Letters

Playing the Long Game

June 2021

Playing the Long Game

At Somar we are very bullish on the impact of technology and innovation in the lives of consumers around the world. We have written about this in previous letters and in our fortnightly Sunday e-mails.

The advent of the internet, augmented by the high penetration of smartphones, means we are now online virtually 24/7 and can easily be kept informed of all aspects of our lives and of the world within seconds.
This means we are now more impatient. We want information immediately. We want our products delivered in the same day. We want to stream our favorite show immediately.

Patience is a key ingredient in the achievement of excellence in most tasks. We know how hard and for how many years athletes train to become Olympic champions. A great wine needs to be aged for years. And the building of great, generation changing companies also takes years of persistence and hard work.

In financial markets, the frenetic change of prices second by second creates the illusion that a lot of information is getting incorporated on a daily, weekly, or even monthly basis.

My experience shows the markets can judge the fundamentals incorrectly for a period of years. This is due to fads and wrong narratives that catch-on and persist even in the face of contradictory fundamental data.
Let us look at a couple of examples.

After a successful IPO in 2008, Visa continued to execute on its strategy of substituting cash and checks for electronic forms of payment. In the Summer of 2010, as part of the Dodd-Frank Law which passed in the wake of the great financial crisis, an amendment was introduced that asked the Federal Reserve to study and set the prices of Debit Interchange rates. These are the fees paid by merchants to the banks that issue debit cards, to share in the cost and benefits of the Debit card payment system.

Visa and MasterCard used to set these fees but did not receive any of them. Also, the US Debit business represented much less than 20% of the networks’ total revenues. Public market investors though, were alarmed by the increased regulation and sent the stock down 30% (see Fig.1). Some investors deemed Visa outright “un-investable”.

Fig. 1
Source: Bloomberg

In the meantime, the company continued to execute on its strategy flawlessly, and the business thrived both on the top line (Fig. 2) and the bottom line (Fig. 3).

Fig. 2
Source: Visa

Fig. 3
Source: Visa

It is striking that despite the violent reaction of the stock price, the company’s financials did not register a single “blip” in their secular progress.

Many investors decided to sell during the controversy and moved to other opportunities. But the investors that stayed focused on the long-term were well rewarded with the stock more than multiplying by 10x over the following 10 years (Fig. 4).

Fig. 4 Visa Share Price

Visa’s case is not rare. Other visionary companies have faced a lot of skepticism during their life as public companies. Perhaps one of the most striking comes from Amazon. For almost 4 years its stock went sideways or even down (Fig. 5). Between the peak in 2003 and the bottom in 2006 the stock was actually down more than 50%.

Fig. 5 Amazon Share Price
Source: Bloomberg

The widely held belief at the time was that the company could not build a profitable business model and was going to face significant competition from eBay which was the leader, had a financial services arm (PayPal) and a more attractive business model (Marketplace with limited inventory risk and costs).

Amazon continued to execute very well during this period, with extremely strong growth of sales (showing strong customer attraction to Amazon consumer proposition) and, atypically for a company still in investing mode, strong growth of operating profits (Figs. 6 and 7 respectively).

Fig. 6
Source: Amazon

Fig. 7
Source: Amazon

Eventually, after almost 4 years, investors caught up to the massive opportunity ahead for Amazon and the stock reflected its progress. Since 2007, the stock has gone up an outstanding 80x. (See Fig. 8).

Fig. 8 Amazon Share Price
Source: Bloomberg

Throughout the past 5 years I have met prospective investors that required daily performance updates and even daily liquidity. I conveyed to them there was no alignment between their goals and Somar’s. Patience is a competitive advantage of Somar and a driver of superior long-term returns.
We understand it is not fun to underperform for a few months when those around you are outperforming. But to be a great investor, you need to be patient and focus on the long-term opportunity of the companies you invest in. If the opportunity is big enough, we do not mind waiting 4 years to enjoy an 80x.

Luckily, we are met with a wide array of opportunities and the likelihood that all of them, hit a 4 year “air pocket” at the same time is low. But we will be patient when the facts support our thesis. And we will always be transparent to you on our thinking. If you ever want more information, please do reach out. We are very happy to share our thoughts.
I look forward to hearing from you at either pedro.ramosatsomarcap.com or +1.646.581.6842.

All the best,

Pedro Ramos

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Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice. Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees. 

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