“We don’t get paid for activity, just for being right.” —Warren Buffett, 1998 Berkshire Hathaway meeting
We made one new significant investment in the second half of the year, which brings the grand total of significant new investments for the year to one. While this level of activity is somewhat less than what I would typically expect, it is important to not mistake this inactivity for laziness. We are constantly bombarded with new investment ideas, and inactivity in the face of relentless pressure to “do something” is difficult to maintain. As a reminder, for the most part our portfolio is filled with companies that have been purposefully chosen because they are dealing with some kind of structural or operational difficulty that causes the market to price shares well below our estimate of intrinsic value. We invest based on a variant perception of the company’s reality, and then wait. We are not looking for turnarounds, but rather good businesses whose value will become apparent with time as management executes, and the market catches on to what is happening beneath the surface. Our future success will thus be largely determined by our ability to remain patient, and it does not make sense to jump from one situation to the next simply to “do something”. Rather, our activity level will be determined by the performance of our companies versus our expectations, and the opportunities – both present and future – that are before us.
The addition to our portfolio is Gaia Inc. (GAIA). For those that ask where I find investment ideas, GAIA is a good example of how random the process can be. I first came across GAIA a year ago when I was having back problems, and searching for yoga videos on line. I noted that the business was a subsidiary of a publicly traded company, but did not do much research at the time. I then came across the company again when I noted that Lindblad Expeditions, a company I had followed for some time, bought a travel subsidiary from GAIA’s former parent. Again, I did not do much work on the name at the time. Next, Scott Miller of Greenhaven Road Capital, an excellent investor and valuable friend of the fund, suggested that I investigate the company in more detail. Lastly, I noted that the company’s Investor Relations representative, Cody Slach of Liolis, represented Iteris at the time of our initial investment, and I found him to be helpful and honest (not always a given with micro cap stocks and IR). With all these touch points, it seemed as if the universe was kicking me in the shins and demanding that I take the time to understand the company, which is fitting considering that GAIA deals with topics such as “fate” and “destiny” in their business.
I have included my full writeup on the company from October at the end of this letter, but in brief, GAIA is a streaming video business focused on yoga, “seeking truth” and “transformation” that is growing revenues 50+% per year. While the company is not presently profitable, that is largely due to the vagaries of GAAP accounting, where customer acquisition costs (i.e. growth) are expensed day 1, but revenue is only recognized ratably over the life of a customer. In other words, if someone were to loan me $10 today, and then I were to give this person $1 a day for the next 20 days, the lender would not recognize a “profit” until day 11… but I would still recommend that if given this sort of opportunity, you make that loan.
Our investment in GAIA is somewhat unusual for us as the future of the business is far less predictable than most of our other portfolio companies, but it very much fits the bill given the presence of a very impressive owner/operator CEO, operations in a niche market, and very attractive industry economics. These factors alone are not enough to justify a purchase, but the price we paid for our shares can only be described as a complete anomaly.
In addition to the streaming video business, GAIA has a cash rich balance sheet and owns a building just outside of Boulder, Colorado. However, at the time of our purchase the cash did not appear on the company’s balance sheet, and I believe the value of the building is significantly higher than indicated by the company’s balance sheet, causing the market to completely miss what was going on at GAIA. As a result, we were able to buy our shares at prices below my estimate of the value of the company’s cash, investments, and real estate, meaning that we theoretically got a niche streaming video business that is growing revenue by 50% a year and controlled by a very impressive entrepreneur for less than free.
I initially viewed this as an investment that would likely be short-term in nature as I believed shares would quickly trade higher when the market recognized the value of the company’s cash. However, while the shares did quickly appreciate, after meeting with the CEO and his leadership team and learning more about their plan, I elected to hold our shares. While the future of this business is uncertain, the CEO’s mixture of passionate confidence and pragmatic rationality make him someone that I think we will benefit from partnering with. In the meantime, our downside is protected by cash (which will shrink due to growth spending), investments (which if history is any guide, should grow with time), and real estate (which should continue to appreciate). If the business does succeed, I expect it to be worth many multiples of our original investment in 3 to 5 years, making the upside/downside analysis very attractive.
The above post has been excerpted from a recent letter of Laughing Water Capital.
Disclaimer: This document, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified offeree receives a confidential private offering memorandum (“CPOM”) / confidential explanatory memorandum (“CEM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the CPOM/CEM, the CPOM/CEM shall control. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. While all the information prepared in this document is believed to be accurate, Laughing Water Capital, LP and LW Capital Management, LLC make no express warranty as to the completeness or accuracy, nor can they accept responsibility for errors appearing in the document. An investment in the fund/partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio is under the sole trading authority of the general partner/investment manager. A portion of the trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. The portfolio is concentrated, which leads to increased volatility. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. There is no guarantee that the investment objective will be achieved. Moreover, the past performance of the investment team should not be construed as an indicator of future performance. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund/partnership. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of LW Capital Management, LLC. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Laughing Water Capital LP, which are subject to change and which Laughing Water Capital LP does not undertake to update. Due to, among other things, the volatile nature of the markets, an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment. The fund/partnership is not registered under the investment company act of 1940, as amended, in reliance on an exemption there under. Interests in the fund/partnership have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws. The S&P 500 and Russell 2000 are indices of US equities. They are included for informational purposes only and may not be representative of the type of investments made by the fund.