Our aim is to provide thought-provoking investment insights and access to information to help readers understand where we believe the world's best investment opportunities lie.
Each letter discusses a topic that relates to our portfolio and investment philosophy. We’ve been able to learn an incredible amount over the years by reading ideas and thoughts from other successful investors. Our quarterly letters take inspiration and at times quote writings that have influenced our approach including; Charlie Munger, Howard Marks, Philip Fisher, Warren Buffett, Nomad Partnership and Saber Capital to name a few favourites. Contact us directly at [email protected] if you would like access to historical archives:
In this letter, we explore the concept of valuations and our 5AM Capital framework rooted in Occam's Razor. In investing, simplicity often holds the key to sucess. Inspired by Occam's Razor, the timeless principle that favours fewer assumptions, we focus on essential drivers of durable value whilst avoiding unnecessary complexity. Simplicity isn't easy - its a discipline that requires clarity and focus. It's a skill that is built through time with experience and diligence. It's about seeing the forest through the trees.
The letter emphasizes the importance of simplicity in investment analysis, guided by four valuation principles: i) purposeful valuations, ii) triangulating valuation methods, iii) maintaining a long-term focus, and iv) prioritizing businesses with growing intrinsic value.
Keywords: Occam’s Razor, Intrinsic value, Monopolistic businesses, Valuation triangulation, Long-term investing, Competitive moats, Global equity fund, Sector diversification, Market discipline, Sustainable growth
In this note, we explore the concept of ‘Win-Win-Win’, which underscores the importance of companies that prioritize the interests of shareholders, customers, employees, and the community. We believe that achieving this balance is critical for ensuring long-term sustainability and success. The letter considers the need for companies to earn the right to increase prices through a superior value proposition to customers over time - rather than a 'corner and gouge' mentality which can generate short term metrics at the expense of long term balance and durable growth.
We explore Amazon/AWS as an example of a company that embodies the win-win-win philosophy through its customer-centric innovation. We contrast this with Coca-Cola, where we observe that its product and pricing strategy may unbalance and strain the ecosystem over time, resulting in potential risks to customers, health systems, and ultimately, shareholders. At 5AM Capital, our focus remains on investing in durable, long-term businesses that can compound returns over time by maintaining this win-win-win balance.
Keywords: Win-Win-Win, Stakeholder alignment, Long-term value, Amazon innovation, Customer-centricity, Durable investments, Business moats, Scalable models, Coca-Cola critique, Sustainable growth
In this note, we discuss our focus on prospective return on invested capital (ROIC). This is explored in context of an enormous step change in AI capex spending by big tech. One of the questions we have been asking ourselves is if Microsoft (historically the quintessential capital-light business – which turned a profit and free cash flow every year since inception) is becoming more of an infrastructure play with its growth in Azure?
The note also covers what we think is important from a valuation perspective as we consider these investment CapEx cycles.
Keywords: Capital Light, ROIC, AI, Incremental returns, Scalable models, Free cash flow, Big tech, Risks, Valuations, Cyclicality of businesses, Investment cycles
In this note, we discuss our approach to (and the importance we place on) capital preservation. We see risk defined as the possibility of permanent capital loss, not just price volatility. To avoid this, our investment analysis thoroughly scrutinizes precursors to capital loss to prevent exposure to: fraud, bankruptcy, market decline, regulatory changes, excessive leverage, or management incompetence.
Keywords: Risk management, Asset allocation, Safe haven assets, Principal protection, Low volatility, Fixed income securities, Defensive investing, Portfolio diversification, Treasury bonds, Cash equivalents
In this note, we discuss our approach to Portoflio Management. Although we are bottom-up fundamental investors at heart and focus on the specifics of each individual position, building a portfolio is so much more than simply selecting a handful of very high-quality individual names. Getting overall portfolio positioning right is equally as essential to generating strong long-term returns as individual stock picking.
Keywords: Asset allocation, Diversification, Risk tolerance, Investment strategy, Portfolio optimization, Performance benchmarking, Rebalancing, Active management, Passive management, Expected returns
Due to our focus on selecting high quality, high margin, durable monopolistic style businesses that can compound returns, we hope not to sell regularly – however, we regularly test our portfolio holdings thesis, competitive position, management, and valuation and occasionally determine a need to divest. In this note, we discuss our selling process and explore five case studies of selling decisions.
This letter analyses five positions we have sold for five different reasons.
Keywords: Exit strategy, Profit-taking, Stop-loss orders, Capital gains, Tax implications, Market timing, Liquidity, Overvaluation, Rebalancing, Sell signals
As investors, we want to invest in the best possible businesses, regardless of whether they are unlisted or listed or where they are head quartered. It is logical that the most successful businesses will grow to be the largest, making it most likely they will be listed rather than remaining private. As such, global equities offer access to the world’s highest quality businesses, run by excellent management teams with ample access to capital to grow their operations.
This letter analyses two core components of the asx: Mining and Banks.
Keywords: Emerging markets, Developed markets, Market capitalization, Diversification, Currency risk, Equity valuation, Sector allocation, Growth stocks, Dividend yield
We look to invest in long-term, durable, compounding businesses. We thus want to see management with long term and shareholderaligned incentives. We believe the simplest and best alignment is common stockownership.
This letter analyses Eurofins Scientific, a niche family run testing andcommissioning business.
Keywords: Alignment of interests, Incentive structures, Capital appreciation, Short-termism, Long-term value creation, Benchmark performance, Owner mindset
Economics theory suggests that during inflationaryperiods companies will be able to offset cost increases by raising prices, however business reality is more nuanced and inflationary impact is not uniform across all companies. Paraphrasing George Orwell: some businesses’ earnings aremore equal than others.
This letter analyses Visa, a beneficiary of inflation.
Keywords: Real asset equities (e.g., infrastructure, real estate), Commodity-linked equities, Dividend growth stocks, Cyclical sectors (e.g., energy, materials), Pricing power, Equity risk premium, Inflation-adjusted earnings, Value stocks, Global diversification
We at 5AM Capital see investing primarily as a negative art. We focus just as much on avoiding certain investments and characteristics as we do on identifying great ones. Only once we can’t find a good reason to avoid an investment, would we consider investing.
This letter analyses google.com's parent company, Alphabet.
Keywords: Negative screening, Exclusionary criteria, Controversial industries (e.g., tobacco, firearms), Screening out risk, Exhaustive assessments, High quality businesses, Durable
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