Investor Education: Hedge Funds
A hedge fund is a limited partnership where high net worth or accredited investors get their money managed by fund managers who are the general partners. A limited partnership (LP) is a partnership of two or more partners. There is the general partner, in this case, the hedge fund manager, who oversees and runs the hedge fund, while the limited partners, in this case, the investors, do not partake in managing the business. The general partners of an LP have unlimited liability and the limited partners have limited liability up to the amount of their investment in the partnership.
Read more about Hedge Funds here!
New Money
“[Warren] Buffett’s timing was all but perfect. Of course, one could say that when Buffett abandoned the market in 1969, he was ‘early.’ After all, if he had hung on, he could have ridden the Dow to the very top: 1071 in January of 1973. But Warren Buffett was not concerned about catching the top of the wave. He was far more interested in not wiping out. While most investors are motivated by a desire to make money, Buffett focused first on not losing money. In that way, Buffett behaved like Old Money. The majority of investors agonize over the prospect of getting out too early and missing out on the profits that would have made them rich. But the very rich don’t fret so much about making money. They have money. Their greatest fear is losing it. This explains why, when the bidding escalates—whether in a stock market, a ‘hot’ real estate market, or at a Sotheby’s auction—Old Money tends to step aside, letting New Money carry the day.” —Maggie Mahar (“Bull!”)
Stock markets continued their march upward last week. Despite a decline on Friday, the S&P 500 closed up for the fifth week in a row, and the Nasdaq extended its winning steak to eight weeks. Both indices hit their highest marks since April 2022.
New Money seems to be in charge again. The preservation of capital, often associated with those that have Old Money, and a concept given some notice during 2022, is once again becoming a little less popular than speculation. Evidence of speculation’s returns popped up this past week in the IPO market when restaurant chain Cava came public:
The popular Mediterranean fast-casual restaurant chain had an impressive debut Thursday after its initial public offering. Its share price nearly doubled to $42.38, valuing the unprofitable company at $4.7 billion.
…The company, which operates 263 restaurants in 22 states, had $624 million in revenue in 2022 and a net loss of $59 million. The situation got better in this year’s first quarter, but the company still operated in the red. Cava had $205 million in sales during the period, up 15% year over-year, and a net loss of $2 million—better than the $20 million of red ink in year-earlier period.
Even using a favorite Cava metric, adjusted Ebitda—earnings before interest, taxes, depreciation, and amortization—the company’s valuation is expensive, considering it had $17 million of adjusted Ebitda in the first quarter.
With a $4.7 billion market cap, Cava is valued at a steep $18 million per restaurant, nearly three times that of Shake Shack.
If we go way back in history, to November 2021, we questioned whether Rivian’s market cap might be slightly optimistic after it came public. And the same can now be said of Cava—although that’s not a prediction that the stock will crash anytime soon. It went down on Friday and might continue to go down. Or it might go up back up. We don’t know. Timing the end to speculation is a tricky thing, and we get things wrong all the time.
But when you see signs of froth and enthusiasm seemingly disconnected from even the most optimistic scenarios, it’s usually a good time to hold onto your wallet and start behaving a little more like the Old Money Mr. Buffett emulated back in 1969, before he was even forty years old.
Of course, in today’s market, even forty-year-olds might be considered too aged to understand the future, and how it will play out. But in speculative markets, they always are. As John Brooks wrote in his book The Go-Go Years about the 1960s in which Buffett was operating:
It was coming to be believed, in the absence of evidence to the contrary, that almost any man under forty could intuitively understand and foresee the growth of young, fast-moving, unconventional companies better than almost anyone over forty. In the face of this clearly prejudiced new view, age continued to fight a desperate holding action. “Competence and judgment are not the product of age alone,” tradition-oriented David L. Babson and Company grimly wrote its clients, “but there is a high correlation between experience and the ability to assess the risk factor.” One may imagine the chortling of the gunslingers at that.
History is just one continuous rhyme.
Tweets of the Week
In Case You Missed it…
Lightning in a Bottle - by Ian Cassel
The Wisdom of K - by Chris Mayer
Contrarians, Bracing For Tough Times, See Beauty In 5.5% T-Bills
Generative Artificial Intelligence and Corporate Boards: Cautions and Considerations
Long-Only Value Investing: Size Doesn’t Matter!
Value Hive Podcast: Mike Alkin: The Ultimate Uranium Crash Course
Masters in Business Podcast: Gretchen Morgenson: From Wall Street to Journalism
Private Equity Deals Podcast: Breitling – Andreas Holzmueller and Luke Chapman
How Leaders Lead Podcast: Gil Hanse, golf course architect – The details matter
If you have not already upgraded your membership…
Avenel Financial Group, a merchant banking and advisory firm located in Charlotte, NC, launched a new business venture called the Co/Investor Club. The Co/Investor Club is a community of value-oriented investors that collaborate on investment opportunities and ideas. You are receiving this newsletter because you are a Free or Premium Member of the Co/Investor Club!
Chat with Mike
Whether you’re an executive with investment opportunities or a college student looking to network, we would love to chat with you! Email our Founder, Mike Pruitt, at mp@coinvestorclub.com with questions and ideas or schedule a meeting.
Don’t forget to follow us on social media too!
Twitter: @coinvestorclub1
LinkedIn: Co/Investor Club
For our disclaimer, please visit our website.
Have friends that want to join? The Co/Report is public, so feel free to share!
Thank you for reading. Co/Report grows through word of mouth. Please consider sharing this post with someone who might appreciate it.