Welcome to the 2024 annual letter. Our gain in net worth during the past year was 29.8% compared with a gain of 6% for the All Ordinaries Index, our 21st year of outperformance. This year our gains were driven by returns from our international and domestic equities and a continuation of the rally in the Perth real estate market. Our dental business contnues to go from strength to strength, albeit at the great time and effort of your Chairman. I mentioned in my letter last year the difficult times I faced in March of 2020. During those dark hours I had to recompose and redefine my approach. Whilst I still adhere mostly to the principles I espoused in the past, the 2020 setback has led to me broadening my approach to better suit this dynamic era. Never before in history has the business landscape changed so rapidly, requiring nimble and decisive action for companies to remain relevant. The spreadsheet only goes so far in capturing the zietgeist of the moment and whilst still the foundation of ‘Margin of safety’, I have found the most lucrative opportunities lie on the distant horizon. Ironically this has led to a simplification if anything of my valuation approach but a more liberal appraisal of a business’ longer term prospects. Many would describe this as going further out on the risk curve, but I firmly believe this is a necessity in an era where even the most dominant competitive moats can be erased rapidly with the advance of technology. 2024 saw a continuation of the stellar equity market performance of last year, led by the rapid advance of AI which is ushering in a 4th industrial revolution. No-one yet can fully contemplate the impact AI will have on jobs and society but according to the Godfather of AI Jensen Nvidia (nod to Dan Ives), AI intelligence factories are being set up all over the world. These AI factories produce tokens of intelligence which can be incorporated into business processes to dramatically improve productivity and foster innovation. This is leading to the rise of AI agents which can work side by side with human workers. Every field of human endeavour looks like it will benefit from the integration of AI. Further computing advances into the physical realm will lead to the advancement of robotics including driverless cars and humanoid robots which can interact with the physical world both in factories and the home. The US economy remains the dominant market in the world and I believe this advantage will be extended with the re-election of Donald Trump. I have always maintained that a businessman is the logical choice to lead a nation which is essentially one large enterprise. Trump understands that as well as anyone. Even though many folk like to describe their issues whether home,work, religious or otherwise in terms other than money, ultimately the underyling issue is a fight for resources and influence. The roads are always busy on a Monday morning not because of any higher calling.
“Our greatest glory is not in never falling, but in rising every time we fall.” Confucius
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett
“What separates the winners from the losers is how a person reacts to each new twist of fate.” Donald Trump
Annual Percentage Change | ||||||
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Calendar Year | Kanday | All Ords | +/- |
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2003 | n/a | 11.1 | n/a | |||
2004 | 62.2 | 22.6 | 39.6 | |||
2005 | 23.7 | 16.2 | 7.5 | |||
2006 | 60.2 | 20.00 | 40.2 | |||
2007 | 26.3 | 13.6 | 12.7 | |||
2008 | -16.4 | -43 | 26.6 | |||
2009 | 31.7 | 31.3 | 0.4 | |||
2010 | 24.84 | 1.4 | 23.44 | |||
2011 | 19.6 | -13.9 | 33.5 | |||
2012 | 12.4 | 10.8 | 1.60 | |||
2013 | 28.7 | 13.6 | 15.1 | |||
2014 | 15.8 | 1.2 | 14.6 | |||
2015 | 10.6 | -3.8 | 14.4 | |||
2016 | 9.7 | 7 | 2.7 | |||
2017 | 12.5 | 7.9 | 4.6 | |||
2018 | 3.95 | -10.3 | 14.3 | |||
2019 | 30.5 | 24.8 | 5.7 | |||
2023 | 4.95 4yr CAGR | 2.9 4yr CAGR | ||||
2024 | 29.8 | 5.8 | 24 |
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Cumulative Return | 2003-2024 | 3172% | 152% | |||
Compound Annual Return | 2003-2024 | 18.07% | 4.50% |
Key Themes of 2024
“If you need to watch a motivational video to get motivated, then unfortunately I think you don’t stand a chance “ Marcel Candeias
“There’s no such thing as problems. You just need more money.” Marcel Candeias
