End of year update

With each passing year I realize that I should concentrate much more on my best ideas, instead of having a few more businesses for the sake of diversification.

The specific examples were Facebook, Apple and Moody’s this year.

With Facebook, I decided to not go over 20% of my IB account. At approximately 130$ a share, Facebook was a no brainer and an incredible opportunity. Looking at FB around those prices, I kept thinking about the salad oil crisis of American Express. If I am not incorrect, Buffett had put 40% of his portfolio in it.

With Apple, I reasoned that I already have positions via Berkshire – 10% of my portfolio. I also was concerned that I am being too aggressive on tech names. With Google, FB, and Apple – I was touching 70% of my IB portfolio! With these reasons in mind, I only put 10% of my portfolio in Apple.


Moody’s was a mistake of omission. Last year, to teach a value investing course … I needed to come up with an example with a serious moat that has survived several problems and came out stronger. After rejecting Visa/MasterCard, and Google/Facebook, I finally zeroed in on Moody’s.

Moody’s has a phenomenal moat and has survived a direct attack in 2009 (profit was up ~ 20% that year). Arguably, the stupidity of rating agency models were responsible for the pervasiveness of the financial crash of 2008. Still, they were able to argue that ratings qualified as free speech and hence are protected by the Constitution, even if they are way off the mark.

I ran my simple valuation model (earning multiple = growth + dividend) and came up with a price of 135$, while the stock was at $150. I decided to pass and wait for a lower price.

My mistake was not to adjust my simple model for business quality.

Captain Hindsight

I am in two minds about learning from these “mistakes”.

Would I have put my decision making through a reevaluation if my return this year (~ 26%) exceeded that of S&P500 (~ 31%)?
To compare, last year I did ~ 1% while S&P500 did ~ -4%. I was not bothered that much then. My gains came from a near double of (Hikma Pharmaceutical) and I was much more active. I fail to see why I did not put myself through the grinder then even though it was clear that I made many decisions then. In particular, I decided to reduce the number of positions I had from ~ 12 to 5! A more interesting question to ask is if that was a mistake?

Should I have gone over 20% of portfolio for Facebook?
I was extremely sure about the fact that FB will come back. I see the trident of Facebook, Instagram and Whatsapp as a set of apps which are almost impossible to kick for a user. But then, I have a rule of 20% to protect myself from my overconfidence. Did the strength of my confidence allow me to break my rule?

Should I have built a larger position in Apple?
This one, at least, is a clear yes. A harder question to ask is: should you worry about sector specific risk in your portfolio? What made me uncomfortable is a > 70% concentration in technology stocks. There are several mental gymnastics to get out of this predicament. One can just say that Apple is not a tech company, albeit a product company. I am going to give this question some thought and see why this makes me uncomfortable.


  • Still keeping the rule of 20% for max p




Portfolio changes

After long last, I have some portfolio changes.

One month ago, I reevaluated my Apple position. At $1t market cap, the company becomes too big to offer reasonable return with any margin of safety. I remember in December 2018, the market was overly pessimistic with several articles challenging the shift to service and their problems with China etc. Nothing much has changed. But, the stock has climbed nearly 50% from $150 to $220. All things aside Apple is very cheap at 12x earnings but not cheap at 18xearnings.

I would have likely done nothing if an opportunity had not presented itself.

Interactive Brokers came up with an IB Lite product. This is a great move which brings forth the distinction between IB pro and all other brokers.

* IB does not sell order book to market makers

* IB pays reasonable interest on cash (libor-0.5%)

* IB has the lowest commission.

What does not work in IBs favor is it’s platform which is targeted at traders. There is a learning curve.

IB Lite (no comissions, sells orders for money) with a good app will be a game changer!

Meanwhile, Schwab and Ameritrade announced 0 comissions. They will still continue to sell your orders and pay almost no interest on your cash.

IB has a great product and is playing a game that others can’t! Their smart routing tech saves a lot of money for now IB Pro customers.

I have replaced Apple with IB.

On other front, IB is an owner operator with the founder owning ~ 80%. They have ~ $6b of regulatory capital while they only need $1.5b!

It is a well run and safe broker and is the cheapest around. This is a hard product to compete with.

Quarterly Update (Q1’2019)

No change in the portfolio for this quarter.

chart (3)

I looked at a few things over the last 3 months but none of them excited me. For example: Record Plc, Eurofins Scientific & Be Think Solve Execute. I finally decided not to take any of the positions because I did not feel like I understand them enough.

I continue listening to Berkshire Hathaway Shareholder meeting recordings which are now available on Youtube. I started with 1995 and am now listening to 2002. They are 4-5 hours long and I enjoy them immensely.

