Josh Tarasoff, who is General Partner of Greenlea Lane Capital Partners LP, gave a very interesting talk at the Ivey Ben Graham Centre that we think is worth a listen.
His strategy is to focus on Compounding Machines in high concentrations, with (one of his] examples being Amazon.
"The first key concept is compounding machines.... The way I define it is, companies that can increase their earnings power rapidly over the long haul, which means that they have large opportunities to invest at high rates of return on capital. There's two reasons that I do this. I only invest in compounding machines. There's nothing else in the portfolio, and I don't look at anything else. I don't consider anything else."
An example business model he covers is the Volume-price virtuous circle - where a cost advantage, leading to investments customer value proposition, leading growing volumes, leading to an enhanced cost advantage, leading to investment in customer value proposition.. You get the idea. Examples of this being Walmart, Costco, GEICO, and (his example) Amazon.com.
He also covers his long-term horizon approach, which he argues is essentially required to be a successful investor.
"There are really powerful secondary effects to having a very long term approach to investing. So if you invert it and you think about a shorter term approach to investing, let's say that your investments last for two or three years. Your holding period is two or three years, and let's say you have a portfolio with two dozen stocks, 24 stocks, just to make the math easy. That means that every year you need to replace 1/3 to 1/2, so 8 to 12, of your portfolio....So that's one idea per month, or every six weeks, forever. That's really, really hard. Ideas have to be good if you want to beat the market, and doing that is really, really, really hard. I think that it's just taken for granted in the investment industry that it has to be really hard, and that it's something where you're buying and selling all the time, and there's this time pressure to the job."
Where does he find ideas? 3 buckets. 1) Look at like minded investors, and network 2) Following themes. E.g. Amazon - Believed transition to online sales is inevitable, so looked at every online retailer he could find, now online retailers are 1/3 of portfolio. 3) random.
Other business models? Markel Value investing capital allocater. Has the ingredients of talent and culture + structural advantage.
How do you decide to sell if goal is to hold forever? – 1) Change in investment thesis or 2) [Basically opportunity cost] I calculate ranges of intrinsic value, and predetermined prices. If a company increases to a price vs intrinsic value and 2) becomes larger than a certain amount of the portfolio I will trim the holding. However, I don’t have predetermined prices where I want to sell 100% of something. Intellectually that price exists but if you have a great compounder what you want to be fearful of is selling it. I tilt my process to err on the side of holding too much than selling too much. I think overvaluation as it is ahead of itself. I am always thinking “If I sell it, what then?” How am I going to replace that? And if I can’t replace it in a few years would I rather be owning it in a few years and never having sold it.
Trupanion note (animal health insurance) – Understanding growth rates. The opportunity in pet insurance is so big that there is room for everyone to grow, so doing a top down analysis doesn’t really work. My focus switched to how much marketing capital can they deploy (implies focus on cost of a new customer).
His slide deck can be found here: https://www.ivey.uwo.ca/cmsmedia/3777652/tarasoff.pdf
Also here's an interesting interview with him covering a few things including how he started his fund - https://microcapclub.com/2017/11/josh-tarasoff-two-biggest-lessons-learned/