I have decided to call this the complex year of simplification. With interest rates raised by the RBA to over 4% and the Perth property market finally showing signs of life, I took the opportunity to clean up our balance sheet by selling our investment properties. One real estate agent I spoke with actually said this was the strongest property market in Perth history. But my story would not be so simple. I waited for the tenant leases to expire on our East Perth apartments before marketing them for sale. Of course I got the usual feedback from the agent that the apartments had become old and dated. And I was told to expect underwhelming valuations, despite the propery BOOM. I knew I needed to get a result otherwise it seems I could never move on. So when I got a ‘decent’ offer for the first apartment, I took it. One down. Next, came our previous family home, a beautiful 2 level apartment with views of the river and CBD, but accessed by 2 flights of stairs! The agent made me spend $30K to bring the apartment back to new – paint, carpets. It looked great. The first home open attracted 52 potential buyers. Wow! And then only 1 made a firm offer and 10% lower than what I paid for the apartment 17 years ago. After discussion, I went for the offer before the newness of the listing wore off. Everything was going to plan until I received a phone call on a Saturday night telling me that a water purifier had burst and the apartment had been flooded. To cut a long story short, after cleaning the place up by hand, and making an insurance claim which involved the buyer and the owner in the apartment below and over 100 emails, the deal finally went through a further 2 months later. Nightmarish stuff. Property 3 was listed in September and took almost 2 months to receive a genuine non-lowball offer. The settlement went through relatively smoothly. In the wash I basically got back the money I had invested in these properties, but it truly felt like being married with children and trying to finalise a messy divorce. I maybe captured half of the so called Perth property boom, but I am happy to put this chapter behind me and move on.
“He can’t be bargained with. He can’t be reasoned with. He doesn’t feel pity, or remorse, or fear. And he absolutely will not stop, ever, until you are dead.” Kyle Reese
I want to make a comment about how desperate you are to win and succeed? Every year will have its ups and downs which will not show up in the year end summary. A successful result is borne out of relentless focus and sticking to the task at hand. I got sick from July 10 until 9 August this year. Very sick. It so happened that during this period my usual operating chair broke down and I had to work on a back up chair. Inconvenient. I didn’t miss a day of work. I checked. Again I ask, how desperate are you?
“You’re either inside or you’re outside. In my world, either you get it right, or you get eliminated.” Gordon Gekko
I will continue to increase our holdings in US investments in the coming years. There is a difference between the capitalist US and socialist Australian systems. Let me give an example. Marko Kolanovic, a star funds manager at JP Morgan got tapped on the shoulder and lost his job due to his incorrect bearish calls on the market in 2022 through 2024. This was a guy who for nearly 2 decades had risen to be a star at the firm, earning him the nickname of the ‘quant guru’. In the US though you are only as good as your last decision. And Marko got it wrong, so he was eliminated. This is why the US dominates the financial world and why Kanday Group will continue to grow our influence in this market.
Focus on quality high growth
“Time is the friend of the wonderful business.” Warren Buffett
In the past few years some of the stock purchases I have made looked ludicrous at the time from a valuation perspective. The market knew these were high quality companies with strong secular tail winds, so their stock prices had been bid up to seemingly astronomical levels. Let’s look at two of them to see how the investments have played out 3 years later.
#### **Thesis** 1. **ServiceNow (NOW):** The thesis for ServiceNow revolved around its leadership in enterprise SaaS solutions, particularly in digital workflows and IT service management. It consistently reported strong revenue growth, high free cash flow, and significant expansion into areas like customer service, HR, and cybersecurity. Its broad adoption by Fortune 500 companies suggested resilience and strong demand for its solutions. 2. **CrowdStrike (CRWD):** CrowdStrike was seen as a leader in endpoint security, benefiting from rising cybersecurity threats and the increasing adoption of cloud-based solutions. Its Falcon platform demonstrated strong customer retention and consistent growth in annual recurring revenue, highlighting its competitive edge in cybersecurity.
#### **Financials** 1. **ServiceNow (NOW):** When I purchased Servicenow stock I was paying around $600 a share for a company slated to earn less than $6/share, meaning I was paying over 100* earnings for the stock. What I noted though was that Servicenow had a consistent track record of growing revenues at 30% per annum and earnings even faster. Since then, it has experienced significant growth, with revenues almost doubling in the past 3 years and earnings expected to reach almost $14/share this year.
