A Investment Portfolio maybe or maybe not created by Warren Buffet

A free investment portfolio but not *investment advice of course*

So, I have a lot more ideas of what to do with money than I actually have money, and I would like to share some of these ideas. Now everybody’s financial situation, tolerances, and needs are different so therefore this portfolio should not be taken seriously without deep considerations of each.

Nonetheless, I would like to have somewhere I can create a paper portfolio and see the results or lack of in my ideas. I expect 261% annual returns indefinitely. To whoever does read this, hopefully I could provide some benefit in showcasing a couple ideas that they would then further research, or some investing perspectives that are new to them. The objective of this portfolio is the highest long-term returns, with no care for income, volatility, or asset allocation. However, there will be care for what I and more importantly Howard Marks, Benjamin Graham, Monish Pabrai, Buffet, and others defines as risk. Risk is the chance of loss. More importantly than just a swing in the stock price, a permanent loss in the value of the business. I will be focusing on individual stocks for a couple reasons,

A. I really enjoy learning about them

B. This is where my expertise is

C. I think 100% stocks(without debt, or derivatives, or something else) when chosen well, have the highest risk adjusted long term returns potential in most future scenarios than a combination of other assets such as Real estate, debt, Gold, or crypto(ew).

In creating this portfolio, I am choosing businesses for what I believe is their long term compounding potential. I believe in an intrinsic value investing strategy, that as it has been stated many times before, seeks to own the assets that have the highest amounts of discounted cash flows which one can reasonably predict AKA the assets that are within your “circle of competence” So while I do believe and practice an intrinsic value investing strategy, I am not interested in incredibly low EV/EBIT, P/TBV, FCF yield, or PE stocks. I am interested in the businesses that can be compounders. The kinds of businesses that one good decision, to buy, can produce 10+baggers. WHEN HELD ONTO FOR EXTENDED PERIODS OF TIME AND NOT SOLD OR TRIMMED REGUARDLESS OF THE MARKET. That is in bold letters, because I believe so, so, so, so, so (you get the point) strongly in

A. Letting your “winners” run

B. Having very low turnover rates if you own the good businesses

As Peter Lynch the legendary fund manager has stated (probably the second greatest investor with the first name Peter) the greatest advantage in stocks is the incredible upside for being correct. If you are wrong about a stock, you put a thousand dollars in, all you can lose (assuming no margin or other instruments which I will just always imply) is 1,000 dollars, but if you are right and you are truly patient the right small cap can become 100,000 dollars or more. The incredible upside that a lifetime of patient investing offers, even just a couple ten baggers, is more than enough to offset all the mediocre decisions. However, you only will ever experience those big winners if you let the story unfold.

I have a personal list that shows a good amount of what I look for in a potential compounding machine which I seek to purchase at a good price, and it should also be said that in any investment I seriously consider I have to be able to understand the business. I cannot understand Nvidia, but I feel I can understand Union Pacific Railroad.

10 Compounding Traits

1. High ROE/ROIC/ROA

2. High degree of earnings reinvestment

3. CEO who was the founder, part of the family, has a lot of equity, or a long tenure

4. A management team that has an insatiable appetite for growth

5. High gross margins

6. Low need for debt to grow

7. Products and services that solve problems, improve lives, or make things cheaper and faster

8. The highest competitive position in its market with the best products and services

9. Reasonable or low multiples

10. Market Cap below 20 billion

Ultimately, just like every other investor I want a business to have a moat, high returns on capital, an ability to reinvest the returns into new high return assets, a capital light business, an insatiable owner operator, conservative balance sheets, and something I weigh very very heavily and am proud to, is what quality the business actually is. I feel overall more satisfied and like in the way Phillip Fisher meant in “Conservative Investors Sleep Well” not in the sense of owning utilities, Coke, Mcdonalds, Proctor and Gamble, or a railroad or waste management company, enjoy owning the businesses where the products and services are not just moaty, but are actually improving society, and helping people to live better. I understand an investment in a company’s public stock does not fund them unless it is the IPO, and the amount likely to be invested will not sufficiently raise the price so that it would increase the compensation of the executives at lets say a cigarette company, I still feel the way I feel about investing in the best products and services. I am overall a HUGE proponent of the virtues of capitalism, a free market system, and that business and profit are not curse words. Not that I do not think there should not be social safety nets or adjustments to tax brackets(perhaps the highest two income brackets, or long term capital gains, especially for certain amounts of sales, or a change in the inheritance tax). There are awful examples of business, take the industry of diamonds, there is probably not an industry with a more disgusting, unproductive history than that of diamonds and the DeBeers company. What I do think though, it is incredibly dangerous of our society to forget that for thousands and thousands of years the standard of living moved in millimeters over time, and somehow once we adapted a global system full of more personal and economic freedom in the past couple hundreds of years in MDC’s like America the standard of living has exploded up 15-30 times. Adam Smith understood the power of incentives, that people take care of their own property and capital better than anyone else, and that a more free market system with capital for entrepreneurs allows innovation to well innovate. But this post is about a stock portfolio not those beliefs of mine.

