30th Year as a Chief Investment Officer

 

[ * Performance information reserved for current partners]

“Experts” and 30 Years

This is our 30th year running Target 3 hedge fund.

While running Target 3, we have heard many dubious claims.

We have heard this one many times: “hedge funds are risky”.   Sure, they can be. Some hedge funds, not all, take huge risks and if the risk pays off, everybody wins big.  If the bet doesn’t pay off, the manager just closes the fund and opens a new fund with the same lure of big returns and repeats the cycle.  It’s a game of heads they win, tails you lose.

We have and always will manage Target 3 like our own money, because it is.  Not only our money, but some of our high school classmates, college classmates, friends and family.  We would like to be welcome at future Thanksgiving Dinners or on the streets of our hometowns.

Looking at past results during negative periods in the stock market and Target 3’s performance.   

Years 2000-2002: “The Tech Wreck”  – Target 3 returned 112% vs. the S&P 500 total return of -20%.

Years 2007-2010: “The GFC” or Great Financial Crisis –  Target 3 Returned +28.7% vs. the S&P 500 total return of -8.5%.

Year 2020 – Covid: Exceeded S&P 500 total return.

We achieved this performance by thinking about risk and reward and not following the crowd.  Sure, during the internet boom that led to the Tech Wreck, we were pressured to invest in internet companies.  Instead, we invested a large amount in a pasta company that had some issues but was fixed. We researched the business and determined it was a low-risk, high reward situation.  Our investment paid off handsomely and we cruised right though the Teck Wreck.

When an “expert” says “hedge funds are risky” consider this:

The average mutual fund manager has 4.7 years of active experience.

The average mutual fund has been in business for 8.6 years.  We ask, why all the turnover?

One might also inquire about:

  1. Does the fund manager have most of their own net worth in their fund? We do.
  2. Can you call the fund manager? Good luck with that.  You can get a hold of us anytime.
  3. The fund manager is essentially forced to hold 50-100 or more stocks. The human mind is not capable of a thorough visualization of that many risk/reward situations. Sure, we diversify, but only in 6 or 7 main ideas that we have heavily researched.

When we look over the landscape currently what do we see?  Many investors are going to be disappointed with their mutual fund’s future returns.  It’s inevitable.

For example, a large portion of mutual funds are forced to buy Tesla stock now that it’s in the S&P 500.  Let’s look at the numbers:

Tesla is valued at more than the combined value of the 7 largest car companies.  Toyota, Volkswagen, Daimler, GM, BMW, Honda and Ford.

Tesla has revenues of $0.03 trillion while the other 7 car companies have revenues of $1.1 trillion.  It’s not just that these other car companies have 37x’s the revenue of Tesla. They have so many more tried and true systems, engineers, quality control, supplier relationships, factories and things we can’t even think of.  Building a safe and reliable car is very difficult and the margins are slim.  No wonder Tesla has the worst reliability of any car company. (JD Powers survey of 87,000 buyers).

Currently, Tesla’s stock is down for the  year, could Tesla’s stock be up this year?  Sure, but it’s a bet we are not going to take.  The odds that Tesla has trouble down the road seems pretty high to us.  The large car companies are not going to cede the electric car market to one company. The odds of that are zero.  There are at least 27 different electric cars coming to market between now and 2023, and many will have better quality than Tesla.

What is our strategy for 2021 and beyond…..just do what we have always done, buy good companies that we understand, run by people we admire and pay an advantageous price.

Your money invested like our own, be assured we’re partners in every investment.

* Past results are no guarantee of future performance.

** Weekly prices are an estimate, the month end price is precise when the accounting review is complete.

This blog does not constitute an offer to sell, or a recommendation of any security, this update is for informational purposes only.

Mashed Potatoes vs. Business Investing

Mashed Potatoes vs. Business Investing

Almost all mutual funds own 100-200 stocks and these funds also mostly all own the hottest stocks going.  They are all crowded into a handful of very expensive companies that are very popular. These mutual funds are a bowl of mashed potatoes. They are almost all the same and it doesn’t matter how many different mutual funds or styles an investor buys, they’re practically the same stocks. These mutual funds are “diversified” in the same stocks. We ask, are any of them actually diversified if they own all the same stocks? Diversification sounds good, but we found out in 2008’s financial crisis that diversification was just a good sales tactic. It didn’t hold up when inventors needed it to work.  Mutual funds own 100-200 stocks, we think it’s absurd to invest your money and ours into the 150th best idea, that’s what these funds are doing.

Even though these popular stocks and mutual funds have had a big run lately, Target 3 has done 35% better than the S&P 500 over the last 20 years.  At least 80% of mutual funds don’t beat the S&P 500.  What we do works over time.  Sooner or later these popular stocks will have problems, it has always happened in the past without exception. When the next bear market comes in the stock market, which it will, we expect to have acceptable results.

Your money invested like our own, be assured we’re partners in every investment.

* Past results are no guarantee of future performance.

** Weekly prices are an estimate, the month end price is precise when the accounting review is complete.

This blog does not constitute an offer to sell, or a recommendation of any security, this update is for informational purposes only.

Everlasting Gobstopper Business

Referring to the movie, Willy Wonka & the Chocolate Factory.  From Wikipedia: “The Everlasting Gobstopper is a candy from Roald Dahl’s 1964 children’s novel Charlie and the Chocolate Factory that is intended, according to Willy Wonka, its creator, “for children with very little pocket money”. It not only changes colors and flavors when sucked on, but also never gets any smaller or disappears.”

We are looking for an Everlasting Gobstopper in business form.  We just need one every so often for our returns to be acceptable, if not well above average.  We also need management that understands that they are running a one-of-a-kind business and they are doing the right things to optimize the business.  When we find one, we will buy enough to make sure it counts.

Your money invested like our own, be assured we’re partners in every investment.

* Past results are no guarantee of future performance.

** Weekly prices are an estimate, the month end price is precise when the accounting review is complete.

This blog does not constitute an offer to sell, or a recommendation of any security, this update is for informational purposes only.

 

Investment Analysis

The Plan

Our plan is always the same.  We strive to buy businesses that have an enduring competitive advantage, are simple to understand, run by people we admire and offered at a fair price.  This is more than a slogan or tagline.  We don’t change this general mode of operations based on who the politicians are, what the Fed is doing, what the stock market is doing, the weather, or pandemics. The future is always uncertain.  All projections going into 2020 were smooth sailing.  To offset perennial uncertainty, we buy investments that we are confident can weather a storm and we can add to if the price is right.  It has worked well in the dislocations of 2020, 2008 financial crisis and 2000 tech wreck.

Your money invested like our own, be assured we’re partners in every investment.

* Past results are no guarantee of future performance.

** Weekly prices are an estimate, the month end price is precise when the accounting review is complete.

This blog does not constitute an offer to sell, or a recommendation of any security, this update is for informational purposes only.