Top 50 Microcap Managers: Denver Smith
For this week’s Top 50 Microcap Investor we present Denver Smith, Co-CIO and Founding Partner at Carlson Ridge Capital, a value focused hedge fund manager based in Denver, CO. Denver graduated from the University of Oklahoma with undergraduate degrees in finance and economics before returning to his alma matter to ultimately earn his M.B.A. Additionally, Denver possesses his Chartered Financial Analyst designation alongside a resume filled with other finance related jobs, one of which includes a former position as Chief Investment Officer of 73114 Investments LLC.
Read our feature on Denver here
Last month’s Lunch at the Club investor presentation has received great feedback from our Premium Members. Michael Green, portfolio manager and chief strategist at Simplify Asset Management gave a fantastic overview of some of his key ideas on the rise of passive investing. We've decided to make the video public for all to see.
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Competition
In his annual interview with CNBC’s David Faber this past week, Liberty Media Chairman John Malone warned about what can happen in an economic environment of easy money:
Too much competition can kill any business. If you have a lot of cheap money creating too much competition—particularly in capital intensive businesses—it can wreck the profitability of any business.
In a time of near-zero interest rates, a supportive Fed, stimulus checks, SPACs, private equity, and at a time when investors and even large pension funds are adding leverage to try and squeeze any ounce, or hope, of return that they can find, we seem to be in an environment of easy and plentiful money.
Perhaps there is no better example of this than the electric vehicle industry. Tesla commands a market cap north of a trillion dollars. The company is the leader in the industry for now, and even so, there are a lot of things that need to go very, very right to justify the company’s valuation. And recently, the upstart Rivian came public and has a market cap north of one hundred billion dollars, which is a lot of money, we think, especially for a company with less than one million dollars in sales so far this year.
Like John Malone, Charlie Munger has also seen a lot in his long life and made similar reflections when he said: “We have found in a long life that one competitor is frequently enough to ruin a business.” Both the electric vehicle industry as well as many others have seen capital intensive businesses pitch themselves as the technology companies of tomorrow. Maybe some will be. But they can’t all succeed to the levels of profitability needed for investors to make money buying at higher and higher prices. How and when it unfolds we make no guesses, but we expect the investment banks promoting such companies will dance for as long as they can. Investors may be wise to remember Warren Buffett’s warning in his 1989 letter to shareholders:
In the end, alchemy, whether it is metallurgical or financial, fails. A base business can not be transformed into a golden business by tricks of accounting or capital structure. The man claiming to be a financial alchemist may become rich. But gullible investors rather than business achievements will usually be the source of his wealth.
… Whenever an investment banker starts talking about EBDIT - or whenever someone creates a capital structure that does not allow all interest, both payable and accrued, to be comfortably met out of current cash flow net of ample capital expenditures - zip up your wallet.
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