What to expect in 2018 – January 2018

What to expect in 2018

It’s tough to make predictions, especially about the future” Yogi Berra

I follow the Noah rule: predicting rain doesn’t count; building arks does” Warren Buffett

At Somar we are excited for 2018. Not because we can accurately predict how the year will unfold. But because throughout 2017 we have focused on what we can control.  In 2017, we set out to build an extremely high-quality portfolio for 2018 and beyond. We like our chances under a wide range of scenarios. In 2018, we will continue to relentlessly search for opportunities to upgrade our portfolio. We see a lot of innovation delivering step improvements in customer value propositions.

At this point you are probably inundated with macro-economic predictions. We don’t believe that incremental macro-economic changes will have a material impact in the long-term investment returns for Somar. Macroeconomic growth tends to be a rounding error for the fast-growing companies we tend to invest in. We have seen investors lose very attractive investment opportunities by trying to play the macroeconomic cycle. Throughout our career there has hardly been a year where some pundits didn’t predict an impending recession and cautioned investors to wait. As Paul Samuelson, an economics Nobel laureate said: “Economists have correctly predicted nine of the last five recessions”. Judging for the air time business media give to economic data such as jobs reports or interest rate changes, you would think all great investments spring from tremendous foresight into these variables. But do you remember what the Fed Funds rate and unemployment rate were once you discovered the tremendous business opportunity created by smartphones, online search, e-commerce, ride / home sharing or social media? Did it matter whether the Fed was preparing to raise or decrease rates? Did the economy go into recession after you invested? Do you care?

Rather than fret about the weather or the market, at Somar we spend our energies on the things we can control. We believe we are in the golden age of investing (please see our June 2017 letter) driven by an unprecedented pace of innovation and worldwide consumer adoption. Entrepreneurs are leveraging technical innovations such as the internet, smartphones, cloud computing among others to offer consumers a step change improvement vs. incumbents in the value proposition. The big risk for us is missing investment opportunities. That is why every day we search relentlessly for new investment opportunities under our circle of competence to make sure our portfolio always reflects the best risk-reward we can find. Our 2017 hunt was the most successful in our career. By the end of the year, our portfolio presented a superior risk-reward than it did at the beginning of the year. For 2018 we will continue the same relentless pace. That is what you can expect from us and it is entirely under our control.

Every investment decision stands on assumptions about the business future performance. We strongly prefer to anchor our expectations in assumptions that have proved their validity across time, macroeconomic scenarios and geography. You can build your strategy and portfolio around them. They work for you in most conceivable scenarios. Here are a few illustrations of this:

  • Consumers prefer more choice than less choice
  • For consumers of non-luxury goods, customers prefer lower prices
  • For the same price, consumers prefer more service than less service
  • A good investment occurs when the cash deployed is significantly less than the stream of cash flows generated in the future discounted to the moment of investment

 

These may seem simplistic or even childish, but they are very powerful. Take the preference for lower prices. It may be consensual that these businesses benefit in recessions as people trade down to save money and extend their budgets. But these businesses also capture share in macro expansions. Sure, some customers will trade up. But a lot of customers who couldn’t afford the product and therefore were “non-consumers” can now start to buy the product. Price competitiveness therefore allows companies to gain market share under different macro-economic scenarios.

So, the time has come for us to make some “predictions” for 2018:

  • strong innovation around the world, including diffusion and adoption of best practices in different geographies
  • continuing execution and roll-out of the innovative companies already in our portfolio
  • relentless search for new investment opportunities by Somar
  • continual upgrading of Somar’s portfolio expected risk-reward

As you can see we are focused on building our Ark. One that takes advantage of the favorable winds we see but also that protects against several different scenarios.

We wish you success in your other businesses and hope you are finding as many opportunities as we are. Feel free to reach out if you want to discuss any opportunities that pique your interest. We are honored that you have enlisted our help in searching for the best opportunities to deploy your financial capital. It is the golden age of investing and we are excited to navigate it with you.

