Tennis, Sardines, and Bitcoin (2021 mid-year letter to partners)

Topics: the practice of permanence; price is not value; sardines and Bitcoin

Dear partners and friends,

Farm Road Capital out-performed the S&P, which gained 14.4%, in the first half of 2021.

The lack of details is intentional. Your manager encourages you to avoid considering short-term returns. Industry customs dictate that short-term returns are indicators for long-term returns. Your manager cannot disagree more. The proper value investor knows what would likely happen, but could only guess at when. Short-term returns matter little in judging the skill of the value investor. In early letters, Warren Buffett preferred his returns judged on a rolling 3-year time frame at minimum.

The practice of permanence

At the center of FRC’s investment philosophy is a widely known yet commonly misunderstood concept – compounding.

Compounding is really just interest on interest. Returns on prior returns over a long duration generate true wealth. This is well-known.

What is not well-known is how compounding is achieved. The answer is within the public filings of Berkshire Hathaway. More than half of Berkshire’s net worth was generated by less than half a dozen investments. Warren Buffett has held some of these investments for decades.

Permanence is what Buffett ferrets out and treasures in a business. He searches for timeless competitive advantages that are sustainable through good times and bad. Decades of ownership of select companies made Berkshire worth $640 billion, the 6th most valuable company in the Fortune 500.

This is what FRC aims to achieve – finding companies worthy of permanent investment. Practicing permanence means that the ideal goal is to never sell. However, this is easier said than done. FRC sells when the assessment of the business is mistaken (unforced error); when unforeseen circumstances significantly alter the prospects of the business (forced error); or when valuation reach wild levels.

Your manager, first and foremost, seeks to minimize unforced errors. Dr Simon Ramo identified two different games of tennis in his insightful book Extraordinary Tennis For The Ordinary Player. The first game is the Winner’s Game played by professionals, who win by scoring excellent shots. The second game is the Loser’s Game played by amateurs, who win by making fewer mistakes than their opponents. In a Winner’s Game, 80% of points are won. In a Loser’s Game, 80% of points are lost – hitting out of bounds, double-faults. Amateurs win by avoiding mistakes.

Returns in investing can be described as the difference between intelligence and arrogance. The more intelligent and less arrogant one is, the higher the returns. One may play the Winner’s Game by guessing the future of self-driving (ie be more intelligent), or play the Loser’s Game by sticking to what one surely knows (ie be less arrogant).

Investors can win by betting on crazy ideas that work, or just by being not crazy.

Your manager has made many errors by over-estimating his intelligence. Minimizing errors is crucial yet counter-intuitive. Our minds are programmed to reach goals, not avoid mistakes. Think about driving. We drive to get from A to B. It is unnatural to explain driving to avoid accidents. Yet defensive driving has the best chance to get you to your destination in one piece. This means that avoiding errors has to be a conscious effort. Your manager is hard at work to be less arrogant in determining the limits of his knowledge.

Management of companies, which are worthy of permanent investment, tend to have similar habits. They avoid crazy M&A that peers are doing, and focus mostly on organic growth. They are humble by never going all-in on a single product. They survive by diversifying bets and avoiding large risks.

Your manager said at the start that compounding is often misunderstood. This is because of the popular belief that it is possible to time the market consistently (ie buy at the bottom, sell at the top, repeat). This belief disfavors permanence and encourages active trading (exactly what Wall Street and Robinhood want). Reuters calculated that the average holding period for US stocks was only 5.5 months. The great economist and investor, John Maynard Keynes, spoke about the futility of market timing:

As the result of these experiences I am clear that the idea of wholesale shifts [in the stock market] is for various reasons impracticable and indeed undesirable. Most of those who attempt it sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind” -Keynes’s memo to the Estates Committee at King’s College in May 1938

Despite the futility, many still believe in timing the market, likely because of inherent human instincts that are difficult to resist. Some favor action more than profits. Others trade based on social proof more than business fundamentals. Many cannot detach from the grips of greed and fear. Ed Thorp once said that you always get what you want from the markets. That many would lose and yet still believe in timing the market implies that some non-monetary concerns are probably satisfied.

Price is not value

A few readers questioned whether your manager has the correct selling discipline. An example should aid that consideration. In the first quarter of 2021, the valuation of technology stocks had risen so high that a company in the portfolio was valued at 40-50x revenue. It intuitively seems like an ideal time to sell, but your manager did not sell. The assessment of the business was correct, unforeseen circumstances were absent, and valuation was not at wild levels.

Within weeks, the stock fell 47% from its peak because of inflationary concerns (see Appendix for a more detailed explanation). Your manager again did not sell because of the same reasons applied weeks earlier.