So just like Warren Buffet, Charlie Munger, and Monish Pabrai I am not a massive fan of diversification for what Benjamin Graham called the “enterprising investor” so you won’t see 2% positions in this portfolio. The “defensive investor” AKA 95+% of investors should practice wide diversification. As Warren has said many times, it is so silly the idea of putting more money into your 30th best idea as opposed to your best or second-best idea if you want to beat the average performance, after all how many people got rich off their 30th best idea.

So now that I have established a lot more background than necessary, here is my paper portfolio that aims to beat the market while controlling “risk” and a blurb for each stock. I think you will find I generally adhere to the principles I have laid out, some being: Small caps and mid-caps are attractive due to larger potential runways, high ROIC, high gross margins, excellent products, moats, reinvestment opportunities, and always a fair or good price.

Name/Ticker/Weighting Percentage

Stock 1: Kapsi (KSPI) 15%

Kapsi is run by a fanatic CEO who is basically the founder, owns a lot of shares, and is a chronic overachiever. The business is a superapp used by 80% of Kazakstan at least monthly and they are expanding into Turkey as well. They do E-commerce, payments, and fintech. They have fantastic economics, are growth obsessed, and are selling for a very good price. They strive to have very high-quality products and net promoter scores. Their products help bring Kazakhstan faster, more plentiful, and accessible options in their lives. They use very little debt but instead use deposits to fund loans. They have multiple moats in one, network effects for payments, e-commerce, a strong and well-known brand, and a real data edge that supports well done lending.

Stock 2: Bank OZK (OZK) 15%

Bank Ozk is a regional bank in states like Arkansas, Florida, and more. They do a lot of CRE lending and are funded without almost any debt but instead their deposits. The bank is run by quietly one of the greatest CEO’s of all time. He is one of the most exceptional overachievers you will ever learn about, George Gleason. Since the IPO in 1997, the bank has a CAGR of 17.8%, but the price to book is at a historic low, and the PE, so in more normal valuations the CAGR would be even higher. He has grown their assets since he took over as CEO over 40 years ago from 20 million to 40 billion. They have a quite adequate for a regional bank CET1 of 11.2%, and have had lower non-performing loans than the average U.S bank in every single year since inception, usually around 1/3rd the average, and absolutely thrived during the GFC turning it into an opportunity. They have crazy good efficiency rations, NIM, ROA, ROE, margins, you get the point. They double to quadruple loans and deposits every single decade.

Stock 3: Novo Nordisk (NVO) 13%

Novo Nordisk is pioneering alongside Eli Lilly incredibly helpful drugs that have massive demand. They have 99 percentile ROA, ROIC, and gross margins. They are selling for a reasonable price of 17 times forward earnings. They have pretty low debt. They have massive reinvestment opportunities, great economics, a reasonable price, and a strong portfolio of patented drugs.

Stock 4: Pinduoduo (PDD) 12%

Pinduoduo runs both Pinduoduo and Temu ecommerce. They have become an equal in China to JD.com and Alibaba by cleverly targeting more rural cities those two ignored, by having a unique gamified, communal shopping experience, and by offering a much better selection of fresh goods from rural Chinese farmers. They have the lowest cost experience as well due to their strong subsidies, group discounts, and exclusive operations of 3P ecommerce. Their Temu ecommerce that has been doing very well in the US also sells about the lowest cost goods by using an exclusive 3P system and by having subsidies for purchases as well. Overall they offer excellent products and services, have amazing margins and ROA and ROIC, have practically no debt, they have an insatiable appetite to grow, and are selling for an EV/EBIT and EV/FCF of less than 10.

