Greenhaven Road Capital recently published its Q4 Investor Letter (you can download a copy here). The letter discussed the hedge fund’s investment thesis on the top five positions, including Etsy Inc (NASDAQ:ETSY). Etsy is a $2.6-billion market cap company that operates a global online marketplace for creative entrepreneurs to for buying and selling of handmade/vintage items and unique factory-manufactured items. In this article, we’re going to take a look at Greenhaven’s thoughts on Etsy.
The thesis here is unchanged: Etsy is a valuable two-sided marketplace providing value to merchants who can sell items on an inexpensive platform and consumers looking for a more personal alternative to Amazon. The company has become increasingly focused on profitability and has dropped numerous projects that were not core to providing a better product for creative entrepreneurs (sellers) or buyers on the site. Further, they have restructured engineering resources to allow for faster innovation. Etsy’s decision to drop their in-house CRM (customer relationship management) software and transition to Salesforce is an example of this reorientation.
Similarly, they will migrate from three internally operated data centers to Google Cloud, which brings cost and functionality advantages. All of these changes seem quite positive as it is hard to argue that Etsy should be running its own data centers. In his book “Good to Great,” Jim Collins has a notion that to transition from good to great, there is a flywheel that starts slowly and through consistent small actions momentum is built. It appears Etsy’s CEO is committed to a more focused and efficient enterprise, and each one of these actions is a push on the flywheel. It will be interesting to see how much momentum the company can generate.
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Etsy Inc (NASDAQ:ETSY) operates an e-commerce website for buying and selling handmade and vintage items. For the third quarter ended September 30, 2017, the company reported total of $106.4 million, up 21.5% year-over-year. Net income for the quarter was $25.8 million, or $0.21 earnings per share, versus a net loss of $2.4 million, or $0.02 loss per share, for the same quarter of the year before.
Shares of Etsy have moved up 4.55% since the beginning of the year, while the share price has jumped more than 65% over the past 12 months. The stock has an average rating of ‘Hold’ from analysts polled by FactSet.
Meanwhile, Etsy isn’t a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the third quarter of 2017, there were 29 funds in our database with positions in the e-commerce company, including Conatus Capital Management and Hawk Ridge Management.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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