2. **CrowdStrike (CRWD):** When I purchased Crowdstrike I was paying around $200 a share. This was even more egregious than Servicenow. The company was not yet GAAP profitable so I had to forecast earnings by predicting a future margin on revenues. Even after assuming a healthy profit margin I was paying close to 170* earnings on a $1.20/share forecast net income. What I noticed though was that Crowdstrike had been growing revenues at over 50% per annum and while this was sure to slow as the company got larger, the burgeoning cybersecurity industry gave me confidence that growth would not be slowing anytime soon. Since then, Crowdstrike has increased revenues by over 250% and look through earnings have more than tripled.
#### **Outcome** 1. **ServiceNow (NOW):** The stock’s price has grown at a 23% CAGR and continued leadership in the SaaS space has made it a profitable investment. Importantly the stock is now trading at less than 70* forecast 2025 earnings. 2. **CrowdStrike (CRWD):** The stock’s price has grown at a 20% CAGR and despite a software update outage which affected customers globally, Crowdstrike has emerged unscathed and still a cloud cybersecurity leader. Importantly the stock is now trading at less than 80* forecast 2025 earnings demonstrating that a great return has been achieved even as earnings multiples have compressed. **Conclusion:** Both ServiceNow and CrowdStrike delivered value to Kanday but it did require holding through the turbulence of 2022. Both companies remain leaders in their respective fields, driven by secular trends in digital transformation and cybersecurity. An historical example of this growth approach to investing is Amazon. If you bought Amazon in 1998, you were paying 480* imaginary earnings, emblematic of how frothy the market was in the late 1990’s. Yes, that was not a typo. 480* non existent earnings. So, what happened if you bought Amazon stock in 1998? If you put it in your sock drawer and held for the long term, the stock has delivered 18.5% per annum for the past 26 years, which would turn a $100K investment into $10M. During that time Amazon has increased revenues from $610M to $630B and deservingly become one of the most valuable companies in the world. Hopefully we can look forward to similar long term results from current holdings such as Servicenow and Crowdstrike. And yes, if you were wondering, we own Amazon as well.
Nvidia
“Eighty-five percent or more of the global IT spend remains on-premises. This is before you even calculate gen AI, most of which will be created over the next 10-20 years from scratch and on the cloud. There’s a very large opportunity in front of us,” Andy Jassy, CEO of Amazon
“AI is the most important technology that has come over the last 50 years” Lisa Su AMD
“Why do I need that?” Jose’ Candeias
Nvidia became the world’s most valuable company by market cap in 2024. With the promise of a 4th industrial revolution, megacap tech companies have been scrambling to get their hands on Nvidia’s latest GPU microchips. Each chip sells for around $40,000 and the chips need to be purchased in the thousands to make up clusters which are assembled in data centres which become effective intelligence factories through the use of large language models. Furthermore, the sale of each GPU chip comes with a recurring revenue stream attached as Nvidia charges $4,500 per annum to update and maintain each installed chip. Nvidia also offers NIMS, Nvidia inference microservices, whereby companies can utilise Nvidia trained models to generate outputs based on input data. All for a fee of course. Aside from the huge and rapidly growing data centre business, Nvidia also has chips for gaming, automotive with the advent of driverless cars on the horizon, professional visualisation through the development of omniverse digital twins to be used in factories and industry and embedded systems for the rising adoption of AI at the infrastructure edge and in robotics. Phew, if you can keep up with all of that then congratulations. If you invest in technology though make sure you invest in the technology leader. While Nvidia has flourished, former chip industry darling Intel has floundered. Owning a stock like Nvidia has demonstrated the importance of conviction in holding a stock. Climbing the wall of worry and no pun intended, wanting to cash in the chips, my wife tried to convince me to sell Nvidia stock at first $500, then $600, $900 and $1200. On a split adjusted basis the stock currently trades for $1400. I guess if she stops checking on me and agitating to sell then I will have found the top and it will be time to sell. Joking aside, Jensen Huang, Nvidia’s CEO, confidently asserts that the age of AI is still just getting started. Jensen Huang says we at the dawn of the next Industrial Revolution. I am prone to believe him, explaining why I added to my Nvidia stock at $200, $450, $490, $550, $650, $850 and $900. This may look like momentum chasing but Nvidia’s results just keep improving. Nvidia’s financials are unlike any other company in history. Nvidia is antipicated to report revenue of $130B in 2024 with net income of $72B, an astonishing net profit margin of 56%. Influential analyst Tom Lee has postulated that like in 1949-55 and 1990-99 the world has a structural deficit in the number of workers and AI silicone is going to replace $3T a year in worker’s wages over the next decade. If true, then Nvidia still has a long runway ahead if they can maintain market leadership. My only concern is that the law of large numbers will eventually catch up with Nvidia. As they say, trees cannot grow to the sky. I remember having that same concern though several years ago when Apple was a $300B company. Apple stock has increased more than 10x since then, so I am somewhat circumspect now about this perceived limitation. In the last 20 years the world has experienced the pc, internet, mobile, cloud and now AI revolutions. Even change resistant technosaurs like my father now own smartphones, use email and watch youtube videos on the internet. These innovations have transformed our lives and created trillions of dollars of wealth for those who had the vision and courage to participate not just as consumers but as shareholders in the companies which have ushered in these revolutions. A valid question is how many did you profit from?! I definitely don’t want to have to explain to my children how i lived through such an innovative and prosperous time and did not benefit, so count me as all in on the tech and AI revolution and the visionary Jensen Huang. PS if you are astute you may notice that some parts of this report have been written with the assistance of Chat GTP – soon AI will infiltrate everywhere.
