JB Global Capital Fund- Inception Letter
To Our Partners:
Listen to this letter:
January 24, 2023
The Results
The JB Global Capital Fund was launched on January 3rd, 2023, with assets under management totaling $x. In the brief period since inception, the fund has gained 21.30% compared to a gain of 6.52% for the VT Total World Stock Index. We chose the VT Total World Stock Index as a benchmark to measure our relative performance since the portfolio consists of both U.S. and non-U.S. equities. Our goal is to outperform the major indices over time and generate excess returns for our partners.
We expect to write quarterly letters to share updates on the funds’ performance. These investor letters will provide insights into our investment thesis as well as commentary regarding our portfolio companies and general business developments. As it turns out the start date for tracking this fund has been fortunate in that we have outperformed the leading index by 14.78%. We do not believe this short-term outperformance should lead you to believe that we will generate outsized returns on a monthly or yearly basis.
True investment success can take multiple years to fully materialize, and we are excited to have you join us in this process. For any investment fund there are two important elements that you as a partner should be concerned about: the process and the results. We have shared our results with you up onto this point. Now we can take a look at the process.
The Process (1)- Investing Framework
Let’s begin with some guiding principles of our investing framework. After all, investing is a highly dynamic, complex, and volatile industry. We need first principals to hold onto whilst going through the trough of maximum pessimism and the euphoria at the peak of a bubble. Our guiding principles are as follows:
Financial assets have intrinsic value derived from the future cash flows the asset will produce over its full life.
The market tends to price these assets efficiently most of the time.
In times of extreme fear, uncertainty, and doubt, asset prices can become dislocated from their underlying intrinsic value.
An enterprising investor can profit from these mispricing’s through above average analytical skill and above average psychological temperament.
The Process (2)- Quality of the Assets
The success or failure of any investment operation will be determined by two factors: the quality of the asset and the price paid for it.
When we look for a potential investment, we are looking for an exceptional business that is selling at a fair or discounted price. Now you might be thinking, “if a business is exceptional, then why would it sell for a discounted price?” (see above graph) It is our belief that during extreme market fluctuations, a long-term investor can profit from the impatience of shorter-term market participants. This is not to say we will not make investment mistakes (We already have a few under our belt). However, we believe that our successes will outweigh our mistakes over the course of an investing lifetime.
So, how to choose which businesses to invest in? We, like many investors, use filters (or as Charlie Munger would call it “Mental Models”) as a way to narrow down the field of investment possibilities. To start, it must be a business that has economic characteristics that we can understand. It should also have a strong competitive position in its industry and positive long-term business prospects (again, that we can understand). Some of the characteristics we look for when choosing a portfolio company include:
Repeatability in the business model- Habit Forming
Innovative company culture that allows the business to deal with change
Management with a long-term orientation and strong track record.
Clear value proposition
Delighted customers
Growing end markets
Increasing returns to scale
Competitive advantage that is growing
The capacity to reinvest with excess returns on capital
Increasing optionality with scale
The Process (3)- Price
The value of any asset is the net present value of the future cash flows the asset will produce over its full life. This statement is repeated throughout business schools and investment firms throughout the world. It sounds almost scientific. However, note we are referring to the future cash flows, in other words, the unknown but expected cash flows. (didn’t anyone teach you not to count your chickens before they hatched?)
The nice part about investing in beaten-down depressed stocks is that the future cash flows do not have to be spectacular for the investment to work out favorably. In some instances, during turbulent market cycles, the business can be selling on the market for the company’s net assets alone (ignoring any future cash flow). We will admit, we also use a Discounted Cash Flow Model to value a business. However, the model is meant to indicate a direction (either too cheap or expensive), not function as a stock price predictor. To quote the acclaimed economist John Maynard Keynes “It is better to be roughly right than precisely wrong”.
The Portfolio
Since inception, we have made 10 investments in 6 industries as classified by Morningstar. While the investments span throughout various sectors, there is a high concentration in the sectors of Internet Retail, Financial Services, and Cloud Computing. There is also a geographical concentration in China and Brazil. It is our belief that our portfolio companies in China and Brazil have been underpriced by the market due to a mix of macro-uncertainty and political risk induced negative sentiment. Using conservative estimates, some of these companies appear to be trading at up to a 50% discount to intrinsic business value.
The remainder of the portfolio is invested in U.S. businesses that have dramatically come down in price over the past 6-months, due in part to rising interest rates in the Feds battle against inflation. While we can’t know what interest rates or inflation will do in the upcoming years (everyone has an opinion, no one knows), we can invest in profitable businesses with low levels of debt that can survive an economic downturn when needed. The majority of the portfolio companies are self-funded, long-term oriented, profitable businesses that are deeply integrated with their customers and client’s lives. While stock market pundits worry about their stock price movements, our portfolio companies are focused on serving their customers and improving their businesses for the long haul.
Sincerely,
Jack Beiro, MBA
JB Global Capital
The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.