I feel that the portfolio has a significant runaway still, even after a huge 18% run up year to date. I especially feel that Google, Facebook & Apple are still undervalued.

I do not feel that strongly about Distribution Now. But, I do not have any use for the cash. This will be the first position to go if I find a good new position to add.

Culling my watchlist

School Speciality (SCOO)

Sells furniture, supplies and learning models to schools (link). This idea went on my watchlist on Feb 23, 2018 because Alluvial Capital discussed it in their Q4, 2017 letter (link).

School Specialty is as about close to an ideal Alluvial holding as a stock can be. The company is small, with a market capitalization of just under $120 million. Trading liquidity is minimal, with a handful of funds controlling the large majority of shares outstanding. And the company is boring, operating in the lowgrowth school supply industry. Scissors and glue, dodgeballs and desks. School Specialty went through bankruptcy and emerged in 2013. Since its emergence, the company has focused on maintaining sales, improving efficiency, and controlling costs as school district budgets remain constrained. The company has also focused on improving its working capital management, freeing up millions from inventory and net receivables.

The company has an operating margin of < 3%, long term debt of $128 million, $7.9 million in cash and $105 million in equity. A low margin business with high debt is not something I would like to dig into.

Cimpress N.V. (CMPR)

Cimpress does “mass customized” printing (businesses) i.e., customized printing at mass produced prices. They claim to do this by “sophisticated software and carefully architected configuration options”.

While reading on the business I kept asking myself this one question: will I know if the business became uncompetitive? I don’t think so. Pass.

Carrols Restaurant Group (TAST)

The largest Burger King franchisee in the world. Owns and operates more than 800 locations under the Burger King brand.

The company has paper thin margins. Looking at Q1-3’2018 results (9 months), the company had net income of $8.2 million on sales of $871 million. This is < 1%. The company seems to be taking on debt to acquire more and more Burger king shops. The long term debt went from $160 million in 2013 to $281 million in 2017.

Too much debt, thin margins and a debt fueled expansion is not my idea of a good investment.

Coty Inc (COTY)

Coty has the entire gamut of personal care and beauty brands. It is the third largest beauty brand in the world by sales.

Our three divisions – Luxury, Professional Beauty and Consumer Beauty – are home to iconic global brands and much loved regional brands. Luxury is focused on prestige fragrances and skincare; Professional Beauty is focused on servicing salon owners and professionals in both hair and nail; and Consumer Beauty is focused on mass color cosmetics, mass retail hair coloring and styling products, body care and mass fragrances.

The company has grown revenue at a healthy clip. It went from a revenue of $4b in 2011 to $9.3b in 2018. Long term debt, on the other hand, has also grown from $2.5 billion in 2011 to $7.3 billion in 2018.

We anticipate that we will incur a total of approximately $1.3 billion of operating expenses and capital expenditures of approximately $500 million in connection with the acquisition of the P&G Beauty Business.  — annual report 2018

Coty merged with P&G beauty and in the acquisition press release things were quite a bit rosier.

Coty expects to achieve total cost savings of approximately $750, million or 16% of acquired revenues, through the transaction composed of: initial synergies, reflecting P&G costs that will not transfer, of approximately $350 million; and incremental cost synergies, to be recognized over four years, of approximately $400 million, achieved through a range of efficiency opportunities that the combination of the two businesses create.

It is questionable if being big helps you in selling more products or selling them at higher prices. Maybe there is some cost savings on the manufacturing and the supply side. You may also be able to squeeze some margin out of the outlets that sell your product. But, none of this creates much value in the end. Is it a win-win for customers and the business? Probably not. I don’t think the “synergies” are passed down to the consumers. Actually, cost saving in manufacturing may reduce quality. PASS.

Callaway Golf Company (ELY)

Callaway Golf Company (NYSE: ELY) is a premium golf equipment and active lifestyle company with a portfolio of global brands, including Callaway Golf, Odyssey, OGIO, TravisMathew and Jack Wolfskin. Through an unwavering commitment to innovation, Callaway manufactures and sells premium golf clubs, golf balls, golf and lifestyle bags, golf and lifestyle apparel and other accessories.

In 2019, they took $450m debt and bought Jack Wolfskin. This increased the sales by 37% in 2019. Their net margin is ~ 5%. From my buying experience, although Jack Wolfskin is a great brand … there are far too many competitors and the quality is not that difficult to find. I especially liked Jack Wolfskin’s children offering. My daughter’s jacket have always been from JW and she has worn them quite a lot. Last year, we switched to Reima and we have been positively happy. Reima even has girly jackets and is excellent at building warm layers for active children.

