Consorcio Ara (Mexico: ARA)
Western companies re-thinking their China-dependent supply chains post-Covid
Mexico is the best combination of low labor costs, low risk, near shore capabilities for North America
30% of Mexico's GDP is US-exports
Mexico has 130M people and population is growing at 2x the rate of the US population
The average age in Mexico is 29
Mexico has been building 90% fewer homes than the US, and needs at least twice as many
Long-term driver of home prices is land value, of which Consorcio Ara already owns 10 years worth of land they can develop
Company has been around for 45 years and is unlevered
There is c. 150% upside if it only traded up to book value
If it got more aggressive with it buy back right as the Mexican housing market soars, it could go up multiples of current share price as profits soar and company potentially starts to trade at a premium to its book value.
Mexican Stock Exchanges (Mexico: BOLSAA)
All-time great business model
Needs for equity and debt issuance will continue to grow as Mexico develops
Trading at a substantial discount to e.g. ICE and other exchanges
Portfolio construction
10-15 names
No leverage
No effort to manage volatility
Deep dive research to invest for the long-term
Look for long-term low downside, uncertain upside — e.g. unique buinesses or assets, something that is misunderstood, capital constrained, off the radar, etc.
Of 10 names: 2-3 disappoint, 2-3 go nowhere, 2-3 do well, 2-3 go lights-out and drive performance in a power-law dynamic
Hold for months-years
Try to fit investing style to match personality strengths and steer around weaknesses
Writing as a source of alpha
- Serves as a catalyst
- Allows for feedback
- Can give a sense of where the market is
- When you share into the system, people share back
Investing as a game
- The best investors view investing as a game
- There are many ways to win the game
- Many great investors play games (Buffett > Bridge, Marks > Cards, Thorpe > Blackjack, Einhorn and many others > poker, Tobi Lutke > Factorio)
- Playing games helps one practice decision making, dealing with uncertainty, thinking, making mistakes, improving how they think about things, dealing with imperfect information, the role of luck, etc.
- The investing game has changed > used to just need an information or analytical edge and you could outperform. Now with infinite information, analytics and hugely deep markets those strategies have mostly been arbitraged away
- Those "old" skills are no longer the key factors...most video games are open ended and have multiple ways to win...learning how to find a successful path through many possible paths is great training
- Games can/should match personality e.g. Aaron likes turn based strategy games e.g. Civilization, Advance Wars (reboot on Switch in Dec 2021), Fog of War
Nintendo thesis
- Historical boom/bust console cycle
- Saw Nintendo merge mobile + TV + joycon capabilities into Switch, and openly admire Apple
- Digital world is transforming Nintendo as a company...happening over the very long term...now offering subscriptions (e.g. NSO), digital game sales, downloadable content (DLC)
- Thesis is that the console cycle will smooth out...will upgrade your Switch every few years but keep your games and content...more like iPhone..."we are not at peak Switch"
- Has some of the best IP bar-none, and it is dramatically under-monetized
- Working on improving this in a very Japanese way...
- Have c. 25% of market cap in cash, own 50% of Pokemon company, 20% of Niantic (leading AR firm)
- So, buying for 9-10x earnings and long runway for IP monetization and much higher level of profitability and smoother revenue cycles
- Switch Pro can't come this year due to chip shortages
- New Switch is sold out, but "Switch is at peak earnings"...
Cannabis
- Initially dismissed...then realized how big the opportunity is in the health and wellness space, especially overlaid with opioid crisis
- There are many ways to use for health and wellness e.g. insomnia, aches/pains, PTSD, strong addictions, epilepsy, how we've allowed alcohol to get a free pass in society but restricted cannabis (started for industrial reasons since cannabis was seen as competitor, then became a political issue to drive voters along racial lines)
- The market is much larger than you think...existing $100B market (most illegal)
- Current state-legal sales projected at $25B next year
- Have found that workers comp claims go down when medical marajuana is approved — because people are otherwise using far more potent things to medicate (that are more dangerous)
- VERY little institutional involvement...about 4%
- Very clear long-term trend...state after state legalizing...will eventually join passive indexes, etc.
- Age-related issue...below-60's "get it"...but above 60's run the Federal government
- Mitch Baruchowitz: "It is being normalized faster than it is being legalized." >> legal market is eating the illegal market
- But capital constrained, limited access (e.g. institutional custody etc.)...Tilray (Canadian Co.) can trade on NYSE because legal in Canada, but very high quality US-based companies cannot yet trade on US exchanges
- Thesis: Unlevered companies trading at single digit cash flow multiples...once Federally legalized can uplist to US exchanges, and are growing at 25-50% per year, with 30-40% EBITDA margins, with high regulatory barriers, and because such little institutional involvement there's no research etc. "It is wild how few generalists are involved"
- "I don't mind waiting...I know what will happen, and will make money when it trades on the NASDAQ."
- See Verano Holdings...see 2x ETFs
- Own a basket of names...basically unlevered, wonderful businesses, AR Wellness, Verano Holdings, ...
- "A wall of money is eventually coming"
Main worry: as long as interest rates stay low, we're fine...
Great time to invest...just not in the top 200-300 companies
Where have you made your biggest mistakes?
- Betting on the timing of a given catalyst or event
- Betting on a future for which there is no evidence (yet) that it's here
How do you think about selling?
- Mix of qualitative and quantitative
- Get very worried when everyone is agreeing with me
- When there are much better reinvestment opportunities
- If a company is working and there is a long road to reinvestment and growth, you want to keep owning it
Summary notes (from John)
- So much capital has flowed into top large cap names (50% of market is passive, plus major narrative is major trends and companies continuing to grow, plus some aspects of tech shifting from growth stocks to quasi-value stocks) that large end of the market is relatively less attractive
- What has been neglected becomes more and more attractive
- This is where skilled capital allocation can potentially add the most alpha
- A modest-sized basked of neglected names that are wonderful companies riding wonderful trends into "inevitable" futures are likely to do very well over the coming decade
- It is a competitive advantage to be a generalist with an open mandate
- It requires intellectual leverage / levered cognition to scan, choose and track
- The best play might be concentration in the best names of neglected + inevitable themes vs. more concentration in specific names