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Excerpt 2020 semi-annual letter

It ain’t over till it’s over.” [Yogi Berra]

We live in peculiar times. With the global lockdown in response to Covid-19, hundreds of thousands of people around the world are starving, unemployment in the U.S. and Europe is at a generational high, travel remains severely restricted, and managers of most companies I speak to are in full-on crisis mode — but markets scale record heights, driven by unprecedented financial and fiscal stimuli, 0% interest rates, momentum-driven algo-trading and strong speculative retail buying. Money looking for yield has few places to go these days, driving asset prices to inflated levels even as the real economy is in deep trouble.


Lessons learned One thing that has certainly surprised me over the last few months is the market’s willingness to support some extraordinary cases of overvaluation despite the global economic distress. Almost anything with “cloud” or “online” in its name has seen a rally and is now trading well above pre-Covid levels. Yes, the virus is an accelerator of the trend towards online, but most cloud businesses are now trading at 10 to 50 times revenue. That is a lot of growth priced in, especially considering many are burning significant levels of cash to drive growth, and demand may take a hit from suppressed customer spending.

To give you an example of how quickly and drastically perception can change and that valuations matter: Microsoft was a great business in 1999 and is still a great business today, but it took almost 20 years for those who bought shares in the summer of 1999 (at the height of the Dotcom-Boom) to break even on their purchase. Post the 1999 exuberance, the market successively lost faith and was drawn to other stories, sending Microsoft’s share price into a gradual decline, even though the underlying earnings stream kept improving year over year. In 2008, I was able to buy Microsoft at just five times cash flow when it fell out of favor, with the erratic leadership of Steve Ballmer and a supposedly aged product portfolio. What followed was a textbook case of corporate revival and change in market sentiment: Ballmer left, Microsoft successfully switched to a subscription model, and its cloud services are now driving growth and sentiment. Today, Microsoft is one of the highest priced businesses by market capitalization and a core pillar of almost any public equities portfolio.

How to stomach volatility At times of heightened volatility, it is important to focus on what truly matters and not to become a victim of the ticker’s erratic price swings. To stomach periods of discomfort, one needs to have a firm view on a business’ value, to know what you own, hold the course with conviction, and be sure that the market price does not reflect the intrinsic value.

Imagine you owned a beer garden. Would you sell the business every time the weatherman forecast a week of cloudy skies and rain, just to buy back the business once the sun comes out again? Or would you squirm if a potential buyer called you to tell you the business just lost 5% of its value because it was facing a week of unpleasant weather? Most certainly not! However, if you were the owner of a hotel at the best spot in Venice facing a season without tourists due to Covid-19, would you be forced to close shop for good or try to sell out? Possibly so.

Public markets can be extremely irrational. The focus on price rather than value may drive our actions more than we would like. As in real life, emphasizing outcome over effort tends to skew one’s perception. There is a great benefit of being “stuck” in an investment without a daily mark, as is the case with most companies owned by entrepreneurs, real estate, or private equity funds: you do not receive a minute-by-minute broadcast of your net worth and it dampens the impulse buying and selling driven by reactionary tendencies.

So, at times of fear and doubt when the ticker is showing too much red ink, it may be best to turn off the screen, go for a walk and reflect on a business’ value drivers, if its dependencies are changing, and if these factors influence its intrinsic value. The market is there to serve us, not to guide us.


Nobody knows what the market will do over the next few months. Given Covid-related peaks and waves, pending defaults, and rising unemployment, another severe market drawdown is possible. However, a deteriorating real economic climate should not be surprising either, and should therefore be at least partially priced in already.

I see a strong need to remain vigilant, given the continued spread of Covid-19 — the worst is yet to come with regard to the human and economic toll. But I am also aware that unprecedented monetary stimulus measures could drive a material devaluation of fiat money. I therefore consider it important to remain at least partially invested in surviving businesses with pricing power while maintaining valuation discipline.

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