PYPL - Mayar Capital Q2 2023 Letter To Partners

2023-07-19 12:00:00 ET

Summary

• Mayar Capital provides investment management services to institutions, family offices, and high net-worth individuals.
• The Mayar Responsible Global Equity Fund (Class A) saw a 3.11% increase for the three months ending June 30, 2023, while the MSCI World Index increased by 6.79%.
• The fund underperformed this quarter due to lack of exposure to large US technology names that have rallied, pulling the index performance higher.
• Mayar Capital ended the quarter with $268m in AUM and has made no significant changes to the portfolio apart from small rebalancing trades.

Our Performance

General Commentary

For the three months ending June 30, 2023, the Mayar Responsible Global Equity Fund (Class A) was up 3.11% net of all expenses and fees, while the MSCI World Index increased by 6.79% in the same period. Since its inception in May 2011, the Fund has seen a 184.28% increase versus a 178.89% increase for the MSCI World. This corresponds to a 9.00% annualized rate of return for the Fund, compared to 8.83% for the MSCI World.

Investing is a risky and complicated activity. We believe that avoiding errors is crucial for successful investing. As Charlie Munger put it, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

This means that it’s better to prevent costly errors than to make brilliant investment choices. Even the best investors will make errors sometimes. Reducing the frequency and severity of errors greatly improves our chances of success in the long run.

One of the things that stunned me when I first started investing was this table. It shows just how hard it is to recover from big losses. It made me realize how important it is to minimize losses before thinking about the potential gains.

In other words, costly mistakes that cause a permanent loss of capital can set back your investing journey by years or even decades. I remember one of my finance professors once telling us “You have to remember that if you have any number, no matter how big it is, and you multiply it by zero you’ll get zero.”

The first step to managing this risk is to admit your own fallibility. No one is perfect, and even the best investors make mistakes. It is important to be aware of your own biases and limitations, and to take steps to overcome them. To avoid mistakes, we use a checklist-based approach to investing at Mayar. This helps us to make sure we’re looking at all the relevant factors before making an investment decision. It also makes our decision-making more consistent across different situations and over time.

We also require a margin of safety for every investment we make. This means we invest only in companies we think are significantly undervalued. Buying investments at a lower price than their conservatively-estimated intrinsic value cushions us from any mistakes we make in analyzing the company, or when something unexpected happens.

At the same time, it’s crucial to remember that this error-minimizing approach comes at a cost. It means we’ll sometimes miss out on some hot stocks that end up performing exceptionally well. And when that happens, it doesn’t feel good hearing from those lucky few individuals who took a foolish risk-reward bet and ended up winning. This classic case of hindsight bias reminds me of Joel Greenblatt’s words about the danger of hindsight bias when an investment idea works out purely through luck, “Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot.”

The lure of high potential gains can prevent many investors from approaching with more caution. Most of them succumb instead to the reckless attitude of “regret minimization”, which is often completely driven by the fear of missing out (FOMO).

I don’t know if FOMO is a trait that is learned or inherited, but it strikes me as something that would have had an evolutionary benefit when we were running around in the savanna. For investors, it could not be more dangerous. I believe that FOMO is one of the biggest contributors to investor losses.

I don’t know of a simple way to overcome the feeling of FOMO. One thing that seems to help is to have a long-term investment horizon. Trying to get rich quickly is the surest way of parting with your savings for good. Also, it’s a very expensive mistake to view investing as an exciting pursuit. When approached sensibly, it’s as boring as watching grass grow or paint dry. Anyone seeking a thrill should look elsewhere.

Our Portfolio

Our portfolio underperformed the index this quarter and year-to-date. This was due to our lack of exposure to a few large US technology names that have rallied massively, pulling the index performance higher while leaving most of the index behind.

It’s difficult for any active manager to outperform when there is a strong rally concentrated in a few names. Narrowly-driven rallies like this tend not to last, however. Sooner or later, the high-flying names will descend back down to earth.

