RH, AXP

 Disclosure: you shouldn't rely on a stranger's opinion for your investment decision.

Sold RH 

My original investment thesis was primarily based on: 

• Berkshire owns it, and kept buying even in a quarter RH's minimum price was above $300. Probably Ted Weschler was the one who bought it and he knows the furniture business well. 
• I like that the CEO has a long-term vision for running the company and he doesn't sugarcoat things in earning calls. He also owns ~25% of the company taking account into all the stock options and RSUs. There was some complex interest-free convertible financing, but I was comfortable with that.

• Solid growth over the last couple of decades and the business model were able to increase its gross margin over time with the 'climbing the luxury mountain' strategy. They were acquiring higher-end customers while ditching lower-end customers by offering more premium products with higher price tags. This means pricing power, which is what we need in an investment for the inflationary environment. 

• The stock wasn't insanely expensive after falling back from the $700 level.
  

BRK has sold all of its positions in RH in Q1 2023. Since half of my investment thesis was based on BRK owning it.  I sold all my RH position at $254/share.  

I think recording the thought process for each position really helps. It makes me more decisive when the factors I initially considered changed. 

Added American Express (AXP)

Amex has been on my radar for a while. I was taking my time to get to know this company better and waiting for the right price. 

One of the reasons I find credit card companies appealing is they provide a hedge against inflation. They generate revenue from two sources: merchant transaction fees and the sale of consumer transaction data. These revenue streams are split about 50/50. As inflation increases transaction value, which is a key driver of revenue, credit card companies naturally provide a hedge against inflation.

But why Amex? Why not Visa or MC? Visa and MC are both excellent companies with super high net margins at around 50%, but they are trading at 30x P/E (I'm rounding up numbers for convenience). If their multiples were to drop significantly in the future, I would consider buying V and MC as well. Amex, on the other hand, is cheaper, trading at 16x P/E.

Visa and MC don't issue cards directly to consumers. Instead, banks would issue credit cards on Visa/MC platform and take the full credit risk of customers not paying back the credit card debt. 

Unlike Visa and MC, Amex issues its own cards and takes credit risk. This means Amex also has a banking business, accounting for about 20% of its profit, while the remaining 80% comes from credit cards. Despite the additional complexity, the significant valuation gap makes Amex a relatively attractive investment. Amex issuing its own cards creates a great ecosystem for itself and its customers, giving them control over the customer experience.

I recently became an Amex customer, and I must say their customer service is unmatched by any other bank's credit card. Whenever I call Amex customer service, there is no wait time. Their customer representatives sound genuinely happy to solve problems. It's a different story with Visa and Mastercards issued by different banks. Some of them can take up to 20 minutes to answer your call, and the attitude of customer reps varies.

Although Visa and MC have a cleaner balance sheet and business model without a banking business, such big gap in valuation makes Amex a relatively attractive investment.  

To sum up, here are the main points of my Amex investment thesis

• BRK owns 20%. If Buffett sells all Amex shares, I will probably follow. Since he is the expert on banks and financial institutions. 

• Quality business with a long runway and the price is not unreasonable. Although Amex may not be a huge bargain like those "cigar-butt" opportunities with a clear discount to net cash value, I see it as a quality business with a long runway for growth. It should deliver a decent return on investment over time. So I see buying it as paying a fair price for a good business. 

I've allocated 6.4% of the portfolio at $154/share.

Berkshire Hathaway AGM 2023 (Omaha)

 After a few years of thinking of going to the Berkshire Hathaway AGM in Omaha. It finally happened this year. 

There are also many other events happened over the extended long weekend from Thursday to Sunday. 

I have attended a few (see some pics at the end of the post): 

1. Friday Morning - Mohnish Pabrai's talk at the University of Nebraska. 

I found out about Mohnish from his cloning strategy.  Here's a link to his Youtube video: Mohnish Pabrai: thou shall be a shameless cloner. 

During the talk, Pabrai shared some interesting insights on investing. He discussed how successful investors like Warren Buffett and Benjamin Graham made most of their gains from a few great decisions throughout their lifetime.  For example, Graham made 50% of his lifetime gain from one single investment (GEICO). According to Pabrai, holding on to these winners and letting them thrive is key to investing success. 

Pabrai shared an interesting quote: "Do not cut the flowers and water the weeds." This made me reflect on the common practice of portfolio rebalancing in the investment industry. Typically, when one investment outperforms others and grows to a larger position in the portfolio, managers will sell some of it and reallocate funds to other investments. People who really get it call this 'diworsification'. It leads to suboptimal returns as it fails to fully capitalize on the winners. Rebalancing aims for only average.

