Top 50 Microcap Investor List: Joshua Baker
For this week’s Top-50 feature we present Joshua Baker, Portfolio Manager at Capital H Management in Melbourne, Victoria, Australia. Joshua joined Capital H Management in March of 2021 where he became responsible for co-managing both the firm’s Inception Fund and Active Fund. The Active Fund was founded upon Joshua’s arrival as a result of the Inception Fund’s wild success (26% p.a. net), which achieved net returns of 16% throughout the first year of operation.
Joshua was a guest on our latest episode of the Co/nversations Podcast.
Read our feature on Joshua Baker here!
Scrambling Out of Mistakes
“I spoke earlier about the desirability of removing your ignorance piece by piece, and there’s another trick, which is scrambling out of your mistakes. And we’ve been quite good at both, and it’s enormously useful.” —Charlie Munger
In its Annual Investor Presentation on February 11th this year, Pershing Square Holdings briefly described the reasons that it bought 3.1 million shares of Netflix at a price of about $395 per share. This past week, Pershing Square was in the news again, this time announcing the sale of those shares for a substantial loss, on a day when the stock closed down about 35% from where it traded the previous day. In a letter describing the sale, Bill Ackman, the CEO of Pershing Square, wrote:
We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio. While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty. Based on management’s track record, we would not be surprised to see Netflix continue to be a highly successful company and an excellent investment from its current market value. That said, we believe the dispersion of outcomes has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding.
One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis. That is why we did so here.
We have no opinion about whether the sale was a good one or a bad one when it comes to Netflix’s future potential, or about whether there were some red flags in the company’s accounting that should have gotten more attention from large shareholders before the big drop. The point we want to make is that a good sale doesn’t necessarily depend on profits and losses in the future.
“So why are analysts and the rest of us so reticent to alter views?... The answer seems to me to lie in the ‘sunk cost’ fallacy. This is a tendency to allow past unrecoverable expenses to inform current decisions. Brutally put, we tend to hang onto our views too long simply because we spent time and effort in coming up with those views in the first place.” —James Montier (“The Little Book of Behavioral Investing”)
Changing your mind is hard. And it’s even harder about the things in which you’ve spent a lot of time, effort, and money. But as hard and costly as it is to realize that you are wrong and sell something at a loss, it can be even more costly not to change course and scramble out of a mistake.
It’s not just that an investment loss could become larger (which it may) but it’s also that there is an opportunity cost to your time. If you’re spending time on something that you thought was predictable—but which you now find harder to figure out—it means you’re spending less time on finding things that might be a better fit for your investment style. Remember, you don’t have to make up investment losses in the same way, and in the same companies, in which you made them. There are plenty of other fish in the sea.
“There may be good reasons to continue investing in something to finalize it. But beware of doing so for the wrong reasons, such as to justify non-recoverable investments. Rational decision making requires you to forget about the costs incurred to date. No matter how much you have already invested, only your assessment of the future costs and benefits counts.” —Rolf Dobelli (“The Art of Thinking Clearly”)
"When the facts change, I change my mind. What do you do, Sir?" —John Maynard Keynes
Co/nversations Podcast
We’re taking the podcast global! Join hosts Alec Brunelle and Sam DiFiore in their Co/nversation with three impressive Australian investors - Mark Tobin, Josh Baker, and Luke Winchester
Mark, Josh, and Luke discuss the Australian stock exchange, differences in managing personal and professional portfolios, how they source new ideas and more!
Tweet of the Week
In Case You Missed It…
Alta Fox’s Research Report on Daseke, Inc.
Laughing Water Capital’s Q1 Letter
Greenhaven Road Capital’s Q1 Letter
Farnam Street Investments’ Q1 Letter
Podcasts - In Case You Missed It…
Yet Another Value Podcast: Andrew Wagner on Copart (CPRT)
Insecurity Analysis Podcast: Mary Childs and her book The Bond King
Behind the Balance Sheet Podcast: Russell Napier and Jeremy Hosking [There are also some great letters from Hosking available HERE.]
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