Moby Dick
“To make money in stocks you must have the “the vision to see them, the courage to buy them and the patience to hold them”.” George F. Baker
Charlie Munger once said that the secret to getting rich is to have a few million dollars just lying around, so that you can take advantage of opportunities if they arise. Access to capital is a key element to investing opportunity and success. One such transformative opportunity which I unfortunately missed recently was Carvana. Carvana sells cars online. Anyone who has gone to a used car sales yard, would know it is not a pleasant experience. Used car salesmen are like attack dogs, waiting to pounce on their next victim. Carvana’s value proposition is to remove this unpleasantness and allow you to peruse cars online and then go to one of their automated car ‘vending’ towers and choose your car. Alternatively, once you have chosen your car, you can have it delivered by Carvana to your door. They do all the prepurchase inspections and servicing to give you peace of mind. Once you take delivery, you can drive the car around for 7 days and if you are not satisified, return the car free of charge. Carvana has a model which aims to take the pain points out of purchasing a used car. During Covid, Carvana’s business understandably exploded with revenue more than doubling. The share price of Carvana’s stock followed suit. But trouble was brewing. Carvana expanded rapidly during the pandemic to meet surging demand for used cars. This included acquiring Adesa’s U.S. physical auction business for $2.2 billion, financed through substantial borrowing. As the pandemic subsided, demand for used cars dropped, leaving the company with excess inventory and insufficient cash flow, the lifeblood of business. Carvana had accumulated over $4 billion in debt. By late 2022, many of its bonds were trading at about 50 cents on the dollar, reflecting concerns over its ability to service its obligations. Analysts warned that Carvana was at risk of running out of cash by the end of 2023 without significant restructuring or new financing. The broader economic environment, including rising interest rates and recession fears, worsened the situation. Carvana’s stock plummeted by 99% in 2022, and the company laid off nearly 20% of its workforce in attempts to cut costs . By late 2022, creditors, including major funds like Apollo Global Management, entered agreements to negotiate potential debt restructuring, fueling fears of a prepackaged bankruptcy plan. Now, that’s a lot for an investor to take in. How do you watch a stock decline 99% and then decide to buy in? Foremostly, you need to analyse the facts on hand and try to act dispassionately. Several clues gave evidence that Carvana might survive. Firstly, negotiation agreements. Major creditors signed a cooperation agreement to manage restructuring negotiations, suggesting a unified effort to stabilise the company and avoid outright bankruptcy. This indicated a wilingness to explore options like extending repayment terms to buy Carvana time. Secondly, despite its financial troubles, Carvana maintained a large customer base and continued to generate significant revenue, suggesting the business model had potential and was merely being buffetted by short term macroeconomic headwinds. The used car market is huge and Carvana’s innovative car-buying model and growing brand recognition were assets that could attract new financing. Thirdly, the company took significant steps to reduce operating costs, including laying off 20% of workers and focusing on operational efficiencies to conserve cash. Management was not stubborn and showed a willingness to adapt to market conditions. The bottom line though is that this situation was fairly unique and highly speculative. There was significant risk an investor would face a total loss on investment. As it turned out, Carvana survived and has begun to thrive again. The stock has increased 65x from the lows in a manner of 18 months, which would have turned a $100K into $6.5M. Truly a Moby Dick investment opportunity I missed. The takeaway it that like Charlie said, one of the secrets to getting rich is having money available to make bets when you see opportunity. As your portfolio grows you have the opportunity to direct small bets in the direction of promise and expand the position if the business behaves as expected. Investing opportunities in companies that are down more than 80% from their peak is more common than you might think, and it isn’t just obscure companies that no-one has ever heard of or companies on the precipice of bankruptcy. Household names such as Apple, Amazon and Netflix have all had moments in their history when their quoted equity was sold down by over 80%, providing an opportunity to the brave and discerning investor to make a fortune out of the few investment dollars they have just lying idle waiting for the buying opportunity of a lifetime.
