Investor Summary
Fund Strategy
FUND PERFORMANCE AS OF 30th September 2023
| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | 0% | 0% |
| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | 0% | 0% |
This philosophical letter explores what it means to be a true fiduciary, arguing that advisors must optimize for long-term duration rather than short-term returns. The manager critiques the current market focus on the Magnificent 7 tech stocks, noting that while these are exceptional businesses, they trade at rich valuations and history suggests betting on the biggest companies has been a losing proposition. Using mathematical examples, the letter demonstrates how modest but sustainable returns compound dramatically over long periods, far outpacing unsustainable high returns. The manager warns against herding behavior and chasing market excitement, from AI to previous bubbles in cannabis, crypto, and dot-coms. Instead, the focus should be on businesses with measured growth, sustainable margins, resilient balance sheets, loyal stakeholders, and managerial continuity. The letter emphasizes that true fiduciary duty means helping clients achieve good long-term outcomes even at personal expense, requiring patience and discipline to capture the awesome inevitabilities of compounding over time.
True fiduciary responsibility requires optimizing for long-term duration and compounding rather than short-term returns, focusing on sustainable business characteristics and patient capital deployment rather than chasing market excitement and momentum.
The manager emphasizes focusing on long-term duration over short-term returns, suggesting that sustainable business characteristics like measured growth rates, resilient balance sheets, loyal stakeholders, and managerial continuity will drive superior long-term outcomes through the power of compounding.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Oct 30 2023 | 2023 Q3 | AAPL, AMC, AMZN, GOOGL, HD, META, MSFT, NVDA, TSLA | Compounding, duration, Fiduciary, technology, value | - | Farnam Street's Jake argues that true fiduciary responsibility means optimizing for long-term compounding rather than chasing short-term excitement. While acknowledging the Magnificent 7 as exceptional businesses, he warns they trade richly and history shows betting on the biggest companies typically underperforms. Focus should be on sustainable business characteristics and patient capital deployment. |
| Jul 19 2023 | 2023 Q2 | CVX, LOV | Capital Allocation, contrarian, energy, Post Mortem, small cap, value |
CLOV CVX |
Farnam Street demonstrates contrarian value discipline through detailed post-mortems of Chevron win and Spark Networks loss. Chevron generated 127% returns by buying during COVID oil crisis but was sold due to poor capital allocation. Firm seeks obvious opportunities in uninvestable situations while maintaining strict analytical discipline and understanding price-implied bets. |
| Apr 14 2023 | 2023 Q1 | - | Defensive, Investment Philosophy, Principles, Resilience, risk management, Value Investing | - | Investment advisor outlines defensive value principles during market volatility from rates, inflation, and banking stress. Emphasizes buying productive assets at right price with margin of safety, maintaining financial resilience over optimization, and avoiding speculation. Advocates patience and cash preservation as option on future opportunities while staying within circle of competence. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2023 Q3 |
AIThe letter discusses artificial intelligence as part of the recent market enthusiasm, comparing it to historical technological revolutions. The manager suggests that while AI may supercharge incumbents, history shows that technological revolutions typically see today's hot tools become tomorrow's commodities as capitalism competes away excess profits. |
Technology Innovation Disruption Competition Incumbents |
BuybacksStock buybacks are mentioned as one of the short-term focused strategies that CEOs employ to boost returns quickly. The manager criticizes buybacks at whatever price as a practice that hollows out cash balances when executives are focused on short-term gains before moving on. |
Capital Allocation Management Short-term Cash Returns | |
| 2023 Q2 |
OilManager executed successful contrarian investment in Chevron during COVID-19 oil price collapse, buying at $76 and selling at $150 for 127% return. Thesis based on capital cycle theory and belief that oil demand would normalize after temporary disruption. |
Energy Contrarian Cyclical Commodities ESG |
Capital AllocationPoor capital allocation led to exit from Chevron despite strong operations. Management spent $14 billion on buybacks at $421 per share while average price was $142, with $5.3 billion in stock-based compensation undermining shareholder value creation. |
Buybacks Management Stewardship Value Creation | |
| 2023 Q1 |
ResilienceManager emphasizes defensive positioning and financial resilience as core principles. Advocates for spending less than you earn, maintaining realistic lifestyle expectations, and selecting resilience over optimization with survival as the supreme goal. |
Defense Safety Survival Conservative Risk Management |
ValueStrong emphasis on buying at the right price to gain margin of safety. Manager advocates for businesslike investing, focusing on intrinsic value based on cash flows rather than speculation or momentum trading. |
Margin of Safety Intrinsic Value Cash Flow Discount Price |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Jul 1, 2023 | Fund Letters | Farnam Street | CLOV | Spark Networks | Communication Services | Interactive Media & Services | Bear | NASDAQ | acquisition target, Dating Apps, Interactive Media, Management turnover, Niche Brands, revenue decline, small-cap, turnaround | Login |
| Jul 1, 2023 | Fund Letters | Farnam Street | CVX | Chevron Corp | Energy | Integrated Oil & Gas | Bull | NYSE | capital allocation, Capital Cycle, contrarian, Cyclical, dividend, energy, inflation hedge, Oil & Gas, Peak Pessimism, Value | Login |
| TICKER | COMMENTARY |
|---|---|
| AAPL | Apple is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. |
| MSFT | Microsoft is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. |
| AMZN | Amazon is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. |
| GOOGL | Alphabet/Google is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. |
| NVDA | Nvidia is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. |
| TSLA | Tesla is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. The letter also notes Tesla's stock averaged 200 million shares of daily average volume in February 2023, more than $40 billion worth trading every day on a $600b market cap, with more than 5% of the company shuffled around every single day. |
| META | Meta/Facebook is mentioned as part of the Magnificent 7 mega-tech stocks that are exceptional businesses with unique advantages and massive scale, but trade richly due to their historical successes. |
| AMC | AMC is referenced as an example of market excitement in summer 2021 when the theater chain tripled in price, contrasting with how few market participants could tell you that Home Depot had returned 140x over thirty years from 1990-2020. |
| HD | Home Depot is cited as an example of long-term compounding, having returned 140x over the thirty years from 1990-2020, while everyone was watching the excitement of AMC tripling in price during summer 2021. |
| Ticker | Put/Call | Amount Bought | Shares Bought | % Change | Weight % |
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| Ticker | Put/Call | Amount Sold | Shares Sold | % Change | Weight % | Status |
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| Industry | Prev Quarter % | Current Quarter % | Change |
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