General Market Musings (US Equities).

Some quick notes I put together in the past few weeks. I try not to focus too much on the macro in my day to day but I still think it helps to have some big picture perspective in order to not miss the forest for the trees. Don’t worry, my next post is going to tackle a specific company, actually one of the most popular of them all. Comments welcome.

Valuations & the zombie economy:  The Shiller P/E at 30.62 is currently at levels that ushered in the Great Depression and only surpassed by the tech bubble multiple. Rates are already low and money is loose so what happens the next time the bottom falls out of the economy. The zombie economy is an allusion to this idea: How much of the economic recovery is alive, real, and vibrant? The Feds balance sheet has quadrupled since the great recession from $1T to $4.5T. This has bled into the economy and maybe has not been matched by increases in productivity. Tough questions but questions nonetheless.

CPG Moats no more: Consumers goods companies that boasted huge moats are now facing some real threats. The advantage conferred to them by their distribution networks might persist but their moats due to their brands might be at risk. Take Dollar Shave Club: from 2012 to 2015 it raised $160M from the venture capital community, created a shaving product with blades that cost less than $10 a month and sometimes as low as $1, leveraged social media and for basically no money put out this great ad that has reached 24 million people. It exited to Unilever at $1B in July 2016. Gillette, a 115-year-old stalwart, has had its North American market share reduced from 70% in 2010 to 54% by 2016. Yikes!! Welcome to the new age of disruption. What does something like this mean to the Kraft Heinz’s and Coca-Cola’s of the world?

Demographics: The children of the baby boom are now entering retirement in droves. According to Stanley Druckenmiller 11,000 seniors are entering retirement everyday for next 20 years and unfunded liabilities promised to them by the government is closer to an astronomical $200T. Surely this is a major issue but maybe there lies an opportunity somewhere in the healthcare sector for the astute US Large Cap investor?

Software is eating the world (I know, I know, I keep repeating this): Chamath Palihapitiya of Social Capital put it much more eloquently than I ever could so I will quote him directly: “There is just this massive trade right now between the disruptors and the disrupted, technology companies are fundamentally dynamic organisms … [There are] so many assets that are fundamentally impaired due to technology.” Uncoupling this quote is important to US investors as it is important to distinguish the disruptors from the disrupted. Examples include: Old Media/Hollywood vs Netflix (not on valuation but company itself), old advertising vs Facebook and Google, Oracle/IBM vs AWS, hotels vs AirBnB. The list goes on and on.

100 Years?

Below is my response to a recent buy side job application question. Trying to go a post without mentioning Buffett or Munger or Berkshire but failing miserably so far. Also did not choose Berkshire as it is in the firm’s 13F. Feel free to let me know what your response to this question is.

If you could only own one business for the next 100 years, what would it be and why? (please do not select a company on our 13F) (max 500 words)

         “Google has a huge new moat. In fact, I’ve probably never seen such a wide moat.”

                                                 Charlie Munger.

Theme: Again, as Marc Andressen put it, “Software is eating the world” and the firm’s most likely to benefit from this are technology platform companies. Ben Thompson put it best in his brilliant post “Aggregation Theory.” The idea being suppliers are being modularized (Hotels rooms become a room in a house) by technology distributions (Airbnb in this example) who then take a disproportionate share of the spoils (users get onto Airbnb to find a room anywhere in the world with Airbnb getting a cut).
Thesis: Alphabet (formerly Google) is the ultimate platform company with several of its platforms (Android, Maps, Chrome, YouTube, Gmail, Search, Google Play all boasting over 1 Billion users each). Sure, almost all Google’s revenues are from its core search/advertising business but look deeper and you can recast it as a transportation business (Uber has to pay Google for every request to its maps API of which there are probably thousands every minute) or a music business (Google Play music keeps a portion of subscriber fees and pays the balance to music publishers).

