Feb 14, 2022
The Science of Hitting (TSOH) & Investing w/ Alex Morris -
BRT S03 EP07 (106) 2-13-2022
Things We Learned This Week
- The Science of Hitting (TSOH) comes from the Ted Williams baseball book on batting and strike zone observations: ie – he tracked his average in each zone of the batter box, and had a higher average when he swung at pitches in a certain zone
- TSOH Investment Philosophy is Value Investing, classic Graham / Buffet style – buy high quality co’s w/ good mgmt, L/T trends, and a Moat - Buffet quote: Investing is a game with no called strikes…can just wait for your pitch
- Long Term Investment Horizon – looking 5 to even 10 years out, for earnings and sales growth
- Key Value Drivers for a stock - Earnings Growth & quality of earnings, Price & Sale increases, ‘volume growth’
- P/E Type Metrics & GAAP Accounting is helpful but may not be useful with R&D, future sales, and volume growth. Example: Netflix – analyze cash expenditures vs. financials which have improved , what are the L/T – trends
Guest: Alex Morris, TSOH Investment Research
Blog - https://thescienceofhitting.com/p/my-investment-philosophy
LKIN - https://www.linkedin.com/in/alex-morris-cfa-47b87027/
Twitter - https://twitter.com/TSOH_Investing
Alex Morris, CFA publishes equities research through the TSOH Investment Research Service on Substack. He has written investment related articles on Gurufocus and worked in the finance industry (RIA's) for the past 10+ years. He is a CFA® charterholder and graduated with my MBA from the University of Florida in April 2015. Prior to starting his TSOH service, he spent ten years as an Equity Analysts at financial firms.
Alex started his investment career in college, and his first writing was published in Seeking Alpha. If you like to discuss investments (equities) or if you're interested in talking about the TSOH Research Service, please let him know. The TSOH blog and service is full of deep dives on stocks Alex is researching plus quarterly updates of his personal portfolio.
TSOH Investment Philosophy – summarized
Asset Allocation – Structural vs Tactical & Cash portion
- L/T Holdings – Seth Klarman style, hold for years, compound the investment. Be a Long Term owner of a business vs short term speculation / trading
S/T trading – competitive, market timing, tax treatment.
- High Quality Businesses – Charlie Munger
Intrinsic Value – how to calculate?
P/E and other market changes are minimal over L/T
Mr. Market analogy – Ben Graham
4 Criteria:
- Industry with tail winds, top line growth
- High ROIC, Economic Moat
- Good Balance Sheet
- Run by manager with L/T Horizon and skill. *capital allocation
Not all TSOH picks have all 4 criteria.
Chuck Akre quote – allocate dollars to business, occasionally get bargain prices.
Many businesses are eliminated by these criteria – less than 100
5-15 positions
KPI’s or Key Value Drivers - Earnings Growth, quality of earnings, Price & sales increases, ‘volume growth’ - Be warned - Shareholder re-purpose can be value trap
- Concentrated Portfolio – Druckenmiller quote – 2 opps/yr, eggs in 1 basket, watch basket.
Balance of patience and conviction
Money managers and investment advisers can’t be patient.
Munger story on horse track – winners bet seldom, but bet big on good opps
Use a model to keep yourself honest and rational, but do not over-rely on the model
Financial Model – careful with inputs and outputs. Guardrails
Opportunity Cost is too high when you find a good long term company to invest in
Analyze Long term earnings growth and discount it for a valuation – identify key drivers of value creation for sales growth
Berkshire Hathaway letters are big inspiration
Own high quality business, with competitive advantages, in attractive markets w/ sustainable growth, strong balance sheet and good mgmt team
Focus on the opportunity, and long term horizon - L/T over S/T
Notes –
Book Recs: One Up On Wall Street by Peter Lynch (How to analyze on business)
Berkshire Hathaway Shareholder Letters (in full), or Essays of Warren Buffet (summary w/ lessons)
Common Stocks & uncommon Profits by Phil Fisher
Prefers Business Books – can learn more from reading bios like Spotify Story, or Air BnB
Read a lot, stock data, financial news stories, etc. – Be Well read, determine if info is noise or real info
Analyze a company in a detailed fashion, but be unbiased, do not fall in love w/ the stock
Costco example – volume is critical in low price biz, check sales per warehouse
FB / Meta example – has issues, security, regs, privacy
Long Term Plan - Metaverse & VR, many years away, Bought Oculus (VR glasses co)
Made $10 billion investment loss in Metaverse vs. $57 billion opp income in 2021, (EBIT) is normal
Spinoffs – views them as financial transactions
Manager Analysis – manager drives business, really defines direction and thme of biz
Lynch quote of ‘idiots’ running a business, does not apply anymore
Good business sell during all Macro factors ie: Costco – Alex doesn’t own, but great business
Mistakes – Buffet missed on Google and Amazon, Lynch missed on Amazon
TSOH Blog: Returns and Lessons Learned – reviews past mistakes
https://thescienceofhitting.com/p/returns-and-lessons-learned
Failed with JC Penny stock buy. Missed on Costco and Google.
Microsoft – change in CEO, Balmer out. Satya Nadella in – revived company with Cloud business and compete with AWS., MicroSoft - P/E was expensive 2014, but analyze business and it was cheap.
P/E – Metrics and GAAP accounting is helpful but may not be useful with R&D and future sales and volume growth. Example: Netflix – analyze cash expenditures vs. financials which have improved
L/T – trends ie - Disney, Netflix – streaming wars (SPOD business)
Netflix – 200 million subscribers worldwide on way to global business scale
Sports only current ‘Watch Now’ show, streaming moving to sports
PGA Tour went to Netflix, Direct TV losing – NFL Ticket will be up for bid
Disney – IP with content to use in streaming content.
Other competitors - Comcast / NBC Peacock has had little success in US and more issues with licensing worldwide, Sony licenses content
Warner Media/ HBO MAX spin off and merge with Discovery Per Book on AT&T, mismanaged Warner
Disney does not have enough adult content
Branding – Coke, Pepsi , and ?? Only 2 big players in each industry.
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