1Q 2019 Investors Letter

1Q 2019
Rockvue Capital (The Fund’s Name) 16.62%
S&P 500 13.53%
Russell 2000 14.64%
Rockvue Capital vs. S&P 3.09%
Rockvue Capital vs. Russell 2000 1.98%

The Fund’s performance exceeded the S&P and Russell 2000 return during the 1st quarter of 2019. Since launching in 1Q 2018, the (paper) Fund has returned 18.82% compared to the S&P’s return of 8.67%. The businesses we own operated well and the value proposition remains attractive. However, I stress that five quarters of operations isn’t enough to properly audit the performance of a value investing strategy. The shorter the time frame, the greater the chance luck and noise have at distorting returns

We aren’t worried about beating the S&P on a weekly, quarterly or yearly basis. We care about owning great businesses purchased at cheap prices with long runways for multiple and share price expansion. The Fund will undoubtedly zig when the market zags — sometimes to our benefit, sometimes to our detriment. We will have quarters and years of underperformance. Over time, we fully expect to generate risk-adjusted returns that are superior to the general market. It’s why we play the game.

 

Tiger Woods Gives Investment Advice

Tiger Woods won his fifth green jacket earlier this month. Merely four years ago that same man sat and wondered if he would ever be able to swing a golf club again. Walking off the 18th green, Tiger was asked what his strategy was going into the final round of (arguably) the most important major golf tournament of the year. His response was telling of not only how to win golf tournaments, but how to win in financial markets:

“I kept plodding around the golf course. I tried not to make mistakes. When I had chances I tried to take advantage of them.”

Change “golf course” to “financial markets” and you have a foundation for successful investing. As investors we are first and foremost risk minimizers. We pour over financial statements, read earnings transcripts and approximate margin of safety in order to protect our capital. Only then, once all contingencies of downside protection are met, should the value investor consider the upside. Just like the greatest golfer in the world worries about not making mistakes, so does the prudent investor worry about the risk of permanent capital loss. It’s staying power that makes all the difference.

 

A Long Time Horizon Isn’t Enough

Legions of golf aficionados touted Tiger’s comeback as something akin to a miracle. He was too old. Too many surgeries. The competition is too high compared to when he started his professional career. Frankly, the greatest surprise was that Tiger Woods decided to make the comeback in the first place. Why would someone whose accumulated more majors, tournaments and earnings than any other living golfer feel the need to come back? The answer is simple, but vividly profound: It wasn’t about the money. It was because he loved the game.

That answer should ring true for investors as well. It isn’t enough to have a long time horizon — an investor must love the endeavor of researching, analyzing and studying businesses over the course of that time horizon in order to be truly successful. Compounding knowledge works in the favor of the investor. Don’t believe me? Ask Warren Buffett. After investing for over 50 years, Buffett is still as sharp if not sharper than when he started. If an investor wants extraordinary returns, a long time horizon needs to be paired with an intense desire to never stop learning.

Starting this paper fund at a (relatively) young age has afforded me the chance at taking the longest time horizon possible. The goal is to run my own real fund — not a TradingView paper account — however, why not take the longest time horizon possible with what I have now? If I’m serious about starting a fund and managing other people’s money, shouldn’t I be practicing now for how I want to manage money for the next 30, 40 or 50 years?

That sounds idealistic, but can an investor get away with not having a passion for the markets and still be able to perform well? Of course. Financial markets are harsh creatures in that they don’t compensate in accordance with the amount of time one puts into the endeavor. In other words, luck plays a major role — and most investors aren’t comfortable admitting that. For example, I could spend weeks and months researching an investment idea, go and meet management, create elaborate cash-flow models, all to have that investment putter out and fail. On the other side of the coin, I could close my eyes, scroll through the list of stocks on the S&P, randomly select one, and potentially generate a higher return for 99% less work. It is for that very reason why an investor must love what they do in order to stand the test of time.

It’s good to have a 30-40 year time horizon on an investment vehicle, but if the Fund manager burns out and loses the drive to learn and grow, that long-term thinking is worthless. The runway for an investment vehicle lasts only as long as the Manager’s desire to get a little bit smarter each day. My goal is to never lose the desire to learn and grow. If I lose that, my time (and our capital) would be better spent elsewhere.

 

Portfolio Update

Our top holdings did exceptionally well this quarter (save for INTT) and generated most of our quarterly returns. Garrett Motion (GTX) shares returned 60% off the heels of positive earnings and upward revised guidance for 2019. We remain confident that shares can double from current prices (around $19). Frontdoor (FTDR) returned over 30% after the company released earnings and revised guidance upwards. The runway for Frontdoor remains long as they continue their transition from a pure home warranty business into a digital, one-stop solution for all homeowner problems.

After crashing and burning into the end of 2018, Discovery (DISCA) climbed over 20% in 1Q. Garrett and Discovery were trading places for top-dog in the Fund, but after share prices collapsed 20% in December 2018, the Fund loaded up, making it our largest holding. DISCA continues to do all the right things, and we couldn’t be happier with management’s decisions. The company inked a new deal with YouTube TV, further proof that demand is incredibly high for DISCA’s original content. As a refresher, Discovery is the #1 non-sports cable channel among men aged 25 – 54, and Investigation Discovery is the #1 channel among all women in total-day viewing (the women love their murder-mysteries!). Despite Discovery’s tremendous brand power and cult-like fan base, the company trades at less than 8x 2019 earnings. We continue to look for down days to add to our position.

Our newest investment, Target Hospitality, has a chance to be a core position in the near future — while the liquidity has prevented us from making a sizable purchase so far. The entire write-up can be found on the blog. Target is an off-the-beaten-path rental accommodations business that went public via SPAC IPO. Current share prices offer the investor a chance at doubling their investment with multiple ways to win. The business generates 36% IRR per project, sports minimal debt and is the leading rental accommodations company in the hottest oil basin in the world, the Permian Basin. We believe shares are significantly mis-priced.

Overall the Fund holds 18 positions (with one, small short position) — smack at our ‘line-in-the-sand’ maximum number of holdings. This should be taken with a grain of salt, however, as our investments in the shipping industry (through DSSI, DSX and STNG) count as one investment. The hurdle rate for new entries into the portfolio is as high as it’s ever been — something that we’re extremely proud of. Peter Lynch once said (and I’m paraphrasing), “sometimes the best new stock to buy is the one you already have in your portfolio.” We’ve found those words to ring  true.

 

Concluding Remarks

Our businesses continue to execute and allocate capital effectively, and we continue to remain patient shareholders. Time is our greatest competitive advantage at the Fund — giving us the ability to stomach the inevitable volatility of financial markets and using it to our advantage in purchasing great businesses at tremendous prices. The number one goal for the Fund is to not lose money. If we can focus on not losing money, the rest will take care of itself. Although this is a paper account, I treat it as if it were my own / potential investors’ capital. I’d like to think I’m smarter at the end of this quarter than I was at the beginning — and that’s all I can ask of myself. We’ve been fortunate to have such a strong first five quarters, but I stress the individual reading to not put too much weight into these first five quarters. The Fund (and consequently my investment strategy/philosophy) should be judged on its five year track record. We have a long ways to go, but it’s encouraging seeing our ideas pay off.

Thank you for reading and following my journey. It means more to me than you could imagine.

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