Furthermore, I don’t see why their core segment (Golf & Apparel) should grow in terms of revenue. Probably they think the same and that is why they buy growth via taking on debt.


Some thoughts on Apple

Apple released their q1 earnings for 2019 on Jan 29, 2019. Approximately 10% of my portfolio is in Apple. I also have more exposure to Apple through Berkshire, another 10% position for me.

Apple’s Moat

Moat based on privacy

Apple is optically trying to sell itself as a privacy first company. This separates them from companies like Google & Facebook which are ultimately using user data to provide value to the users, as well as advertisers. Apple gets to price their products aggressively and does not need to worry about monetising the  user data.

Because Facebook and Google are ultimately funded through ads, it s difficult for them to compete with Apple on privacy.

And so much of your personal information — information you have a right to keep private — lives on your Apple devices.

Your heart rate after a run. Which news stories you read first. Where you bought your last coffee. What websites you visit. Who you call, email, or message.

— Apple on privacy

This provides Apple a built in moat that none of the existing smartphone makers can compete with. There will always be a market for a privacy sensitive hardware manufacturers. It may grow and shrink depending on the tides of customer sensitivity.

Moat based on a well rounded product that works

Apple devices have a significant resale value, unlike say Samsung. They are built to last a while.

Toni Sacconaghi

Okay. Tim, at your September event Lisa Jackson an Apple VP stated the company needed to quote design products to last as long as possible. And Apple’s clearly doing that by helping with the battery replacement program, iOS working on an older range of products et cetera. But I guess the question is why doesn’t that mean that replacement or upgrade cycles for iPhones should continue to extend going forward in part because that’s almost one of your objectives?


Tim Cook

We do design our products to last as long as possible. Some people hold onto those for the life of the product and some people trade them in. And then that phone is then redistributed to someone else. And so it doesn’t necessarily follow that one leads to the other. The cycles — the average cycle has extended. There’s no doubt about that. We’ve said several times I think on this call and before that the upgrades for the quarter were less than we anticipated due to the — all the reasons that we had mentioned. So, where it goes in the future, I don’t know, but I’m convinced that making a great product that is high quality, that is the best thing for the customer and we work for the user. And so that’s the way that we look at it.

Standing by your product by replacing battery for free is something which only Apple does. I remember having an iPhone 4 whose battery used to run out in 4 hours. I went to the Apple store and even though the product was past warranty (15 months), I walked out with a refurbished iPhone 4s by paying 75 CHF difference!

The latest survey of U.S. consumers from 451 Research indicates customer satisfaction of 99% for iPhone XR, XS and XS Max combined. And among business buyers who plan to purchase smartphones in the March quarter 81% plan to purchase iPhones. Based on the latest information from Kantar, iPhone experienced a 90% customer loyalty rating for iPhone customers in the U.S. 23 points above the next highest brand measured.

— conference call, q1 2019

Apple has a track record of making well rounded, easy to use, well thought out products. They may not have the most cutting edge technology or hardware, but they get there at their own pace and with a great story. For example, Face recognition was a preexisting technology but Apple made it cool.

If you are a customer who does not need to worry about money, which phone do you buy? The answer will probably be Apple.

This gives Apple a disproportionate market share in terms of buying power. Even though Apple has only ~13% of market share in smartphones, Apple owners probably own > 50% of the worlds buying power.

Moat based on wearables

Apple Watch 4 is awesome!

It comes with a great story: FDA cleared heart rate monitor, fall detection for worried adults with old parents and a fast enough processor that is pleasant to use. It is getting rave reviews.

None of the other smartwatches come even close in terms of the eyeballs Watch 4 is getting. Even before Watch 4, Apple was the number 1 watch company in the world by units shipped.

The day is not far when people will consider buying iPhone because they want the watch.

Ideally, I would like to carry my phone in the pocket and do most of the light work on a watch. A watch paired with a bluetooth headset is great for doing quick calls, read notifications, perusing emails/messages etc. I generally run with my android phone for tracking. This is super annoying because it jiggles around in my pockets — if i got one in my running jackets. Most of the time I run with the phone in my hand. A great watch is the only thing I would not be annoyed about taking on a run.

All in all, I am excited about the future of Apple.

Tidbits from the Conference Call

I enjoyed the conference call.

Apple Music

And I’m very proud to say that nearly 16 years after launching the iTunes Store, we generated our highest quarterly music revenue ever thanks to the great popularity of Apple Music now with over 50 million paid subscribers.

Spotify has 87 million paid subscribers (Nov’18). It has a market cap of 24 billion.

