2014: mixed feelings

By | January 14, 2015

With 2014 behind us and the blog being idle for some time, it is a good time to look at the year we’ve just had.

Eden Alpha has a reasonably good year in terms of NIS (Israeli Shekel) while in the same time our USD performance suffered from the strengthening of the USD compared to other currencies, in which we have substantial holdings. Our annual letter can be downloaded at our new website: http://www.eden-alpha.com/#!letters/c1vw1

In some years we won’t beat all the benchmarks, but what counts is beating the benchmarks over three- and five-year periods and so we did just that.

Three Years of Over Performance

Eden Alpha Returns

Eden Alpha Cumulative Returns

If  you downloaded and read our 2014 annual letter then you can skip the rest of the post.

My Prediction: Your Forecast Is Wrong

2014 was a volatile year. During the year we were asked when is the right time to get out of the stock market. This question is usually left unanswered because it assumes that an investor can successfully time the market—that is, create excess return by dancing in and out of the stock market. Unfortunately for market timers, much empirical evidence and a lot of research findings point to the fact that market timing leads to inferior results. As we wrote on our mid-year letter, an investor that missed, due to market timing, the best 30 days in the stock market over the 16-year period that ended in 2013 would have seen his return go from a positive 240% to a negative 30%. Market timing and predictions do not work in the stock market. Next time someone shares his forecast with you, you can quote Barry Ritholtz in reply: “My Prediction: Your Forecast Is Wrong.”

Breaking Records

Newspapers’ headlines never say things like “The 10th of the Month has Arrived”, however, the newspapers like to write that the stock market hitting a new record. 119 years ago, in 1896, the measurement of the Dow Jones Index began. Since then, the world experienced dozens of economic crises, two World Wars, the Cold War, plagues, and so on. In the face of all that, the market broke new records in 49 of those 119 years. Over that time period there were 1,287 days in which the market surpassed its all-time-high record. This occasion has on average occurred more than 14 times a year—more frequently than the calendar hitting the 10th of the month. Breaking new records isn’t as rare an event as it may seem to the unsuspecting reader. Next time you read that markets hit a new high, you will know that this occasion is not at all that rare.

Our New Investment: Liberty Global

What would you think of a company that is consistently losing money accounting-wise, has a balance sheet that is burdened with debt, operates in an industry that some people consider dead, so much so that some banks and brokers won’t even lend money against the shares of this company? Furthermore, while reading the financial reports of the company, you encounter the following statement: “In light of our historical financial performance, we cannot assure you that we will report net earnings in the near future or ever.” Even more, the internal structure of the company is so convoluted as it includes many subsidiaries in different countries and the company buys and sells businesses on a regular basis—most analysts can’t even figure out what the earning power of the company is. Would you invest in such a company?

On another note, what would you think of a company that: increases it’s free cash flow at almost 15% year in and year out over many years; has a very efficient corporate structure that allows it to minimize the tax burden; and its founder is the pioneer of the industry in which the company operates and knows the business since the early 70’s? What would you say if we tell you that this founder is a wizard in M&A and spinoffs that create tremendous value for shareholders over decades? Lo and behold, he actually has a better value creation track record than Warren Buffett, but many people have never heard of him. To top it all up, the company enjoys strong pricing power, it is recession-proof, and it enjoys more than one long-lasting competitive advantage. Finally, the company is traded at a price that does not take all that into account. Sounds like a great bargain, doesn’t it?

You might be surprised but the two paragraphs above refer to the same company: Liberty Global – the biggest cable and broadband company in Europe. The former paragraph is the reason for the mispricing of the company and for why the market presumably afflicts the shares of Liberty Global. The latter paragraph describes why we like it. Liberty Global is managed by Michael Fries and none other than John Malone.

This year we spent a lot of time studying the Cable TV and Broadband industries. We scoured annual reports of companies from all over the world; we read books about the history of that industry; we delved into the various regulations that the industry is bound by, and more. Our research shows that in many occasions the market failed in pricing Liberty Global; and the prices in which we purchased the shares—much lower than current prices—provide us with tremendous value creation potential over the years to come. The man behind this company, John Malone, started his cable career with a company that pulled TV signals from antennas and broadcasted them to small towns in the heartland of the United States where there was no TV signal reception. He experienced the changes induced by cable TV, the change in media consumption habits that were induced by the Internet, the switch to broadband, and many other transitions that the industry experienced in the course of the last 40 years. In various interviews, John Malone reveals his plans and outlook—these are available to anyone who is willing to listen. However, market participants seem to believe that this industry’s best days are behind it and that Malone’s outlook won’t materialize. We are siding with Malone on this one, hence we opened a position in the shares of Liberty Global earlier this year.

Going Forward

In 2015 we will keep doing the same thing, that is, looking for good businesses that are traded below their intrinsic value and are ran by managers that we see as good stewards of capital.

My next post will deal with some mistakes that we made and what once can learn—at our expense—from these mistakes. Stay tuned!

I wish all the readers of this blog a successful and prosperous 2015.

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