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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"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."
Farnam Street's July 2023 letter provides detailed post-mortems of one winning and one losing investment to illustrate their investment process. The firm's successful Chevron investment exemplified contrarian value investing during the COVID-19 oil crisis. Purchased at $76 in March 2020 when oil hit negative prices and the industry was deemed uninvestable, they doubled down at $73 and eventually sold at $150 for a 127% return plus 22% in dividends. The thesis relied on capital cycle theory and conviction that oil demand would normalize. However, they exited despite strong operations due to poor capital allocation, with management spending $14 billion on buybacks at $421 per share versus $142 average market price. Their failed Spark Networks investment, purchased at $7.45 and sold at $0.80, demonstrated the risks of betting on acquisition targets with deteriorating fundamentals. The letter emphasizes understanding what you're betting on based on price, seeking obvious opportunities in uninvestable situations, and maintaining discipline through rigorous post-mortem analysis.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
Market Conviction
High conviction demonstrated through concentrated positions, specific entry and exit prices, detailed thesis explanations, and willingness to double down on Chevron. Manager provides exact position sizing, timing, and rationale. Clear decision-making framework with specific criteria for exits.
Growth Outlook
Letter is primarily retrospective with limited forward market commentary. Manager expresses uncertainty about current oil prices in the $70s stating your guess is as good as mine, suggesting neutral to slightly positive outlook but with significant uncertainty.
Risk Appetite
Manager demonstrates selective risk appetite, willing to take contrarian positions in uninvestable situations but maintains strict discipline around capital allocation and business quality. Portfolio consolidation mentioned suggests moderate risk management.
Capital Deployment
Net capital reduction indicated through portfolio consolidation mentioned in January 2023 and exits from both major positions discussed. No new deployment mentioned, suggesting slight de-risking or harvesting mode during the period.
Forward Guidance
Limited forward guidance provided. Manager states they continue looking for obvious opportunities in uninvestable situations but provides no specific deployment intentions or market timing views. Approach remains opportunistic and patient.
Language Signal
Language is balanced between opportunity recognition and risk awareness. Positive language around contrarian opportunities and uninvestable situations is offset by detailed discussion of losses and capital allocation concerns. Overall neutral with slight positive bias.
Perceived Risk
Moderate risk awareness demonstrated through detailed discussion of what went wrong with Spark Networks and capital allocation concerns with Chevron. Manager acknowledges risks of overcommitting to ideas and importance of kill criteria, but not expressing systemic concerns.
Opportunity Density
Manager indicates opportunities in uninvestable situations come along infrequently, suggesting selective and sparse opportunity set. Focus on obvious opportunities implies high selectivity and limited current deployment opportunities.
Time Horizon
Multi-year holding periods demonstrated with Chevron held for 3 years and Spark Networks held for over 2 years. Manager focuses on fundamental business changes and capital cycle theory rather than short-term catalysts, indicating medium to long-term investment horizon.