Tradie vs College Graduate
In the movie XXX, when Xander Cage is frustrated with his team’s lack of progress in stopping the villain, he says: “Why hasn’t anyone shot this guy yet? Are we waiting for him to die of old age?” Xander Cage “The name of the game is not to top your class but rather to build your capital.” Mohnish Pabrai With college degrees often extending to 6 or 7 years nowadays, I thought it would be an interesting exercise to compare the financial performance of an astute tradie versus a bookworm student who hides in the education system hoping to emerge with prestige and a massive salary to compensate.
Tradie Apprenticeship starting at age 17 and taking 4 years with average wage of $32,000 per year First year post apprenticeship pay is $70,000 Second year post apprenticeship pay is $80,000 We can calculate the total amount the tradie will have by age 30, given the following assumptions: 1. **Apprenticeship years (17–20):** The tradie saves and invests all income for four years as he is stil living at home with his parents paying the bills 2. **Investment rate of return:** 15% per annum, compounded annually. 3. **No additional contributions after the apprenticeship ends at age 20.** He has to move out and start paying for his own life. ### Step 1: Annual Savings During Apprenticeship The tradie earns **$32,000/year** on average during the four years. Assuming they save and invest 100%: – Annual contributions: $32,000 – Duration of contributions: 4 years ### Step 2: Calculate Future Value of Each Year’s Savings Each year’s savings will grow at 15% annually until age 30. | Contribution Year | Age at Contribution | Years to Grow (\(n\)) | | Future Value (\(FV\)) | |——————-|———————|———————–|————————| | 1st Year | 17 | 13 | \(32,000 \times (1 + 0.15)^{13} = 183,760 | 2nd Year | 18 | 12 | \(32,000 \times (1 + 0.15)^{12} = 159,792 | 3rd Year | 19 | 11 | \(32,000 \times (1 + 0.15)^{11} = 139,817 | 4th Year | 20 | 10 | \(32,000 \times (1 + 0.15)^{10} = 121,610 ### Step 3: Total Future Value at Age 30 = 183,760 + 159,792 + 139,817 + 121,610 = 605,979 By age **30**, the tradie will have **$605,979 AUD** if they save and invest their entire apprenticeship income at a 15% annual return and make no further contributions after age 20.
University graduate To compare the university graduate’s outcome to the tradie, we need to calculate the graduate’s **net wealth** at age 30, accounting for: 1. **HECS debt:** $200k accrued during 4 years of university study. He too lives at home or on campus with his parents paying the bills. 2. **Starting salary at age 21:** $100k, increasing linearly to $200k by age 30. 3. **Savings rate:** 20% of annual salary is invested at a 15% annual return. He can only invest 20% because the rest goes to paying for the bills. ### Step 1: Calculate the Graduate’s Salary Each Year The graduate earns **$100k at age 21**, and this grows linearly to **$200k at age 30**. | Age | Salary (\$) | |—–|————| | 21 | 100,000 | | 22 | 111,111 | | 23 | 122,222 | | 24 | 133,333 | | 25 | 144,444 | | 26 | 155,556 | | 27 | 166,667 | | 28 | 177,778 | | 29 | 188,889 | | 30 | 200,000 |
### Step 2: Calculate Annual Investments The graduate invests **20% of their salary** each year. Investment amounts are: | Age | Salary (\$) | 20% Invested (\$) | |—–|————-|——————-| | 21 | 100,000 | 20,000 | | 22 | 111,111 | 22,222 | | 23 | 122,222 | 24,444 | | 24 | 133,333 | 26,667 | | 25 | 144,444 | 28,889 | | 26 | 155,556 | 31,111 | | 27 | 166,667 | 33,333 | | 28 | 177,778 | 35,556 | | 29 | 188,889 | 37,778 | | 30 | 200,000 | 40,000 | ### Step 3: Calculate Future Value of each investment. Investments grow at a **15% annual return**. Each year’s investment grows until age 30: | Age | Invested (\$) | Years to Grow (\(n\)) | Future Value (\$) | |—–|—————|———————–|——————-| | 21 | 20,000 | 9 | 