What is the TAM of search: The global advertising is an approx. $600B market, online is approx 38% of this and Google is 44% of online (approx. $100B). Can online one day be 50% of advertising and Google maintain its position. With modest growth in GDP it is not entirely impossible for Google to double its revenue in 5 to 10 years. Now to get creative, if a brand, say Louis Vuitton, has to close a prime retail location (say London or Manhattan) because retail is migrating online, how much of its former rent will LVMH pay for a “prime location” on Google Search? See it this way and the TAM of search becomes more unbounded.

Valuation: So, what are you paying today for the search business? In my opinion, not much if you are conservatively creative with the numbers. Over the past 12 months Alphabet had FCF of approx. $25B. But if you dig deeper, The Other Bets segment incurred $3.5B of operating losses. Net of tax the core search business is earning closer to $28B in FCF. With $91B of net cash on the balance sheet, and a market cap of $650B, one is paying a fair 20x FCF for the core business growing at between 15 to 20% a year.

Free option on a fantastic future:
Alphabet’s Other Bets segment includes Google Fiber, Verily (Life Sciences), Waymo (Self Driving cars), Nest (IOT), Calico (Combating Aging) GV & CapitalG (Venture Capital, Wing (Drones).

Culture: To last a 100 years, a company must have strong culture and Google is more another company that has a strong culture than one might imagine, Berkshire Hathaway. Google published an owner’s manual in 2004 inspired by Buffett and have transformed to a holding company structure (Alphabet) and hired Ruth Porat as CFO to rationalize capital allocation.
The world of bits (tech companies) will always be more prone to change than the world of atoms and immutable laws of physics (railroads, utilities, etc.)

Antitrust: In a world of slow growth, higher inequality and more winner takes all scenarios there is the chance of a backlash against tech companies having a larger share of the spoils. See Google’s $2.7B settlement with the EU.

Social: Google missed Social and Facebook now has a walled garden and is fast on Google’s heels.

With all credit due to:

Wexboy’ post , Ben Thompson on Aggregation , Greenhaven Q2 Letter , Alex Moazed’’s Modern Monopolies , Google’s Investor Relations , Stevenoop’s TAM post & Horizon Kinetic’s Q2 letter .


Brief Company History: In 1947 Frederick Allen Boylen incorporated Macho River Gold mines to enter the business of mineral exploration with the focus on the Urban Township in Quebec. Through several incarnations the company became Urbana and has been led by its chairman Thomas Caldwell since 1980. It remained relatively dormant for 23 years with small funds being thrown at exploring the Urban Township property in Quebec. Around 2003, under the leadership of Thomas Caldwell Urbana transformed to a pooled fund concentrated in a single asset class: securities exchanges that were going public or merging. In 2005 it changed its principal business activity from mineral exploration to investment. Over time, Urbana has become much more diversified in asset classes and geographic scope. In its current state it is an investment holding company that focuses on a portfolio of publicly traded securities and private exchanges/investments.

Getting into Exchanges: Over the course of 2003-2004 Urbana spent approx. 5.7M CAD to buy 3 seats of the NYSE in anticipation of demutualization and the IPO. In 2005 when the demutualization happened the shares were worth $12M and then $23M by March 2006.

A good Idea taken too far: With this insight (demutualization of exchanges) taken to an extreme Caldwell raised $200M in 2007 to go on a buying spree of private and public exchanges with almost half of this amount invested in NYSE shares. Other exchanges picked up on this buying spree where stakes in the Bombay Stock Exchange and CBOE. Due to the inopportune timing of the purchases and the rise of alternative trading systems most of the NYSE purchase was sold at the loss in the years following the crisis. The CBOE Holdings ended up faring better over this time period as futures exchanges are more of a closed trading system and some shares are still held.

Key Players: Thomas Caldwell (73) and his son Brendan (46) own approx. 55% of the common voting shares thereby establishing hard control of the holding company and having some skin in the game. As of the most recent close price this economic interest is worth approx. $17M. Paradoxically the pair also own 86% of Caldwell Financial, the parent company of the fund’s investment manager (Caldwell Investment Management-CIM) thus it is important to also establish whether they are fleecing the company. Over the past 12 months the fund has paid $4M in investment management fees to CIM, $1.3M in administrative cost for the use of Caldwell’s Financial office, investor relation services & accounting services and $0.35M in trading cost to Caldwell Securities. This total of $5.65M Is approximately $2.5% of net average net assets ($221M) over this period. The model for stewardship is obviously Berkshire Hathaway where the manager participates in equity together with shareholders but 2.5% is not entirely out of whack considering most of these services are absolutely necessary and the Caldwell’s have delivered on NAV per share growth over this period (see below).

