1 question to reflect on
The result of last week's question: It seems most of you at the minimum have one sort of monopoly in your portfolio.
This week’s question:
The problem is, that one can keep analyzing a company and its market for hours and hours. How do we decide when enough is enough?
2 quotes, do you agree?
“I think generally people’s thinking process is too bound by convention or analogy to prior experiences. It’s rare that people try to think of something on a first principles basis. They’ll say, “We’ll do that because it’s always been done that way.” Or they’ll not do it because “Well, nobody’s ever done that, so it must not be good.” But that’s just a ridiculous way to think. You have to build up the reasoning from the ground up—“from the first principles” is the phrase that’s used in physics. You look at the fundamentals and construct your reasoning from that, and then you see if you have a conclusion that works or doesn’t work, and it may or may not be different from what people have done in the past”
Elon Musk
I love first principles. The only drawback is that it takes time and makes my head hurt after a while. The best article ever written on this topic is by Tim Urban titled: The cook and the chef.
The cook has a recipe that outlines ingrediënts and instructions and can replicate this to perfection. Let’s say you’ve read all you can on quality investing and want to replicate Polen Capital’s process. ⬇️
Or maybe you’re more into microcaps and are looking to mimic Paul Andreola’s strategy. ⬇️
Nobody said being a cook is easy. The goal here is not to diminish the value of a great cook. Executing an investing strategy to perfection is hard. But a cook does not necessarily use first principles.
Now this first principle fancy is nothing new. It has been around for centuries ⬇️
“In every systematic inquiry (methodos) where there are first principles, or causes, or elements, knowledge and science result from acquiring knowledge of these; for we think we know something just in case we acquire knowledge of the primary causes, the primary first principles, all the way to the elements. It is clear, then, that in the science of nature as elsewhere, we should try first to determine questions about the first principles.”
Aristotle, Greek Philosopher born in 384 BC
So we arrive at the chef. The chef is the one who creates the recipe. His ability to reason from the ground up leads him to a ‘new’ strategy, to think independently and arrive at his own conclusions.
Do you believe there are any ‘original’ strategies left in the investing world?
I believe anyone who has read the article on the chef and the cook would like to be the chef. And I too try my best to think from first principles by analyzing a company. Our main goal is to think independently and come to a conclusion with the least amount of outside influence possible.
But if you can be a cook, and stick to your strategy (and avoid behavioral mistakes) you’ll go a long way in the markets…
It’s time for this week’s ideas ⬇️
3 ideas of the week
Kitwave (Ticker: KITW.L)
Category: British roll-up compounded
What does it do?
Kitwave is not your typical food wholesale business. It serves more than 40,000 convenience stores in the UK. It’s a classic example of counter-positioning. Where competitors focus on large-volume, lower-frequency deliveries, Kitwave is a master in high-frequency, low-volume deliveries to small stores. They have a scale advantage compared to smaller competitors.
Why should you care?
Besides their strategic advantages, the company has grown its EPS at a 20%+ CAGR over the last 8 years and has ample room to reinvest its proceeds. Kitwave grows organically and specifically through acquisitions of smaller competitors. Although they have some debt, their interest coverage ratio is good. Margins are slim though as is to be expected in the wholesale food sector.
You can read an excellent deep dive into the company written by Jon Cukierwar by Sohra Peak Capital.
Alarum Technologies (Ticker: ALAR)
Category: Microcap AI play
What does it do?
Their statement:
We are a leading global data provider, empowering organizations to gain a competitive edge by streamlining the collection, extraction, and analysis of large-scale structured data from public online sources
To make it more tangible: Company A wants to do a competitive analysis for their positioning. They need to get data from the web, but anti-bot tools used by certain websites prevent this. Alarum can help them bypass these tools and scrape all that data.
Why should you care?
You might have heard of this company as it has appeared on social media or other networks due to its rapid stock price increase fueled by the AI hype. (A 10-bagger in 6 months). Now that momentum has calmed down, it might be interesting to look at the long-term prospects of this company. The biggest question to answer here is: Do they have a capability that few others can replicate? I do not have the answer to that question at this time.
You can go deeper here written by James’s Substack.
Atkore (Ticker: ATKR)
Category: Mid-Cap Buyback Machine
What does it do?
Atkore manufactures and distributes electrical products like conduits, and cable management systems to other professionals. They have a large distribution network with their transportation fleet. It has a worldwide presence.
Why should you care?
It seems COVID significantly bumped all their financial metrics. Sales have declined compared to 2023, ROIC has come down from the heavens (they had an ROIC of 40%+) and it now sits in the twenties. Pricing has also come down and seems more reasonable (P/E of about 7). This company is a cash generator and uses it to buy back its shares (15% this year) and pay a dividend. If the company can retrieve some growth and keeps buying back at the pace they are, you can nail a decent return.
That’s it for this week.
May the markets be with you, always!
Kevin
Thanks for the article, Kevin.