70,357 | | 22 | 22,222 | 8 | 67978 | | 23 | 24,444 | 7 | 65022 | | 24 | 26,667 | 6 | 61682 | | 25 | 28,889 | 5 | 58106 | | 26 | 31,111 | 4 | 54413 | | 27 | 33,333 | 3 | 50695 | | 28 | 35,556 | 2 | 47023 | | 29 | 37,778 | 1 | 43,445 | | 30 | 40,000 | 0 | 40,000 |
### Step 4: Total Future Value of Investments = 70357 + 67978 + 65022 + 61682 + 58106 + 54413 + 50695 + 47023 + 43445 + 40,000 = 558721 ### Step 5: Subtract HECS Debt The graduate has a debt of **$200k**, which reduces their net wealth: {Net Wealth} = 558,721 – 200,000 = 358,721 ### Final Comparison: **Tradie at 30:** **$605,979 AUD** **Graduate at 30:** **$358,721 AUD** ### Key Insights: 1. The tradie accumulates significantly more wealth due to starting earlier, avoiding debt, and benefiting from compound growth. 2. The graduate may surpass the tradie in the long run due to a higher salary trajectory, but the tradie has a clear short-term financial advantage by age 30.
Pricing Power
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” Warren Buffett
“Your margin is my opportunity” Jeff Bezos
Gross margin is the percentage of revenue left over after you subtract your company’s direct costs (i.e., the cost of producing or selling your goods or services). Gross profit margin is the profit remaining after subtracting the cost of goods sold (COGS) from revenue. Net profit margin is the profit that remains after subtracting both the COGS and operating expenses from revenue. Scalability refers to an organization’s ability to grow without being hampered by its structure or available resources when faced with increased production. What do gross margin and scalability tell us about a company? Gross margin is a key indicator of a company’s financial health and profitability. The more revenue there is left after subtracting direct costs, the more is available to operate the business. A lower gross margin suggests a company may be having trouble controlling costs or setting competitive prices. The ability to set prices is key. Looked at in this way, the ideal business is one that has no input costs at all. Many service businesses (like consultants) have no costs at all (aside from labor), but they’re not terrifically scalable. There’s typically a blend between how scalable something is and how much margin you can make from doing it. Tech as a sector on the other hand is fertile ground because it’s absolutely filled with companies that have both great gross margins and incredible scale. How? Because code has a near-zero cost of replication. In other words, many tech businesses can scale infinitely with demand, which means incredible returns to shareholders. For hardware tech businesses, many are doing things that are so hard and unique that they can charge an incredible premium on a per-unit basis. Anyone can open up a store and sell lemonade. Not everyone can sell world-beating graphics chips.
Key Insights from Buffett’s View: 1. **Pricing Power as a Moat**: A company with strong pricing power often has a durable competitive advantage (or “moat”). This could stem from brand strength, customer loyalty, or a unique product offering. Businesses with pricing power are less vulnerable to inflation and rising costs since they can pass these costs on to customers. 2. **Resilience in Economic Downturns**: Companies with pricing power tend to perform better during recessions. Their ability to maintain or increase prices ensures stable or growing profit margins. 3. **A Contrast to Capital-Intensive Businesses**: Buffett prefers businesses with pricing power over those that require significant capital investments to grow. Capital-intensive businesses may struggle to achieve higher margins, even if they grow revenue. Let’s take a brief look at two companies from different sectors to compare and contrast from a pricing power perspective.
