Ro Ro Farm Co.
Investment Partnership
2020 Letters To Partners
“The individual investor should consistently act as an investor and not as a speculator.” - Ben Graham
In 2020, Ro Ro Farm Co.'s return was +25.59%. Ro Ro Farm Co. benefitted from the bear market that was caused by the Coronavirus outbreak. We were very cautious and selective; however, Ro Ro Farm Co. aggressively bought undervalued securities when the market took a nose dive.
The economy completely froze during the tip of the coronavirus outbreak. However, the reaction was more fear-based than fact-based. If you look at the numbers, around 30,000 people die every day from hunger. That means approximately 11 million people die from starvation every year. To date, two million-plus people have died from coronavirus.
In 2019, the death rate was 0.9% in the United States. In 2020, the death rate stayed at 0.9%. There is a high probabily that more people probably died because of indirect causes of coronavirus such as suicide, hunger, etc. However, coronavirus also indirectly saved lives. For instance, fewer people were driving, thus, there are less deaths caused by car accidents. In all, if you take a Utilitarian view, what is the best way to save the maximum number of lives? We are not in the business of getting political, thus, we won’t make comments regarding how the country should be run. In all, the important lesson is that coronavirus was not deadly but it was very contiguous. Ebola on the other hand was more deadly but less contiguous. The death rate was around 50% for Ebola. If another outbreak occurs, with a virus that is deadly and contiguous then we are all in serious trouble.
Richard Feynman, said "imaging how much harder physics would be if electrons had emotions." Remember that many market participants are very emotional.
The psychology of the market certainly has been impacted by coronavirus. However, we are long-term investors. Thus, it is a high probability bet that civilization will continue five, ten plus years in the future (note, we are not in the business of making a macro-economic forecast). Coronavirus gave us opportunities of a lifetime to buy undervalued securities. We bought 'great' companies that were within our circle of competence. Plus, our holdings were companies with tremendous competitive advantages, and excellent management. In all, we were able to buy companies with a margin of safety of 60% plus.
Our confidence was also boosted by the FED and U.S. government. The FED and U.S. government acted quickly and aggressively. From providing liquidity to stimulus checks, the most crucial variable in valuing companies is interest rate. This is more important if you are a value investor. We don't know what investors are doing if they are not value investing.
The political environment was certainly entertaining. I am never surprised by politics because I expect to be disappointed by politics. Note we are not in the business of taking sides.
The main concern for us is that we feel there are irrational activity in the market. Currently, the Shiller P/E Ratio is around 38. The Shiller P/E Ratio has only risen above 35 three times in the last 140 years. However, we also cannot forget about the low-interest-rate environment. You also have to consider the fact that earnings contracted by the economic shock. Thus, we also look at other variables, which are on the high side. As we advance, we will not be aggressive in terms of investing until market fluctuations give Ro Ro Farm Co. more opportunities. This does not mean that we will not be investing. Some holdings in our portfolio are very attractive in terms of valuations. However, we are very cautious.
Note, we have our own way of calculating earning power. If you understand accounting, you understand that it is partly art and science but not an algorithm. Plus, we have our own yardstick in terms of willingness to pay and buy. We don’t compare or look at the markets or legendary investors. It’s essentially what we would buy or sell an entire local business for.
I have been asked by many partners about Tesla and Bitcoin. My answer is that we don't invest in Bitcoin because its is not an income producing asset. Furthermore, the electric car game is too hard for us to make a proper judgment. Thus, we stick to one-foot hurdles rather than six-foot hurdles.
Tesla's market capatilization is around $800 billion. We know that they are a great company. However, it is essential to consider that Tesla's revenue is around $24 billion, profit is about $500 million, and free cash flow is around $2 billion. General Motors market capitalization is around $80 billion.
Now, the market and we know that that probability is high in that Tesla's earning power will increase. Looking at history, investors have lost more money than made money with significant innovations that changed lives such as airlines, auto, and so on. The electric car industry is a very competitive industry with great competitors such as GM, Rivian, BYD, SAIC, etc. The electric car industry also requires high capital expenditure. We are not here to help you make a decision. You have to make your own judgement.
Furthermore, my experience from engineering and flying remote control helicopters tells us that the world of technology moves rapidly, and finding the winner is very difficult. In the end, Chinese companies dominated the remote control helicopter industry, which American companies had dominated for a long time. Similar to the car industry, there was a transition from gas-powered helicopters to an electric remote control helicopter. However, the main learning lesson is that finding the winner is very difficult. Thus, we choose to play an easier game. If other people are making great wealth from the industry, we don't understand. That doesn't influence us.
In all, 2020 has been a year, where I have learned, and developed personally and professionally. The learning game never stops. I hope you and your family members are safe and blessed.
Cordially,
Rojan Shrestha
General Partner
