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.

2020 letter to partners

Topics: a lesson from Napoleon; the unprecedented risk in stocks; our investments; trust as leverage; gratitude shout-outs

Dear partners and friends,

YearFRC ReturnS&P 500 Total Return
CAGR since inception44.8%16.0%
Cumulative since inception339.4%81.3%

Farm Road Capital gained 139.5% in 2020, while the S&P 500 gained 18.4%. From inception in 2017, FRC gained 339.4%, while the S&P 500 gained 81.3%.

Your manager assures you that the S&P is not an unduly short yardstick. 68% of my peers under-perform benchmarks over the most recent 3-year period (2016-2019). Over 5 years, 82% under-perform. Over 10 years, a staggering 89%. The numbers suggest that excess return is rare. Your manager faces long odds, but hopes you are assured by the alignment of our interests. 99% of your manager’s net-worth is invested in the same securities in which you are invested. Your manager eats his own cooking.

Your manager is also the first to assure you that the success in 2020 is unlikely to be repeated. Unprecedented conditions created once-in-a-lifetime (maybe twice) opportunities that are unlikely to repeat in the foreseeable future. Your manager prefers to avoid throwing cold water on your returns, but would do so only to adjust your expectations to reality. There is nothing like cold water in wintry January that wakes one up to the real world. It is your manager’s goal to perform in excess of benchmarks by 10% annually over the long-run.

A lesson from Napoleon

Some pilots describe their jobs as “hours and hours of boredom punctuated by moments of sheer terror.” It is almost the same with investing (replace ‘boredom’ with ‘uneventful reading’).

What pilots do during terrifying moments determine the fates of many. The few decisions made in those moments have impacts larger than many decisions combined in routine flights. The same principle applies to investing. What investors decide during extreme market turmoil have outsized impacts on performance.

Napoleon perhaps has the best response, that is “the average thing when everyone else is losing their minds”. An experiment first conducted in 1951 showed why this is difficult. Psychologist Solomon Asch showed eight college students two diagrams:

He asked them: “Which line – A, B, or C – is similar to the line in the other diagram?” Each participant answered sequentially, such that the next participant could hear the previous answer.

The correct answer was simple. Yet when the first seven participants (who were actors with predetermined responses) gave the wrong answer, the eighth (the sole real subject) almost always gave the wrong answer as well.

The researcher viewed the results “as a striking example of people publicly endorsing the group response despite knowing full well that they were endorsing an incorrect response.” The experiment demonstrated the tendency to conform with the crowd.

When everyone else is losing their minds, the easy choice is to lose your mind as well. The difficult choice is to “do the average thing”. In investing terms, the difficult and “average thing” to do is to take action when the market goes crazy.

I wrote a short article to buy stocks on March 23 2020. With hindsight, the day coincided with the market reaching a bottom after plunging at the fastest pace since the Great Depression in 1929. On March 23, there was no way to tell whether the market would decline further, but there was a reason to buy:

“How do we know that stocks have bottomed? The truth is that there is no way to tell, despite what you hear from Goldman Sachs and CNBC. Steve Jobs said that “you can never connect the dots forward. You can only connect the dots backwards”, which means that we will only know the bottom with hindsight. Because you can’t be certain to buy at the bottom, you should only buy when you expect reasonable returns. Using 90-year averages for the S&P 500 as a benchmark, the investor can expect roughly 7% returns per year in the next 10 years (see Appendix at end of article for calculation), a reasonable return.”

Farm Road Capital on March 23 2020

Buying during turmoil entails a few overlooked yet important nuances:

  1. You must not have excessive leverage: You cannot buy when a significant downturn obliterates your equity. You can only buy if you survive the downturn. This sounds obvious, but it is difficult to expect a downturn when the going is good. Because there is no way of knowing when downturns occur, your manager operates with limited to no leverage.
  2. You know what to buy: The most opportune windows do not stay open for long. Your manager keeps a wish-list of the best businesses to own should opportunities arise.
  3. You know what to abandon: This is perhaps the most difficult yet important. Significant downturns tend to alter the economics of some businesses. The investor must be aware of the paradigm shift. The endeavor requires an unique and rather contradictory blend of skills: sound logic backed by commonsense and financial history, the foresight in imagining what hasn’t happened before (that may defy current logic), and the sturdy independence of thought when commonsense is on shaky ground.