Pabrai shared some stats on Buffett's decisions, noting that only about 4% of them were outstanding and the rest were average. 

The takeaway was that investing can be forgiving - you can make many mistakes and still do well as long as you keep the winners and let them grow in your portfolio. So don't cut the flowers.

2. Friday afternoon - Value investment panel at Creighton University. 

This is a talk from some money managers. Prepared questions were quite generic - things that you would've read or heard online somewhere. But it got more interesting when people asked them questions on the spot. 

3. Saturday - BRK AGM

We lined up at 3.50am to get the seats closer to the stage where Buffett and Munger speak. I was great to feel the energy there in person. Youtube should have a complete recording of the meeting and I am sure there are a lot of different articles out there on different pieces. 

I've met people come from all over the world... South Africa, Luxembourg, France, Japan, Hongkong, UK, and of course Canada and US. One thing I noticed is there's been an increasing amount of students and some <18 asking questions. 

4. Sunday Morning - Merkel Corp brunch & shareholder meeting

Similar to BRK's AGM, Markel Corp also held a Q&A session for its shareholders and provided breakfast at the Mariott. Copycat of BRK, Markel is a holding company with an insurance division that generates float from the premiums collected. It then uses the float to acquire whole businesses (venture division) or buy publicly traded stocks (investment division). Markel's management refers to these divisions as the company's "3 engines".

The company has a market cap of ~18B at the time of this writing. It went IPO in 1986 at ~$8/share and today's price is $1369. Representing a compounding annual return of ~15% since inception.  However, the performance for the last 20 years is around 10% annually. 

Markel appears to be following in the footsteps of Berkshire Hathaway, and it will be interesting to see how the company develops over time. I might look into it more. 

Overall I had a lot of fun at Omaha. There were some key learnings that can be pivotal for my personal investing journey such as "don't cut the flower". I was quite inspired to hear that investing can be forgiving.

Also being surrounded by like-minded people is great. And I got to catch up with some friends that I haven't seen for a while. I definitely feel more aspired after the trip.

Until next time!

In the conference center

Buffett, Munger, Greg Abel, Ajit. 

Value investing panel

Markel brunch

Berkshire shopping

Initial Portfolio

 

Portfolio Setup

Number of stocks - 10 is the target number of main holdings I want to have. I hope to be more disciplined on purchases by limiting the number of bets I make. With the mindset of never sell the stock after the buy.

Sub basket - I also plan to build a small basket of venture-type investments, allocating around 10%. With the plan to hold for 10+ years.

Cash balance - I try to fully invest with zero/minimal cash balance. 

Current Portfolio:

As of 2023-5-1

Company	Ticker	Allocation (MV)
Alphabet Inc	GOOGL	10.4%
Berkshire Hathaway Inc.	BRK.B	30.4%
Alibaba	BABA	4.3%
Bank of America	BAC	2.5%
DaVita	DVA	6.5%
RH	RH	9.4%
Pershing Square	AMS:PSH	5.0%
HP Inc.	HPQ	3.6%
Total Stock		72.2%
Total Cash		27.8%
Portfolio total		100.0%

Above listed are the stocks I currently own. Below is a quick rationale for each of the holdings. I plan to do a detailed write-up for each in the future.

Alphabet - I've been owning this since the 2014 or so and I like the product and services it offers. The search engine, Google map, Youtube and Android system etc. make people's life much easier. 

Berkshire Hathaway - This has been my default go-to for parking cash. It's basically a diversified fund but excluding the garbage you can find out there, and managed by a legend investor which shareholders do not need to pay any fees for his service. 

Alibaba - I think this is a mistake. Mostly because of the business environment in China, where the government has the absolute right to decide a company's faith. 

Bank of America - copycat investing.  A stock that showed up on a few 13-Fs: Munger in the Daily Journal Corp. Buffett's Berkshire, Li Liu's Himalaya Capital, and Seth Slarman's Baupost Capital. I have yet to understand the banking business, but Buffett is good at it.

Davita - Dialysis treatment provider. It's a recession-proof business. Buffett's ownership increased from 20% to 40% as the company bought back more than half of its shares since 2017.

RH - copy BRK. In my opinion it has great potential and a long runway. Also aggressively bought back shares like Davita. 

PSH - Bill Ackman's performance seems decent even after fees. The fund is trading at around 30-40% discount to NAV when I bought it. 

HP - copy BRK and the price/CF wasn't too bad when I bought it. I personally feel it doesn't have a lot of moat, so just a small position.