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Logos LP Up 20% In 2017 – Gentex Inc. Thesis, Why Malkiel’s Latest Edition Is A Must Read

By VWArticles. Originally published at ValueWalk.

Logos LP Q2 letters to investors

Also see Jason Karp’s Tourbillon Capital: FAANGs Are Not Investments; Bubbles Everywhere

Whale Rock Capital: The $1 Trillion Tech Sector Opportunity

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“Patience is bitter, but its fruit is sweet.” -Jean-Jacques Rousseau


The current price per unit is $22.91 and although this is well above our initial offer of $12.52, we caution that generating above-average returns moving forward will likely be more challenging. The bull market is now over 3,000 days old, up over 260%, and is now the second longest and second strongest since WWII. Return expectations should be adjusted accordingly.


The following table represents Logos LP’s total unlevered net return as of the second quarter compared a basket of relevant indexes:

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Although the stock market’s P/E has proven to be a poor predictor of the market’s future direction (for example, a bear market began in 1980 when the P/E ratio on the S&P 500 was 9.5) we see the current environment falling outside the standard deviation of expected norms (virtually zero risk premium on the VIX and many valuations appear strained based on future earnings growth) and thus we have decided to increase our cash position by trimming certain peripherals, part of one core position and raising new investor capital.


We see some pockets of value in North America and those that remain depressed are beginning to pick up steam as investors of late have been rotating out of winners and focusing on the laggards. This rotation is healthy. It has in fact been a big factor stabilizing the markets. There have been periods when tech has notably underperformed, and periods when retail and even some energy stocks have outperformed. This week, the market outperformers were among the year’s biggest losers: retail, oil service and banks.


Nevertheless, we maintain that this is a market which continues to cause immense anxiety. Are investors complacent? We think not. Instead most are over-analyzing and over trading with a keen eye on political developments, a flattening yield curve, lower oil prices and Fed policy.

As suggested previously, we maintain that this lengthy secular bull market still has legs. Earnings are looking good: First-quarter earnings are up 15.3 percent, and second-quarter earnings estimates are also up a healthy 7.9 percent, according to Thomson Reuters. Third-quarter estimates are up 8.7 percent, and while the forward estimates usually come down, early second-quarter earnings reports have been solid. Inflation remains low and both consumer and corporate balance sheets remain strong.


But could the tide be turning? The spate of volatility which we experienced last week spooked the market and reminded us of an old parable about Chinese bamboo.


After the seed for this unique grass is planted, you see nothing, absolutely nothing, for four years except for a tiny shoot coming out of a bulb. During those four years, all the growth is underground in an incredibly intricate and strong root structure.


Then, in the fifth year the Chinese bamboo grows often grows beyond 8 feet.


Putting capital to work successfully for the long-term whether in this market or any other requires patience. This week we were reminded of the importance of sober reflection, emotional diligence and humble expectations. Investors in this environment can be lulled by the high returns the market has offered.


As Odysseus was curious as to what the Sirens sang to him, investors can let their expectations of return be warped, setting themselves up for disappointment. Or as many sailors discovered: disaster.


Like the parable of the Chinese bamboo teaches us, growth must be nurtured. Good things happen to those who plant the “right seeds” and wait. With patience, nurturing and the proper expectations, that “fifth year” will come.


As such, we continue to hold our largest core positions or “right seeds” for the long-term as we believe the fundamentals are still intact and those companies are making key investments in areas that will fuel shareholder value for decades.

A Random Walk

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In 1973, the first edition of A Random Walk Down Wall Street written by Burton Malkiel was published which explored the randomness of stock prices and the underpinnings of equity valuation.


We believe the book is a must read for all investors both sophisticated and novice alike, but there is a specific paper cited by Malkiel in the book (written by Morgenstern and Granger in 1970) titled the Predictability of Stock Market Prices which we found quite fascinating from an academic perspective.


Essentially, both Granger and Morgenstern argued, to quote Malkiel, that the “intrinsic value of stocks is a search for the will-o’-the-wisp”, or in adage to the old Latin maxim, “a thing is worth only what someone else will pay for it”. For many investors, this is quite an interesting statement as it relies less on the true quantitative value of the asset (i.e. calculating the estimated cash flows from that asset discounted to the present or placing a premium based on the characteristics of that company’s operating earnings before interest and taxes in the most basic mathematical sense) and more on the subjectivity of that prospective buyer’s perspective at that moment in time.


Generally, there is some truth to this notion, but perhaps we are entering a new phase in the current business cycle where this axiom is most relevant. For example, one may not be willing to pay 11x book value for Amazon shares in 2004 despite facing tremendous tailwinds (i.e. the impending ubiquity of Internet commerce), but would be more than happy pay for 22x book at ~$500bn market cap notwithstanding a lofty valuation and arguably a much smaller runway than 2004 Amazon.


Within the seventh edition of the book, Malkiel explores various bubbles throughout history and how they often repeat, which may hold some truth to Granger and Morgenstern’s conclusion:

“The new-issue mania of the early 1960s, the “Nifty Fifty” craze of the 1970s, the biotechnology bubble of the 1980s, the incredible boom in Japanese land and stock prices and the equally spectacular crash of those prices in the early 1990s, as well as the “Internet craze” of the late 1990s … provide continual warnings that we are not immune from the errors of the past.”


Notice how these decades all have a theme attached: the “Internet Craze” of the 90’s; the ‘biotech bubble’ of the 80s; the ‘Nifty Fifty’ in the 70s. Are we in the ‘Bitcoin bonanza’ of the 2010s? What about the FANG decade? Is Bitcoin’s value not wholly dependent upon what others are willing to pay for it?


Despite these thought provoking questions, it has become clear that stocks within the technology sector, coupled with record low employment and inflation, have driven this market higher leaving investors little choice of where to put their capital other than equities.


Yet

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