An old saying in Chinese opera goes: every minute of performance on-stage is backed by ten years of hard work off-stage. Investors toil in the shadows for years, ready to perform at a moment’s notice when opportunity arises.

The unprecedented risk in stocks

The exuberance in some technology stocks – electric vehicles, autonomous driving, software – is hard to miss, but the mania is nowhere near the previous sector bubble. These stocks may still decline, just not because of a bubble burst.

I am old enough to remember Yahoo listing on the Nasdaq in 1996. The then-quintessential search engine was valued at $850 million, implying a massive revenue multiple of 607. (a Chinese clone of Yahoo) was listed in 1999 with a $5 billion valuation and $2.4 million revenue, an astonishing 2083x revenue. Even mega-caps with slower growth rates were valued highly. AOL was valued at $200 billion at its peak, even when it generated slightly more than $4 billion revenue. These bubble conditions are absent today. There is only a handful of technology stocks (about 40) trading at 30x revenue or more, and only 4 at 100x revenues or more. Recent popular IPOs such as Snowflake and trade at 245x and 125x respectively, which are very expensive but not bubble-expensive. Mega-cap technology companies (Facebook, Apple, Netflix, Google) trade at 8x revenues or less, a far cry from AOL’s 50x.

The general market does not seem expensive either. The S&P trades at 22 forward PE, near its 2000-tech-bubble peak of about 24, raising alarms for a probable (and painful) mean reversion. But it is likely wrong to assume that 24 applies as the ceiling for valuation today. The economy was very different in year 2000. Quantitative easing and Facebook were not invented yet. Netflix only delivered DVDs. Amazon offered mainly books. Banks were over-levered and held little equity relative to risky assets. Overnight rates were 5-6%, compared to 0-0.25% now. The American economy is stronger and better supported today. The large technology companies are delivering consistent double-digit growth in revenue and profits with no end in sight. They make up 12% of the S&P, up from nothing in year 2000. Banks now hold plenty of capital relative to risk levels, and still make record profits even with lower leverage. The Federal Reserve is much more effective in responding to crises. A stronger economy, with unprecedented supportive monetary (and now fiscal) policies, should see higher multiples.

The question is how long the support would last. This is a complex topic, because the central bank does not have complete control. The Fed has a dual mandate of maintaining stable prices and maximum employment. It currently keeps rates low to promote job growth, and affords to do so because inflation has been below the 2% target in half of the past decade.

What happens if inflation is above 2%? The Fed would raise rates to control inflation, yet higher rates reduce job growth. Fulfilling the dual mandate would be trickier. What happens if longer-term rates increase? The Fed only has control over overnight rates, which influences, but does not determine, longer-term rates. Higher longer-term rates depresses growth. What can the Fed do when overnight rates are already at 0%?

What is certain is that the Fed is determined to expand its influence. It sends the message through a relentless stream of unprecedented and timely policies during the past 12 years, whenever the outlook is dire. An influential Fed amplifies the upsides of its supportive policies, but also intensifies the downsides of policy missteps. The global economy is fortunate that the Fed has not made major policy errors since 2008. The lack of errors is actually an aberration. The Fed made numerous errors in the 94 years between its birth in 1913 and 2007. Its inclination towards novel policies means that significant errors in the future may be difficult to reverse, because history would offer little guidance.

We should count ourselves lucky for a responsive and (almost) error-free Fed for the past 12 years, but should not count our chickens before they hatch.