Nike When evaluating potential investments, prioritize companies with clear evidence of pricing power. Look for consistent margins, loyal customers, and products or services that are difficult to replace or compete against. 1. Nike (Weak to Moderate Pricing Power) – **Why It Has Pricing Power**: – **Brand Strength**: Nike’s brand is globally recognized and associated with quality, innovation, and lifestyle appeal. – **Loyal Customer Base**: Many consumers are willing to pay a premium for Nike products over generic or lower-tier competitors. – **Pricing Strategy**: Nike can command higher prices on limited editions, collaborations, and its direct-to-consumer sales, which bypass retailer discounts. – **Limits on Pricing Power**: – Competition from other strong brands like Adidas and Puma limits how much Nike can raise prices. – Sensitivity to economic downturns—people may trade down to cheaper alternatives in tough times. This has been apparent in recent years. Under John Donahoe, who worked for consulting firm McKinsey for 20 years, Nike aggressively raised prices in 2021 and 2022, straight out of the consulting playbook. This was apparent in the financials as net income margin swelled to almost 13%, after being closer to 11% in previous years. Sure enough customers soon decided they had had enough as revenue growth flatlined in 2023 and turned negative in 2024. Donahoe’s focus on tweaking the financials rather than focusing on innovation and newness against a backdrop of higher interest rates allowed more nimble innovative competitors to start taking market share. Anyway, Donahoe is now gone and another shoe dog more in the mould of founder Phil Knight has replaced him. Even though the Nike brand is strong, time has proven their pricing power is limited. Ironically, a very similar story has played out at another famous brand, Starbucks. Starbucks hired Laxman Narasimhan, hand picked by Howard Schultz, another McKinsey clone. He, too is also gone after a disastrous tenure punctuated by falling sales as customers rebelled against exorbitant prices and his ‘triple pump’ upsell strategy.
2. ServiceNow (Very Strong Pricing Power) – **Why It Has Pricing Power**: – **Mission-Critical Software**: ServiceNow provides essential enterprise software for workflow and IT service management. These systems are deeply embedded into a company’s operations. – **High Switching Costs**: Once implemented, companies face high costs and disruption if they switch away from ServiceNow. – **Subscription Model**: SaaS businesses like ServiceNow benefit from recurring revenue streams, enabling regular price increases. – **Reinforcement**: – ServiceNow’s ability to continuously innovate and expand its ecosystem strengthens customer loyalty and pricing power. Servicenow’s CEO Bill McDermott interestingly replaced John Donhoe as CEO in early 2020. Since McDermott took the reins, net margins have expanded from 19% to an impressive 26%, with a stunning 24% CAGR for revenue. Now, Bill has a reputation of being an excellent team leader, but I would contend that he has the wind at this back with the favourable economic characteristics of the software as a service industry. Meanwhile Donahoe got exposed at Nike as he lacked the ethos of a founder CEO to run a consumer discretionary and far more price sensitive business like Nike. **Takeaway** **Nike** relies on scale and brand (or cost leadership), but their pricing power is constrained by competition and customer price sensitivity. **ServiceNow** exhibits strong pricing power due to niche leadership, essential offerings, and high switching costs, enabling them to raise prices more freely without significant customer loss. I have incorporated this kind of thinking into my business analysis. My new rule is, if a company cannot demonstrate consistent improving net profit margins over a 5 and 10 year period then I avoid and do not invest in it because it clearly does not have any competitive advantage and is a price taker and not maker which will translate into a profit and share crash if there is any downturn.
Be patient (and lucky) rather than smart
“Wall St is where money is transferred from the impatient to the patient “ Warren Buffett
“The flaw in most people’s strategy is their time frame.” Marcel Candeias
“Never interrupt compounding unnecessarily” Charlie Munger
Some of the greatest investments happen by accident, by luck or simply through the alignment of the stars. I contend that as long as you are searching for great investments, you will encounter your fair share of investing luck as long as you are patient and don’t get in the way of serendipity. Bill Ackman, the famous investor from Pershing Square Capital showed what not to do with his disastrous turn with Netflix. Bill Ackman made a highly publicized investment in Netflix in early 2022, only to exit the position a few months later. Here’s a breakdown of the foray: **The Entry** Ackman announced his investment in January 2022. **Position**: Pershing Square bought **3.1 million shares** of Netflix at an average price of $390/share, amounting to a stake worth around **$1.1 billion**. **Motivation**: Ackman cited Netflix’s dominant global streaming business, predictable subscription-based revenues, and strong pricing power as appealing. He also saw the company’s share price drop (down over 40% from its November 2021 peak) as an opportunity to buy at an attractive valuation. **The Exit** Ackman sold the entire stake in **April 2022**, less than four months after entering the position.