Growth in Services

Apple’s service revenue for the year was $41 billion, growing 22% year over year. Apple expects the growth to continue at approximately 20% for the near future (until 2020 at least).

In particular, there is a 20% growth business embedded in Apple with $41 billion revenue and ~ 62% gross margin. Just for fun, we can compare it to AWS — which is a $26b business with 25% gross margin. Obviously, the total addressable market for AWS dwarves that of Apple services. Or maybe Apple pay can become a home run, who knows?

In any case, being conservative with a 40% profit margin for Apple services and paying 20 times earnings, was can easily arrive at a value for Apple services stub i.e., $320b (!) As a reminder, Apple has $130b in net cash and with approximately 4.8 million shares selling at $150 a share, it has an Enterprise Value (EV) of 590 billion. In particular, Apple minus services is selling for only $270 billion (!) This includes the entire hardware segment consisting of iPhones, iPads, Macs, Watches, Beats and so on. Obviously, the success of the hardware and services segment is tied. But, they are both successful businesses in themselves and if conservatively the services stub is worth ~ $320b then the rest of the company is selling very cheaply at $270b.


We repurchased 38 million Apple shares for $8.2 billion through open market transactions …

Apple somehow managed to spend $8.2 billion at the quarterly high of $215 which was the price of Apple shares at the beginning of October. Apple fell precipitously after that got to a low of $146 on Dec 24, 2018. Basically, they went ahead and spent a shit load of money at the beginning of October and then waited out when the stock fell.

it is our plan to reach a net cash neutral position over time.

I hope they are buying their stock hand over fist right now.

As I write this, the Q1 report is out. Happy reading!


Booking Holdings (BKNG) is an interesting business. They own booking.com, OpenTable, Kayak, & Rentalcars.com. They also have significant exposure to Asia via minority investments in Ctrip, DiDi and outright ownership of Agoda. The management has done a great job of building the business for the long term.

Booking currently trades at a forward PE of ~ 17. This valuation hides a couple of things:

  • Booking has approximately $7b in cash, $8.7b in debt but interestingly they have $8.6b in long term investments. The split of the long term investments is as follows:
    Government securities & corp debt: $5.85b
    Ctrip (China):                                   $2b
    Didi (China):                                    $707m
    In particular, we can easily take out $6b from the market cap for computing EV.
  • Booking had offered three tranches of convertible debt of $1b each
    Mar 2012 $1b@$944 due Mar 2018 ($1.4b cash outflow for settling)
    May 2013 $1b@1315 due June 2020
    Aug 2014  $1b@2055 due Sep 2021
    The cash situation for 2018, hence, suffered by nearly $1.5b because of this outflow. Obviously, the outflow will happen in 2020 and 2021 BUT booking has stopped offering convertible debt now. All their nearly $7b long term debt is senior notes.

It looks like booking is actually cheaper than what the superficial analysis tells us.

Competitive Landscape

The competitive landscape where booking.com operates make me very uncomfortable.

Booking’s strategy is to spend on brand advertising. This will result in a user coming to the booking.com portal directly. Right now, a lot of booking.com customers take one of the following routes (1) they are referred via a meta search engine (Trivago/Tripadvisor), or (2) they click on an ad by Google based on the standard keyword based targeting. Given that booking.com has a large enough inventory, a user coming directly to booking will find a fitting accommodation.

On the other hand, Google has been making significant inroads in the travel space. Their flights offering is great! And they are working very aggressively to get the hotel booking experience right. They do not want to do what booking.com is doing i.e., sign up a lot of inventory and act as a middle man between the guests and the hosts. Google is making progress in the meta search space. If you look for “hotels in <city>” they already have a good meta search where you can see which portal offers you the best price. Maybe, even the portal of the hotel sells it cheaper than booking?

Another source of competition is AirBnB. As a business, I like booking much more than AirBnB. AirBnB has two major disadvantages compared to booking.com

  • You do not get an immediate confirmation. You may need to go back and forth over a couple of hours. This kills the experience for me. I already spent a lot of time getting the accommodation right. I don’t want to start the search all over again if the host does not accept me.
  • AirBnB destroys the neighborhoods. It is hard to find places to rent for locals because tourists pay more. I also think that it makes it very difficult for city officials to enforce and maintain the constant influx of tourists if they can live *anywhere*. A lot of places are struggling to cope with over-tourism and we as a society need to come up with ways to handle it. Because this problem will become worse as more and more people move to middle and upper middle class across the developing nations.


I think I can’t make a good call here. Even if I did invest in booking because I like the management and the business, I will not be willing to put more than 5% of my portfolio in it. This is because there are too many people out to get you and you are mostly competing on price.