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Logos 2016 Letter – “The Worst Start To A Year Ever!”- Everyone – What are “baggers”?

By VW Staff. Originally published at ValueWalk.

Logos LP letter for the year ended December 31, 2016; titled, “Three Year Anniversary.”

“The best thing a human being can do is to help another human being know more.” –Charles Munger

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Charlie Munger

Rupal Bhansali Of Ariel On Non-Consensus Investing

When Matthew and I started Logos LP from our apartment in downtown Toronto, we had no idea it would become the kind of firm it is today. Even before its inception it was only a beta version of a pure alpha strategy we developed in Montreal while studying for the bar exam. Oh how far we have come as our firm today has grown assets over 600% in less than 3 years, all the while providing an outlet to share our knowledge globally.

Nevertheless, we still have the same purpose beyond making money to guide us: To empower organizations and individuals to solve meaningful problems and have the confidence and ability to shape their own futures. In the furtherance of this purpose we have two ambitious goals. The first is to maintain a compounding machine that will create transformative generational wealth for our unitholders over the course of the 21st century. The second is to spread knowledge to assist our community in becoming more thoughtful investors but most of all more thoughtful humans. We are proud to say that we are on track in achieving both these goals over the long-term.

Although this has been a journey with highs and lows like no other, it has been a wonderful 3 years and we are excited to see what Logos LP will accomplish in the next 60 years and beyond. Nevertheless, perhaps more so today than ever before we believe that the only truly reliable source of stability is a timeless inner core and the willingness to change and adapt anything and everything other than that core.

What is our core? Our firm is anchored in the timeless values of trust, integrity, resiliency, lowturnover, long-term stewardship, innovation, discipline and continual learning with regards to our investments and the world around us. If cracks developed in any of these core pillars, our fund and partnership would cease to exist. As we move into our 4th year of operation we remain acutely aware of the need to maintain our sense of self in this chaotic and unpredictable world.

“It is better to understand who you are than where you are going- for where you are going will almost certainly change.” –Jim Collins

That is why we want to thank each and every one of our investors who believed in us from the beginning. Without this encouragement and support, none of this would be possible. You were the ones who believed in our vision and kept pushing us to forge ahead during hard times. No amount of gratitude can be explained by this simple letter, but we want you all to know that we have a deep agape (as the ancient Greeks would call it) that is now entrenched in the soul of the Logos LP brand.

Lessons Learned

Don’t Dabble In Alternatives

Before we get to the fund’s performance in 2016, there are a few things we have learned over the past 3 years that are important for us to discuss. To start we wish to look to a great quote from one of our favorite investors:

“We look for a horse with one chance in two of winning and which pays you three to one.” — Charles Munger

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Charlie Munger

We believe this quote not only represents an investment outlook but an attitude on life. Although we believe our capital allocation strategy has embodied this notion (which we will talk about below) there are a few ideas we have learned about ourselves and the fund since inception.

Lesson #1: Our “Core” Strategy Limits Risk

At a high level, the Logos LP investment process is to use the power of leverage to acquire businesses that have the highest returns on capital coupled with large book value per share growth (i.e. high quality) over a long period of time, using a composition mix of “core” and “peripheral” positions to reduce the volatility that leverage naturally provides. But what does this strategy actually mean to our investors? Although many of you have read our investment memorandum as part of your introductory package, we want to take a moment to provide some details as to what our strategy is all about, where it is going and how we think it provides us with the best balance over the long-term.

The strategy is built around particular stocks that are known to be “core” positions. There are very few of these stocks out there that are potential “core” positions. However, at a high level, these are stocks that the fund would never sell or allocate out of (but may not continuously buy over time, either) because the opportunity cost, volatility and probability of satisfying results over the long-term is too great. Conceptually, these positions must not only have strong book value per share, high returns on equity and stable revenue growth, but they must also have specific qualitative characteristics that are generally difficult to find. They must have what we believe is:

a. A highly sustainable competitive advantage: This not only investigates ‘high-moat’ quantitative aspects like recurring depreciation expense, gross margin expansion and CFROI but also looks deeply in the actual markets the company operates in and the strategic direction the company is taking.

b. Long-term stability: This looks for companies and markets that we believe will be around for the next 100 years. The company should have sound management raised organically within the industry it operates in while consistently looking at the long term. We also evaluate management’s propensity to own shares in the company via open market purchases. This encapsulates a favourable view of other insider ownership such as founding families.

c. Visionary corporate culture: In “Built to Last” Jim Collins compares visionary companies with regular companies on the stock exchange and found that companies that are truly visionary have specific qualities (i.e. timeless core values and a purpose beyond just making money, Big hairy audacious goals, cult-like cultures, home-grown management etc.). These companies have done significantly better over time than the broader market and we look for companies that we believe have this visionary culture.

d. Small enough to become a “bagger”, big enough to have a chance: Companies with high profit margins and growth will eventually encounter slowing growth because new entrants will eventually seize the opportunity to compete against these companies, especially if these companies are small with smaller moats. We look for companies that are small enough to become a “bagger” (more on this later) but big enough to be able to attack a market without getting completely crushed by the competition. The sweet spot would be companies under $10 billion (could be upwards of $15 billion depending on the market) as we believe based on our studies these are large enough companies to make a potential footprint in the global economy while having the growth runway that we find desirable.

We analyze the above qualities in conjunction with a probabilistic analysis and an overall quantitative assessment into the business to see if it would have the potential to

The post Logos 2016 Letter – “The Worst Start To A Year Ever!”- Everyone – What are “baggers”? appeared first on ValueWalk.

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