🗞 A Modern Approach to Value Investing

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 🔈️ 7 Timeless Quotes from A Value Investing Legend

• 🛒 An Inside Look at the Developing Marketplace of Instacart

Let’s dive in!

A Modern Approach to Value Investing

Bill Nygren is somewhat of a legend in the value investing world.

As the Chief Investment Officer - U.S. of Harris | Oakmark, Bill has spent a lifetime mastering his craft and nearly 30 years outperforming the S&P 500.

Today, Bill manages three separate funds (The Oakmark Fund, Oakmark Select Fund, and The Oakmark US Large Cap ETF) that in aggregate are responsible for more than $25 billion in assets.

In the Oakmark Select Fund, which Bill has managed since 1996, the fund has generated annualized returns for investors of ~12%.

To put that in perspective, $10,000 invested in the fund at inception would today be worth $236,253!

The S&P 500 over that time… Just $140,055.

This week, we had the pleasure of sitting down and chatting with Bill Nygren for the latest episode of A.U.M.

Bill’s timeless wisdom is pervasive throughout the discussion, but here are a few individual quotes that stood out:

On Value Investing:

1. “When you make an investment, you’re getting two things. The balance sheet and the guy who runs the company, and you better like both of them.”

2. “One of the biggest problems with value investing is you’ve got this continuum of patience, which you need and stubbornness, which will kill you. Where you sit on that continuum can determine how successful you are as a value investor.”

3. “40 years ago returns of businesses were much more tied to physical assets. So it was easier to say… if a company's got a $30 book value, they'll probably earn somewhere around 15% on that, some number of years out, $4 to $5 a share of earnings is a pretty reasonable projection. The world we live in today, returns are much more tied to intangibles. It's harder to just look at a book value number and say five years from now they should earn X percent on equity. So I think I think it requires today an ability, of an ability, to understand how a business works, analyze its competitive situation, and make informed estimates of what the company may look like five years down the road.”

On Management:

4. “You almost never meet a CEO that doesn't have great public speaking skills, that doesn't have an IQ significantly above average you know… You know, these people start out in companies that have thousands of employees and they rise to the top. It's because they're charismatic, they can speak well, they're really smart, and that's really not enough to distinguish a management team. That's kind of table stakes. And I think today I can rate managements much more quickly on how focused they are on their shareholders as opposed to, maybe their own legacy or making the company bigger. And it is meeting a hundred of them that is what helps you decide if somebody's top decile or not.”

5. “It's human nature that people do what's in their personal economic interest… So what we want to make sure is that the economic incentives for the management team are tied enough to performance metrics, equity metrics, stock price options, so that they will make more money if we make more money.

   And we don't want to be in the company that doesn't have denominators on their performance bonuses. If you hit this sales metric or this earnings metric, you get 100 % of your salary and bonus. It's easy to get there by making dumb acquisitions.”

On Fostering Intellectual Tension:

6. “I don't want somebody to come in and say, wow, you're really smart to own all those bank stocks and man, I think they're really cheap too. I want the person to come in here and say, you know, it looks kind of crazy to me that you own all of these and here are my reasons for thinking you're not right.”

7. “Envision a long table, roughly 20 of us seated at the table… You now give a 60 second summary of why you think the stock should be purchased. And then for the next half hour, the 19 other people at the table try to tell you why you might be missing something and why it could be wrong. The goal of the meeting is that we identify as many of our mistakes as possible before we lose any client dollars on them.”

Portfolio Allocation:

Since Bill manages several publicly available mutual funds, FinChat users can monitor the holdings of both The Oakmark Fund and The Oakmark Select Fund on the platform.

Here are the latest holdings of The Oakmark Select Fund:

FinChat Update

Introducing v4.5.1

This week, we shipped some major upgrades to the platform.

These include:

• Our biggest speed improvements ever ⚡ ⚡

• Adding Global ETF Coverage 📊

• New Website Branding 🌐 

• Dozens of subtle design improvements

FinChat In The Wild: Buyback Capital

Instacart: Faux-network or real network?

Introduction & History

Instacart (CART) was founded in 2012 by Apoorva Mehta. Of Indian extraction and Canadian nationality, Mehta took the inspiration for CART from his arduous bus commute to get groceries in the Canadian Winter. As a back-end logistics engineer for Amazon in Seattle, Mehta dreamed of starting his own company. In 2010 he quit and moved to San Francisco.

After a string of failed startups, he finally ideated the concept for CART and promised to not go to the grocery store until the code for it was completed. In late 2012, he secured admission to Y-combinator by having the CART app deliver a six-pack of beer to YC partner Gary Tan after missing the admission date by two months. The rest, as they say, is history.

The concept that picked up product market fit was elegant:

“Instacart is a product where you can order your groceries and get them delivered to your door within 1 hour. What’s interesting about this is how we actually make this happen. Instacart is an entirely software company. This means we don’t have any warehouses, no trucks, and we don’t hold any inventory. So when you order your groceries, we have one of the thousands of personal shoppers in our network pick up your groceries from stores such as Wholefoods, Costco, and Safeway, as well as many others, and have them brought to your door within 1 hour.” - Apoorva Mehta

Like so many things, the Pandemic was a watershed for the company. CART’s sales increased by a factor of 5 in 2020! This was followed up with a very significant uptake in personal shoppers, although nowhere to the same extent. The post-Pandemic era saw CART list via a normal IPO in 2023, a very rare occurrence in recent years. Apoorva Mehta stepped down as CEO, and subsequently from the board, and was succeeded by former Meta Platforms executive Fidji Simo.

If we speed up to today, CART is a lot more than a grocery delivery app. Obviously, underlying their operations is grocery delivery but today CART has over 600,000 personal shoppers in North America. They partner with 1,500 retailers, provide delivery from 85,000 grocery outlets, and work with 6000 consumer packaged goods (CPG) companies.

13.7 million users are active on the app every day!

Layered on top of the key consumer experiences (on both desktop and mobile) is an advertising business. Thematically, the advertising business is not dissimilar from how retailers typically make their money - the so called ‘shelf fees’. CART’s digital real estate is valuable and CPG companies pay for prioritized listings.

The digital advertising experience is, of course, a significant step up from the form of traditional retailer advertising alluded to before. The starkest difference is that the advertising outcomes are measurable. Underlying CART’s relationship with the retailers is a number of B2B products. This includes inventory management tools, advertising products for the retailers website, as well as a white-labelled e-commerce front to power these direct bookings.

Meme of the week

Less than a month ago, Berkshire Hathaway filed their 4th quarter earnings and Warren Buffett wrote his annual letter to shareholders.

One of the biggest takeaways from the report was that Berkshire is sitting on $334 billion in cash and cash equivalents. That’s the highest cash allocation Berkshire has ever had. While this initially drew much criticism, it also coincided with nearly the exact market top.

Since that report, here’s the performance of the major indexes:

• $SPY: -8%

• $QQQ: -11%

• $DJIA: -7%

Looks like the Oracle of Omaha maybe hasn’t lost his touch after all.