Are they Caldwells good capital allocators? Above average but not out of this world. They have had some huge wins such as NYSE before demutualized, CBOE Holdings (Cost $5M, Fair Value $19M), Teck Resources in 2016 (up 330% over holding period in later 2015 till present), Bank of America (Cost $12M, Fair Value $26) Real Matters (see below) but also their fair share of misses (Bombay Stock Exchange, AGF, Bermuda Stock Exchange).
Caldwell has made it clear that he does not intend on liquidating the fund in order to resolve the discount to NAV issue. He is of the view that the advantages of permanent capital and affording daily liquidity to current shareholders outweigh the disadvantages and I tend to agree with him. From October 1, 2002, the date when Caldwell Investment Management started managing Urbana’s investment portfolio, to June 30, 2017, the CAGR of Urbana’s net assets per share has been 16.2%. During the same period, the CAGR of the S&P/TSX Index was 9.1% and the CAGR of the DJIA Index was 10.0%.

Urbana Township: Urbana Corp has owned mineral claims in Urbana Township located in Urbana-Barry Greenstone belt in Quebec for decades giving it rights to 44 claims ( 2,756.31 acres) in a very active belt of gold deposits. Urbana entered into an exploration partnership with Beaufield Resources in November 2014 to further explore the area. It spend 460K on mining expenses in 2016 and 180K in 2015. The Intention is to do a deal with a mining partner (JV, royalties) as opposed to becoming a fully-fledged miner but no ore body tonnage has been proven as yet. I pulled up annual reports as far I could find on SEDAR (1997) and even then, the company spoke of exploration on the same parcel of land and had spend $200k to buy out a minority shareholder to hold all 48 Claims or the urban township so I wouldn’t quite bet the house on their prospects. A winter drilling program found 13.0 g/t gold and 0.8% copper over 1.23 metres on the parcel of land. Through conversations with geologist and investor relations presentations this find is apparently promising but still far from conclusive. I believe the way to view this is as a free option as long as exploration costs are kept at a minimal.

Dividend: $0.05 per share in each of the past 3 years but In Jan 2017 Urbana paid the regular $0.05 dividend and a special $0.05.

Shares Outstanding: 10 Million common shares (voting) and 40 Million Class A shares (non voting). Repurchased approx. 37M shares over the past 10 years. Reducing share count by almost 40%, all at discounts to NAV.

The opportunity: Shares are currently trading at a 31% discount to NAV/ Potential upside of 45% if the gap to close. The discount has been slowly decreasing over the past few years.

Why should the discount close? Although there is no way to be certain, 3 major events are happening over the next 6 months that will make the companies portfolio more liquid and possibly enhance investor confidence.


1. Urbana’s renewal of the NCIB to purchase up to approx. 4M of its non-voting Class A shares, representing 10% of the public float.
2. An Urbana holding, Real Matters went public in May 2017. The company is a Canadian effort to digitize the mortgage appraisal process. Urbana’s purchases started in Dec 2013 with 5 total financings in the private market at a cost of $12.8M and current market value of $29.5M (12% of Assets) as of Sept 15th 2017. It becomes freely tradeable on November 7th when the lockup period ends.
3. The Bombay Stock Exchange went public in Feb 2017, Urbana was able to sell 26% of its holding with the balance subject to lockup provisions. On Feb 1 2018 the balance is able to be fully sold. This balance of is currently $23M (9.3% of assets).
-Urbana’s Portfolio is currently 58.5% liquid public market equities and 41.5% illiquid. The above transactions would make the split 80% in favour of public equities. Of the remaining 20% of private assets, the main stakes are in the Canadian Securities Exchange (4.25% of assets), 2 Private Equity Funds that have been performing quite well (Radar Capital I & II- 3.8% of assets and Highview Financial Holdings (an outsourced CIO office – 3.26% of assets).