The stock then increased 53% from bottom (still 15% below peak). Guess what your manager did not do.

The stock price fluctuated wildly while its underlying business improved. The investor must hence never rely on stock prices as an indicator of underlying business quality. A rising stock price does not mean that the underlying business is doing better, and a declining stock price does not mean that the underlying is doing worse. Using prices to inform business quality, which in turn affects prices, is a logic fallacy (circular reasoning to be precise).

Stock prices are nothing more than the collective behavior of many buyers and sellers, many of whom transact without any concern for underlying businesses. Your manager analyzes business quality to understand stock prices, instead of looking at stock prices to determine business quality. Many investors practice the latter more often than they care to admit.

The stock market is bullish in nature. Wall Street, corporations, and even countries have much to gain from rising markets. Stocks, therefore, are biased to be over-priced. You would likely get less than what you pay for. The adage “you get what you pay for” almost always does not apply in stocks.

Investors face a daunting task because they have to get more than what they pay for in a mostly over-priced market.

Price is what you pay, but value is what you get.

Sardines and Bitcoin

“There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared.

One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.” -Margin Of Safety by Seth Klarman

Speculation is built on sentiment. Prices increase for no reason other than willing buyers paying higher prices than previous buyers. Circular reasoning, while false in logic, is difficult to resist.

Anything is a candidate for speculation. There is no criteria other than willing buyers. History has shown that flowers, gold, land, property, stocks, baseball cards, tea leaves, and even uranium are worthy candidates.

The allure of speculation lies in its ounce of truth. Sardines is a source of nutrition, and should be priced as such. What speculation does is take inherently good things so far that they turn into damaging traps for the unwary.

A modern example is cryptocurrency. With roots in cryptography, Bitcoin is built on blockchain technology deemed impervious to hacking, conferring convenient proof of ownership. Its cousins want to take hack-proof technology further. They purport to make “smart-contracts” a reality, in which digital currencies can be exchanged according to a set criteria without human intervention. The truly ambitious want to build a decentralized ecosystem where applications are unhackable, untraceable, free of human government, and truly utopian.

Bitcoin and others have utility. The question is how much. Bitcoin is now worth more than Disney, American Express, and Coca-Cola combined. Its market value exceeds the GDP of Hong Kong and Sweden.

Thinking about customers often reveals hints to the potential of cash flows and valuation. Who would appreciate the unhackable, untraceable, and utopian nature of crypto assets? Your manager can think only of repressed societies, criminals, and hobbyists, all of whom have little potential to generate sustainable cash flows. Repressed societies are generally poor without functioning governments. Criminal activity would eventually be punished and their cash flows confiscated. Would crypto assets become a magnet for hobbyists like what Lego or Magic The Gathering did? It is difficult to tell.

Without real promises of cash flows, cryptocurrencies are difficult to value at best, and downright speculative at worst. Value investors should avoid them for these reasons.

Your manager may be completely mistaken about the potential of cryptocurrencies. A friend, who became a hundred-millionaire from Bitcoin, would like nothing more than insist on its world-altering potential (on a new yacht no less, to make his argument more compelling). In investing, nothing compels one to jump over seven-foot hurdles when there are one-foot bars to step over. Your manager prefers the latter, following the rules of the Loser’s Game.

If you have any questions, contact me at

Marcel Gozali



Our portfolio declined near-40% from its peak during 1Q21, before rebounding in 2Q. During 1Q, readers questioned why the portfolio declined when the markets were at record highs. Our portfolio invests mostly in technology and media companies, which show the most promise in growing intrinsic value over the long-run. While the overwhelming majority of these companies reported improving financial results in 1Q21, their stock prices did not keep pace, mostly because of inflation concerns. Markets anticipated that the Federal Reserve had to raise interest rates to offset higher inflation. The higher interest rates are, the less valuable future cash flows are, the more valuable current cash flows are. Companies in our portfolio invest heavily in R&D to support future growth, so they are likely to generate more cash flow in the future than present, hence markets believe they are worth less in a potential high-rate environment.

Your manager spotted a gaping hole in the market narrative. It is not certain that our companies would definitely perform poorly in a high-rate environment. There is no question that high rates lower the valuation of future cash flows, ceteris paribus. The question should be would cash flows grow enough to offset the impact of high rates.

Our focus is on fundamental business performances, not on their stock prices. Many mistakenly look to market prices for guidance, thinking that prices correlate to business performance (ie higher prices mean better performance). Yet the market is nothing more than the collective result of many buyers and sellers, many of whom transact without any concern for business performance. Your manager aims to rise above the instinct to conform to the “herd” that is the market, and remain independent in assessing business value.