We haven’t made any material changes to our portfolio this quarter apart from small rebalancing trades, trimming SAP and adding to PayPal ( PYPL ). We also added slightly to our holdings in Helical.

The Fund and The Company

Our Investor Relations Team has put in a tremendous effort over the past few months on the IT development front. This is a journey that the team started three years ago and was hindered by various regulatory speed bumps. I am very happy to announce that for most investors the whole investment journey can now be completed online.

Mayar Capital ended the quarter with $268m in Assets Under Management (AUM).

The team and I were thrilled to see many of you in early June at our Mayar Roundtables. Your overwhelming support means a lot to us, and we wouldn’t be able to do what we do with it. Thank you for your continued trust.

As always, if you have any questions, please don’t hesitate to reach out to us.

Best regards.

Abdulaziz A. Alnaim, CFA

Managing Director

Business Summaries: United Parcel Service ( UPS )

( Headquarters: Atlanta, United States of America, Founded: 1907 as American Messenger Company)

What does it take to start and build a hundred-billion logistics behemoth? In the case of United Parcel Service, the answer is simple: two bicycles, a phone, a couple of teenagers – and over a century of hard work.

UPS was founded as the American Messenger Company by 19-year-old Jim Casey and his business partner Claude Ryan in 1907. With just $100 in initial funding (a small bank loan), most of the company’s early deliveries were done on foot, with bicycles used for longer journeys. It took six years before the company took delivery of its first vehicle, a Ford Model T. Initially serving stores in Seattle, the company then branched out to deliver packages in California, where it changed its name to United Parcel Service and invested in its first conveyor belt for sorting parcels.

Despite its rather modest beginnings, the company now transports around six percent of the United States’ daily GDP, three percent of global GDP, and is one of the hundred largest publicly-listed companies by revenues worldwide. Now operating from 1,800 facilities, UPS utilizes 125,000 delivery vehicles across the world, in addition to hundreds of planes. The parcel delivery market has become infinitely complex as volumes have grown, and the company has just come off a large multi- year capital investment program in new, modern facilities as well as automation technology.

About half the company’s revenues come from transporting parcels within the United States, with another third of sales earned internationally. The balance of the company’s business is conducted within the Supply Chain Solutions segment which, amongst other things, operates a forwarding business and a freight business that UPS exited last year.

Delivering over six billion packages from almost 200,000 network entry points, as UPS did in 2022, is certainly a mammoth operation. Such a task also involves enormous complexity, and this is where UPS’ economic moat lies. The setup of warehouses, sorting facilities, and truck depots forms a physical network which, combined with UPS’ massive scale, makes the company an asset that is virtually irreplaceable. Because this is by nature a highly operationally leveraged business, any new entrant would not only have to lay out many billions of dollars in physical capital but would also need to endure years of losses as volumes scale. This makes UPS’ enterprise extremely hard to replicate, and hence very valuable. It’s no surprise, then, that the company consistently produces returns on capital in excess of 20 percent and has grown sales at 6 percent a year over the last two decades.

Of course, no talk of new entrants would be complete without mentioning Amazon ( AMZN ), which has rapidly grown to take 20 percent of the US parcel market at the ‘expense’ both of UPS and FedEx. However, it’s worth noting that while Amazon’s share of volumes is one fifth of the market, its share of the value is about half that. This stands to reason – the volumes delivered by Amazon are small packages received by consumers. These are lower-value deliveries and, because they also take longer to deliver than B2B deliveries, have a lower margin.

In fact, it is the express strategy of UPS CEO Carol Tome to move away from low- value, high-volume business and to make UPS “better, not bigger”. This involves manoeuvring from shifting Amazon’s parcels (which represent a mid-teens share of the business) towards higher-margin volumes in B2B, small business, and healthcare verticals. We think this is a sound strategy – after all, value creation comes only when new growth brings returns in excess of the cost of capital on the incremental investment required to achieve it. If management continue to allocate capital rationally, positioning UPS for continued efficient growth in the US and internationally, we will continue to be very happy shareholders indeed.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

For further details see: