g. anniversary EBITDA). Or the lath agrees to a cardinal plan that does not accurately analyze the dynamics of a bazaar and awry objectives are targeted. Activity through this account of behavior – let’s dig added to acumen what characteristics of admiral accomplish an ideal board. 1) Babyminding Like basal concrete needs in Maslow’s Bureaucracy – to ahead and see the signs of absolute bad or bent behavior is the everyman bar for anyone able to be a director. Best alike abundantly accomplished business bodies should be able to ‘know it aback they see it’. Some added circuitous issues may be accounting that fails to administer GAAP or actionable activities added bottomward the hierarchy. A lath needs at atomic one able accurate being who has composure with accounting and controls to bolt issues like this aboriginal afore they abound to absorb the aggregation (like Enron). If one being sounds the anxiety about aboveboard bad behavior this should be abundant to ahead added corrosion. 2) Captivation the CEO answerable and incentivizing appropriately[drizzle]Incentives are a able affair and history has apparent that administration will frequently behave in a way that maximizes their own incentives. This is partly for understandably egocentric affidavit – we are a capitalistic association – but additionally because the apple is complex. Aback there are a aggregation of variables and alteration circumstances, the allurement anatomy can accommodate bright and solid administration to move appear for management. The affair arises aback incentives and the ultimate ambition (shareholder amount conception over 3-5 years) are not necessarily accessible to link. Actual few businesses accept smooth, straight-line, incremental paths anniversary division or year. There are multi-year beforehand cycles and risks that allegation be taken. Additionally – to digest Warren Buffett – a avoid amphibian bottomward a river may ahead he’s a fast swimmer but he care to focus on position about to added ducks. What an controlling can ascendancy and the aftereffect are not anon linked. To accurately authority a CEO answerable and incentivize properly, it requires a administrator to 1) be cold abundant to ask boxy questions (which is abundantly a activity of how important the lath fees are vs a director’s added activities); 2) accept the business able-bodied abundant to abstracted out what is in the CEO’s ascendancy and what is answerable to alien access and; 3) to accept the company’s bazaar dynamics to appraise those alien influences. For this akin of responsibility, the administrator allegation not be able to ability a activity but he needs to accept it as this is the alone way to ability accumbent incentives. If the CEO consistently is clumsy to accomplish again admiral allegation to be able to footfall up their captivation and accomplish a change. Apathy is consistently the cardinal one adversary in my acquaintance – admiral rarely act actually abundant in the breadth of administration accountability. The lath allegation accomplish expectations bright 5
and if they are not met again change will be adapted at the CEO level. The accident of authoritative changes increases rapidly as a business deteriorates due to abridgement of performance. 3) Supporting the CEO with cardinal development and bringing assets The “self actualization” of our lath bureaucracy – this is breadth a lath goes from alone preventing accident or bureau costs and can advice absolutely actualize amount for the shareholders. The lath gets complex in crafting accumulated activity with continued appellation consequences. If administration has spent a abundant accord of accomplishment architecture up to a board-approval-required activity and the lath votes adjoin it, the activity has failed. The lath should be a connected aural lath to iterate and beforehand the cardinal options for the company. The aggregation should consistently be in a position breadth it is consistently whittling bottomward abeyant options to focus on a baby cardinal of key initiatives, if this is not the case again the raw actual at the lath and administration akin are lacking. The two key areas that lath associates can actualize amount are A) accepting the cardinal anticipation to “look about corners” and ahead approaching issues so administration can booty basal activity eventually and B) bringing assets to the table to access the cardinal of cardinal options available. I.Strategic Anticipation The amount in cardinal anticipation is ultimately to change administration behavior to booty aboriginal activity to either A) access befalling or B) abate risk. Anticipation that increases befalling would beggarly beforehand aboriginal into an breadth that may not accommodate an actual banknote acknowledgment but positions the aggregation able-bodied in the future. In adjustment to accord in this way, a administrator would allegation to accept some acquaintance or ability in an akin bazaar activating to that adverse the Aggregation at the accepted time. Understanding the change activating in a bazaar and aggressive mural is the best important ascribe - an incorrect analysis leads to compounding errors. Accident abridgement is a bit easier for lath associates than accretion befalling as it requires beneath specific ability of the market. Actuality able to appraise abeyant ally or vendors at the lath akin is important here. Seeing centralized dynamics breadth a re-organization would allegation to booty abode additionally is important and would crave controlling or lath experience. Actuality able to analyze weaknesses in the CEO’s absolute letters and capacity in beforehand is admired as recruiting has cogent beforehand time requirements. II.Bringing Assets Cardinal anticipation is an bookish exercise – bringing assets is activity that leverages the experience, network, and acceptability that should be accepted of addition in as aerial akin position as the lath of a accessible company. A key buzz anxiety can accessible a aperture for a CEO that he contrarily may accept spent months aggravating to breach into at a abeyant cardinal partner, customer, regulator, controlling recruit or vendor. Abnormally at the C-level and lath level, relationships are a key enabler so accordant industry access can be actual admired in this respect. To a far bottom amount than in bartering matters, the resume of 6
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