Happy investment hunting in 2018. And above all: Happy New Year!

 

 

 

 

Year in Review – December 2017

Year in Review

The end of a year marks a period of reflection for what has been accomplished, and preparation for what is to come. As we look back at 2017, we feel very good about the progress we have made. We have upgraded our portfolio, developed our team, launched new Data Science projects, reduced fund costs, and built strong constructive relationships with the management teams of our portfolio companies.

Some of the highlights of the year include:
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Creative Destruction – October 2017

Creative Destruction

Capitalism […] never can be stationary. […] The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. […] The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism – Joseph Schumpeter
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Upgrading Our Portfolio – September 2017

Upgrading Our Portfolio

Somar’s mission is to support the financial success of our investors by investing their capital in businesses
with both a leading customer-value proposition and a large market opportunity ahead.
We find attractive opportunities in underfollowed companies that have outgrown Venture Capital’s sweet
spot but that are not yet big enough to be ETF-owned.
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Fact-based vs. Opinion-based Investing – August 2017

Fact-based vs. opinion-based investing

“When my information changes, I alter my conclusions. What do you do, sir?” – John Maynard Keynes

One of the hardest and most profitable skills to develop as an investor is the ability to be open to new information and to change one’s mind when new information alters one’s previous conclusions. At Somar we have improved our returns by leveraging new information to change long positions into shorts and short positions into longs. To develop this skill, we had to overcome 3 barriers:

  • Confirmation bias
  • Commitment and consistency bias
  • Ego
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Mistakes… I’ve Had a Few – July 2017

Mistakes… I’ve had a few

At Somar we strive daily for continuous improvement to make sure the portfolio at market close is more compelling and has more upside than the portfolio at the start of the day. We use several tools for this: talking with management, direct observation, data science, reading, observing other people’s mistakes and analyzing our own mistakes.
This month we will share what we learned from some of the mistakes we’ve made since inception. After reading this letter you may be surprised how we have been able to deliver returns despite so many mistakes. That speaks to the quality and upside of the opportunities we are finding. We have found more attractive opportunities in the last 3 months that at any time in the life of the fund. That is a topic for another letter…
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Golden Age of Investing – June 2017

Golden Age of Investing

Over the first half of 2017 we added several new secular winners to our portfolio. The pace at which we
have been doing that has been accelerating which speaks to the quality of the opportunity set ahead of us.
Our estimation of the portfolio’s risk-reward now stands at an all-time high [please read our April 2017
letter for a description of this internal metric].
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Somar Turns 1 – May 2017

Somar Turns 1

One year ago, we partnered to start the Somar journey. 12 months later we are off to a good start and look forward to the future with strong confidence. My conviction that Somar will deliver superior risk-adjusted returns to our investors has never been higher: our performance is ramping up nicely; we have a highly professional, cohesive and committed team; and a stable and growing group of investors.
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A Personal Story – April 2017

A Personal Story

My dad is a medical doctor. He started his career in a hospital, working all night at the emergency room.
His passion was serving as a community doctor. Therefore, when I was 10, he moved our family to the
Portuguese countryside and built his practice there. Every day he put in long hours: leaving home by daylight
and coming back for dinner at around 8PM. Most nights, he would see patients after dinner at our house and
occasionally he drove at night to do domicile consultations. He built a stellar reputation: one of my
schoolmates’ family told me that my father saved the life of his grandfather. It is hard to overstate how
proud I am of him.
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Portfolio Construction Process – March 2017

Portfolio Construction Process

We believe Somar’s portfolio management process is accretive to our returns. Our process allows us to

  • Quantify and monitor our expected portfolio performance for the next 12 months
  • Easily weigh trade-offs between opportunities and risks among different industries and geographies
  • Use market volatility to our investors’ advantage by sizing up positions on weakness when their risk-reward improves and harvesting positions on strength as their risk-reward declines
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