Our investments

Your manager is invested in the same securities as you are. Our portfolio contains 6 US-listed equities in the technology, media, and healthcare industries, with market capitalizations ranging from $100 million to $100 billion.

Your manager favors businesses in sustainable, predictable, and non-traditional niches growing at above-market rates. History has shown that sustainable above-market growth is rare, because the required ingredients tend to exist separately. Each ingredient appears ordinary in isolation. When bundled together, each ingredient reinforces others, and, in a flywheel fashion, results in a multiplier effect and a whole that is greater than the sum of its parts. The ingredients include heavy commitments to innovation and people, clear visions for market leadership, industry tailwinds, excellent unit economics, and incentivized leadership, among others.

The value of our holdings in ecommerce and digital advertising have significantly increased. Social distancing and lockdowns caused by the pandemic accelerated the shift to online retail and advertising. Consumers are unlikely to favor physical retail after experiencing the seamless nature of ecommerce. Advertisers are also less likely to commit to non-digital formats after benefiting from the greater efficiency of digital advertising over alternative formats. More importantly, the management teams of our holdings delivered. No one expected the scale of the pandemic and disruptions. Yet our management teams recovered quickly from the economic shock, took advantage of disruptions, and led their businesses to new highs.

The key risk in technology and media is the unintended consequences of regulations. Not the regulations in and of itself, not even the immediate effects, but the second, third, and subsequent order effects of regulations. Ecologist Garrett Hardin advocates asking ‘and then what?’

Regulators start with good intentions in restricting the outsized, black-box influence of Facebook and Google (black-box because many elements of ad pricing are proprietary). The results should unfold like any worthy economics textbook says so. More players in digital advertising results in more competition and innovation. Advertisers can shop for the lowest cost amidst the plethora of choices. The lower cost of advertising would benefit the ultimate end-consumer.

Reality is more complex. Human behavior, unlike physical phenomena, unfold in unpredictable ways. Facebook and Google have commanding leads because of their copious collections of data. New and smaller players do not have an edge in data. What would they do to get an edge? Would they resort to new methods of data collection that threatens consumer privacy further? Would they refuse transparent reporting on collection methods to protect their edge? Would digital advertising then become less transparent than it was?

There is no one easy answer that balances the interests of all involved. Your manager does not dream to be a regulator, but would align our investments with the way the world works.

Trust as leverage

I have been told that the logo is an abstract image of houses or mountains. It really is simply a handshake, which is a universal representation of trust.

Any self-respecting investor knows that it is impossible to know everything about a company, though it is just as important to work as hard as possible to know as much as possible.

So how is it possible to be sure of a good deal? One has to trust that the other side would hold up its end of the deal. And that is what the handshake really represents. You trust that the other side would take care of things, that you would never have known, to your benefit.

In this perspective, trust functions like leverage. In physics, leverage allows for results that are multiplies of the effort exerted. When you trust the other side, the Pareto principle works (80% of results from 20% of effort).

How is trust established for an investor in practical terms? Your manager hardly has contact with holdings. There are no boots on the ground. Your manager favors publicly available information, and it is usually sufficient to know whether management is trustworthy. How does the CEO represent the business, industry, and competitors? Does the CEO fulfill promises? What excuses does the CEO or CFO have for missing targets? How do senior executives talk about other employees? The catch is to read enough to know what makes sense.

Gratitude shout-outs

Many have provided advice and support to your manager:

  • My wife and mother-in-law, who have believed and supported me in every way possible (nothing motivates an investor more than having the mother-in-law’s savings on the line)
  • My parents, who provided the opportunity for me to pursue my education in the United States
  • Peter Kaufman, who generously showed me how the world works by teaching me its timeless and unique principles
  • Scott Hendrickson and Mike Kimpel, who taught me their research framework and provided useful feedback on my ideas at Columbia
  • Alex, Ben, James, Roger, and many others who provided useful feedback

If you have any questions, contact me at

Marcel Gozali