“It’s precisely when people can’t see what it is that could make things turn down that risk is highest, since they tend not to price in risks they can’t see.”
– Howard Marks
The quote above is from Oaktree Capital’s latest investor memo, written by the legendary Howard Marks. His memo’s are mandatory reading for anyone with investments in equities, debt, property or any other asset class and he is one of the greatest investment minds on the planet – when he speaks, you listen. His latest piece there they go again… again is a timely reminder of the cyclicality of markets and it really forces you to sit back and consider how many “no brainer” investment opportunities are currently available.
This week I’ve been reading the book The Selfish Gene, by Richard Dawkins. A key focus I have when selecting what book, I will read each week is diversity. Despite advising against it, I find myself following the intellectual journey of Charles Munger, wherein one seeks to understand the big ideas in each of the major scientific disciplines in order to create a “latticework of mental models.” This means that I try and alternate the subject matter of the book I read each week from history, to biology, to physics, to ethology, to psychology as well as reading the more standard investment/finance style literature.
I found the book to be enlightening, albeit difficult at times to churn through. It explores a broad range of ideas centred around his gene-centred view on evolution and how the metaphor of a “selfish gene” can explain survival of the fittest more aptly than group selection style “for the good of the species.” I found the inclusion of game theory and specifically how the prisoners dilemma relates to certain stable points for traits in a population truly eye opening. The book left me with more questions than answers and has inspired me to look at the financial markets in a slightly different way – something that will result in a paper/blog article at some point down the road. It is a marvellous book and I highly recommend it to you.
The stock that caught my eye this week is a little known ASX listed company that is close to my heart – Kip McGrath Education Centres. This Newcastle, Australia based company posted a cracking set of results with EBITDA up ~24% despite a foreign exchange headwind of ~$500k. Excluding the FX headwind, EBITDA would have been up a whopping 50% – and based on the outlook statement, it sounds like the growth is set to continue. Despite posting this kind of growth rate, as well as operating a capital light business model with highly recurring revenues, a fragmented customer base and close to a net cash balance sheet, KME continues to trade on around 10x earnings! It’s worth noting that my family holds a financial interest in KME via our family investment company and my employer is also the second largest shareholder. Full disclosure.
Other stuff I’ve been reading over the week
Another great interview over at Investors Field Guide Brad Stulberg
Connor Leonard from IMC discussing their investment philosophy
The psychology behind FOMO
An oldie but a goodie from Giverny Capital
Seb Evans from Naos on the most important question to ask fund managers
Farnam Street Blog discussing inflection points
GMO’s Jeremy Grantham on Charlie Rose
GMO’s Q2 letter
Transcript from the Sequoia Funds investor day
The Rubicon Stock pickers quarterly letter
Red flags being raised from the FRED’s junk spread chart
John Dorfam on what Graham would be buying in the current market
Q2 letter from Upslope Capital
13 Commandments according to Benjamin Franklin
Until next time, good luck finding those hidden compounders!