1. As the portfolio becomes more liquid, the capital is allocated poorly.
2. The Caldwells abuse their hard control of the company.

*Fun fact: In 2016 Caldwell took out a newspaper ad to apologize for punching a classmate 65 years ago. See story here . Also both Thomas and Brendan have a great sense of humor which is always a good thing.
*All dollar figures are CAD. See here for NAV breakdown

Getting Started

The idea behind this blog is to catalog my investing ideas and thoughts. Over the years I’ve come to realize that the only way to crystallize your thoughts is to put them down in writing. I’ve done much reading but have not put in nearly enough practice due to a combination of my own lethargy and personal circumstances over the past few years. Better late than never!!

The Philosophy : I adhere to a (mostly) strict value investing philosophy. For the uninitiated, value investing is the idea that each security has an intrinsic value that can be estimated. In addition, as Ben Graham, the father of value investing so succinctly put it, in the short term the stock market is a voting machine but in the long term it becomes a weighing machine.In essence, the true intrinsic value of a security is eventually reflected. In addition, I also have a strong belief in the power of compounding over long periods of time and our natural inability to grasp this idea. The philosophy is obviously influenced by Buffett, Munger, Graham and younger investors like Mohnish Pabrai and Allan Mecham.

The process : For every potential stock purchase I will initially perform bottom up analysis to estimate intrinsic value per share. This will then be compared to the current stock price. If the discount to the current stock is meaningful, we have a potential purchase opportunity and margin of safety. This margin of safety ensures 2 things, above average returns if the difference between stock price and intrinsic value is narrowed. Alternatively, if I have made an error in calculating intrinsic value the margin of safety potentially prevents a permanent loss of value.

The Return : The goal is to beat the average stock indices by 5 to 10% per annum. This objective is quite presumptuous if you consider that fewer than 5% of professional money managers beat their benchmark/index. I’m I any smarter? No, but I believe following a value investing framework, taking high conviction bets, and investing in smaller, less liquid situations that are not on the radar of large funds can help achieve this. The average return of the S&P 500 has been approximately 10% from 1928 to 2014. Amazing considering the world experienced 2 major wars, several economic cycles and much else. I believe the next few decade at least will have lower returns for several reasons (governments are highly indebted, stock markets have mostly recovered from the financial crisis so fewer bargains exists, global economic growth might be partly artificial from increased money supply and low interest rates). So my estimate for annual return of stock indexes going forward is 5%, thus our return objective is 10-15% per year.

Risk: To avoid permanent loss of capital. Volatility (movement of stock prices day to day) is not risk. Permanent capital loss is real risk and can happen in two main ways:
1. The actual business behind the stock is damaged permanently. For example, In June 2007 the Apple iPhone was introduced, at that time Blackberry was a dominant mobile phone company and the company had a market value of $90B, Fast forward the 2017 and Blackberry is a marginal player, iPhone dominates, and Blackberry stock has a $5B market value, which translates to a 95% permanent loss of value.
2. The stock was purchased at a price too high relative to the company’s value. For example, in the year 2000 during the heyday of the Tech Bubble, Microsoft net income was about $9B and the company had a market value of about $550B, so it traded at a multiple of 61 times earnings (=550/9). Fast forward to 2017 and Microsoft earned about $21B in the past 12 months (increase of 130% from 2000) but its market value is still roughly the same $550B and a holder of stock has not made money. This is not a typical permanent loss of value since no actual money was lost but when you think in terms of the opportunities missed the error becomes clear. Over the same period Warren Buffett’s Berkshire Hathaway increased in value by 358% and TD Bank increased by 267%. In 2000 you were paying too much for the future earnings of Microsoft, however rosy the future turned out to be.

In conclusion, I hope I can bring some value add to my investing process and the value investing community. Feedback welcome.