2021 Year in Review
The “Q4 2021 Portfolio Update” was sent to subscribers this morning, with updated returns and the portfolio allocation (all positions and weightings).
If you have any comments or questions, please let me know.
As we look ahead to the new year, I wanted to close out 2021 by sharing the links from three of the most popular write-ups since launch in April 2021 (a large percentage of subscribers joined the service in the past few months, so they missed a few of these articles when they were originally published).
This is an overview of who I am, or at least who I’m trying to be, as an investor. It’s my attempt at clearly explaining the investment strategy that I currently employ, which also speaks to some of the mistakes I’ve made over the past 5-10 years (as discussed in “Returns and Lessons Learned”).
This section comes with an important disclaimer: in all honestly, I don’t believe each of my investments currently meet all of these criteria.
My explanation for that inconsistency is two-fold: (1) The application of these criteria isn’t always black or white and requires the ability to make sensible exceptions. For example, Spotify doesn’t pass the second criteria on its current economics largely due to where it’s at in its lifecycle; that said, I expect that to be resolved over the course of the next 5-10 years. As that example suggests, these criteria cannot always be rigidly applied or taken at face value. (2) It’s a fair critique of some of my portfolio positions, and I need to be more demanding as an analyst; if I own companies that are not on a path to meeting each of these four criteria, change is required.
This deep dive is a good example of the kind of research I hope to deliver to subscribers on a consistent basis; if I can provide a few unique insights on a company that we all “know” about, along with a clear conclusion on the valuation and my investment decision, that’s a job well done in my book. I hope you agree that I lived up to that standard with this write-up (along with “The Costco Snowball”, a detailed look at the history of Costco’s executive membership program and how it has accelerated “scale economies shared”).
As shown below, Costco’s warehouses meaningfully and consistently outperform its primary competitor, Sam’s Club (and Walmart is no slouch when it comes to retailing). The average Sam’s generates about half the revenues of a Costco - and the gap has widened over time. Given the unit economics of the business, that’s a tough hurdle to overcome – which explains why Sam’s Club has a smaller unit base today than it did a decade ago (over the same period, Costco increased its U.S. warehouse count by one-third)… The takeaway is clear: people love to shop at Costco.
This was the first deep dive that I published following the launch of the service, so it will always hold a special place in my heart. While it’s still early for this investment, I believe that the results Spotify has reported in recent quarters points to the massive long-term opportunities that lie ahead. (As I noted earlier this morning, ~11% of portfolio is currently allocated to SPOT.)
It took more than a year, but Spotify managed to successfully negotiate these new agreements, partly by agreeing to extend “schmuck insurance” that would provide the labels with a large payout if Spotify were acquired or went public within two years. On December 11th, 2013, the day after the new label agreements were finalized, Spotify released its new ad-supported mobile app for iOS and Android - and that’s when everything started to change.
In the first half of 2014, Spotify added ~70,000 new users a day (run rate of 25 million users a year). Ek would late admit that without these new agreements, the company would’ve gone bust within six months. Instead, it was experiencing a period of unprecedented user growth. This was a momentous development that marked a major turning point for Spotify.
I hope everybody had a happy and healthy New Years!
The next write-up will be a deep dive on Ollie’s (OLLI).
NOTE - This is not investment advice. Do your own due diligence. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved. The TSOH Investment Research Service is not acting as your financial advisor or in any fiduciary capacity.