**Reason for Exit**: Netflix reported its **Q1 2022 earnings**, revealing it had lost 200,000 subscribers, its first subscriber loss in over a decade. The company also projected losing **2 million more subscribers** in the following quarter. This unexpected shift in Netflix’s growth trajectory caused Ackman to reassess his thesis, leading to the decision to sell. Ackman stated: “We have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.” He expressed a desire to avoid “permanent losses of capital.” In other words, he tried to be ‘too smart’ and assumed he knew more about the business than Netflix management. Ackman is known for taking concentrated bets and sticking to his convictions (e.g., his long-standing Herbalife battle). However, his swift exit from Netflix was a rare instance where he abandoned a thesis quickly. He attributed the exit to his firm’s focus on long-term investments and unwillingness to gamble on a company with uncertain near-term fundamentals. **Loss**: Pershing Square incurred a loss of approximately **$400 million** on the Netflix investment. Ackman’s high-profile entry and exit amplified attention around Netflix’s challenges, including increasing competition (e.g., Disney+, Amazon Prime) and questions about its subscriber growth model. Netflix later introduced an **ad-supported tier** to recover subscriber growth, which was a key strategic shift. Ackman’s Netflix foray is often cited as an example of how even experienced investors can misjudge growth trajectories in rapidly evolving industries. Let’s see the opportunity cost Ackman has incurred since his Netflix sale. Bill Ackman sold Pershing Square’s stake in Netflix in April 2022, incurring a loss of approximately $400 million after purchasing shares in January 2022 during a sharp price drop. His fund exited Netflix at an average price of $226 per share. Netflix’s current stock price is approximately $897.48 as of December 2024
Assuming he had held onto those shares, the gain would have been significant. Here’s the calculation: 1. **Investment Size**: $360 per share × 3.1 million shares = $1.116 billion. 2. **Current Value**: $897.48 per share × 3.1 million shares = $2.782 billion. 3. **Potential Profit**: $2.782 billion – $1.116 billion = $1.666 billion. By selling at $226 per share, he recovered approximately $700 million, resulting in an opportunity cost of $1.666 billion minus the $400 million loss he already incurred. Thus, the total lost opportunity from not holding would be about **$2.066 billion**. I could quote innumerable similar examples. Here are just a few to drill in the message of not getting in your own way and giving up the ‘golden goose’ that you may already be holding because you are fearful or trying to be ‘too smart’. Microsoft stock returned zero from 2002 to 2012 then went up 20* over the next 10 years Market darling Nvidia – if you bought stock in year 2000 you likely paid $7 a share. It then fell 70% to $2 a share in the Dotcom crash of 2001. During the GFC in 2009 you could have purchased stock for $2 a share again. So,the current most valuable company in the world produced a -70% return after holding the stock for 9 years. Since then the stock has appreciated significantly and now trades at a split adjusted $1400 a share! But once again there have been plenty of bumps along the way: -50% in 2011-2012, -50% in 2018-2019, -65% in 2021-2022 on the journey to 200* your money from that initial $7 purchase in 2000, a 25% annual return Ben Graham the father of value investing, invested in Geico and it came to be worth more than all the other investments he made over his entire career. The initial investment was prescient but I am sure he never imiagined such an outcome. Coca Cola sold only 9 servings a day in its first year of operation!! This year they had revenue of $69 billion. If you bought Chipotle in 2007, this is what happened. Chipotle traded at 71* earnings in 2007 for $152/share then dropped to $39 in 2008, a fall of 74%. If you held it through today the price is now $3200 a share adjusted for splits, an annualised return of 20% per annum!! Mohnish Pabrai got given 5% of Ferrari for free when he purchased shares in Fiat Chrysler and then sold the stock which has since increase 10 fold. 5% of Ferrari would today be worth over $4 billion.
On a final note, congratulations to Warren Buffett. Buffett turned 94 this year and Berkshire crossed $1T in market capitalisation for the first time. Buffett’s secret has been to seek value relentlessly and have a very long runway to compound his capital. I remember during the depths of the Covid meltdown in 2020 when my portfolio had gone haywire. I spoke to my wife at the time and told her that Warren and Charlie were going to get me out of the mess I found myself in. Berkshire was the first stock I purchased when I began rebuilding my portfolio and I put a sizable percentage of my money into it, having faith in the enduring wisdom and integrity of the goats of investing. Berkshire stock has risen 170% since then and my faith in these legends has been rewarded. Thanks Warren and Charlie. I look forward to updating interested parties on our progress in future reports.
Yours Sincerely
Marcel Candeias