Stock 5: Elf Beauty (ELF) 10%

Unlike the prior 4 Elf upon first glance looks expensive. However, when using P/S not PE it is selling for a fair price. Elf has very good makeup products that are cheaper than most of their competitors and a strong trendy brand. They have very high gross margins, and a reasonably low amount of debt. They are very capex light but seem to have mediocre economics because they are advertising like crazy. They are taking large amounts of market share away from the other cosmetic brands through their trendy products and brand, that are just as good as many competitors’ products but are cheaper, and by advertising aggressively. If they wanted to, in a similar way to Amazon, they could drop advertising and promotional spend, and dramatically increase net profits, but instead they are investing in growing. Good products, lowish debt, fair price, high gross margins, lots of reinvestment.

Stock 6: Yeti (YETI) 7%

Yeti has a very strong brand among consumers known for it’s very high durability and product quality. One of the key tests for the future of a stock, is how well the brand works abroad, as many successful U.S companies don’t translate across borders. Yeti has been doing very well on this front. It is selling for an attractive EV/EBIT and EV/FCF of 10.5 and 11.7. It has good gross margins and very little debt. They have good ROIC and are consistently expanding assets and sales.

Stock 7: Afya (AFYA) 7%

Afya offers medical education in Brazil to undergraduates (majority of business), test prep for medical exams, and tools for doctors and physicians once practicing. This is a very moaty business. Just like in the U.S there is many more students wanting to go into medical school, than there are seats. Additionally, in Brazil demand for doctors and physicians are rising faster than in the U.S. Afya as the largest private medical educator in Brazil helps to fill this need. They expand their own number of seats every year, they also acquire small schools and continue to improve test prep and their products for medical practitioners. Afya has a very favorable business model as every year they are the ones who “customers” want, not the other way around, this gives Afya very good pricing power, consistent business, and lots of room to expand. They have moderate amounts of debt, high gross margins, are selling for around 10 times EV/EBIT and FCF, and decent returns on assets.

Stock 8: Ulta Beauty (ULTA) 7%

Ulta Beauty operates a well-known beauty retail store and a small ecommerce site. Ulta earns very high ROIC and ROA despite being a retailer. They have zero dollars in long term debt. Ulta has a very large number of reward members which is reflective of their very strong brand among women and younger women. They consistently across all their stores provide the largest selection of makeup, haircare, skincare, and perfume versus competitors. With their 10,000 square foot stores they provide more of the brands that people want in these categories versus anyone else. In addition, they have excellent customer service, a well decorated inside, and additional beauty services inside stores which has allowed them to rapidly grow despite the rise in online shopping. You just can’t get the same experience online as in an Ulta, and have almost all your favorite options laid out in one place. All this being said, they do not have as much space to expand in the US as they once did and have been reluctant to expand abroad. Unless this changes most of their cash flow will continue to go back into share repurchases with some minor store expansion. Given the PE of 15 this is still a good price and will turn out to be very good if their expansion outlook improves.

Stock 9: OMA airports (OMAB) 7%

Both of the ideas behind these last two stocks are very similar so I’m actually only going to write one explanation for both. Both companies operate airports in Latin/Central America, primarily Mexico. Airlines are one of the worst businesses ever. Airports are just the opposite. In the U.S airports are not private businesses unlike in many countries abroad. Airports are a great business when the long-term demand for travel in that country is growing. If you are one of the few able to give concessions from the government to operate an airport, there is no competition around for 50, 60, 70+ miles. You are given a natural monopoly. You are able to grow revenues from the growth in the stores inside the airport, the sales from advertising space in the airport, the actual flight sales themselves, the right to have runway space, and the parking garages. In Mexico both due to a growing middle class, and tourism the number of travelers has consistently increased over time. The natural monopolies get the benefits of this as well as the mentioned increased ways to monetize over time. Both companies operate with low debts, have high ROIC and margins and are selling for a 13 and 16 PE. While there will be ups and downs due to macro factors, overall these two operators have very favorable economics.

Stock 10: ASR airports (ASR) 7%

I would love to hear any thoughts or questions that you can’t easily Google, and please keep in mind in your judgements of my portfolio or ideas, that I’m only 20 and still in college so just like everyone else I do not have everything hammered out. Please share with at least 1 or 2 friends because if you thought it was worth reading, and still do now, then why not share information that has some value.

Margin Of Wisdom