In its Q2 investor letter, Greenhaven Road Capital talked about both Etsy Inc (NASDAQ: ETSY) and Envirostar Inc (NYSEAMERICAN: EVI). Etsy is a $6.15-billion market cap e-commerce website focused on vintage items, while Envirostar is a $435.73-millin market cap distributor of commercial laundry and dry cleaning equipment. Let’s take a look at comments made by Greenhaven founder and portfolio manager Scott Miller about Etsy and Envirostar.
ETSY (ETSY)
All other Etsy news pales in comparison to their decision to raise prices, increasing the per-transaction fee from 3.5% to 5%, as announced this quarter. It is rare for a company to introduce a near 50% price increase and still be unlikely to face a significant decline in demand. As this is a platform business, virtually all of the incremental revenue could drop to the bottom line. Management has pledged to make significant investments in marketing and product so there will not be an explosion in profitability, but we should continue to see growth in buyers, frequency of purchases, conversion rates, revenue, and ultimately profitability.
EnviroStar (EVI)
EnviroStar has had a quiet year so far, announcing only one acquisition to date. As discussed in previous letters, CEO Henry Nahmed has articulated a buy and build strategy. He has the currency with his stock to make the acquisitions in a very accretive manner. Time will tell, but I suspect the back half of the year will see significantly more activity on the acquisition front.
Andrey_Popov/Shutterstock.com
Etsy Inc (NASDAQ: ETSY) has been performing very well on the share market this year so far. Since the start of the year, the company’s share price has moved up 151.74%. The stock has jumped 20.10% over the past three months and 198.72% over the past 12 months. Further, Etsy isn’t a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 30 funds in our database that held shares of the company.
Meanwhile, shares of Envirostar Inc (NYSEAMERICAN: EVI) are up 1.83% since the start of the year. The company’s share price has fallen 2.75% over the past three months. However, the stock has increased 40.36% over the past 12 months.
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.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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I started Insider Monkey 12 years ago. From time to time I receive offers from potential buyers who want to purchase the entire business for 2-3 times its annual profits.
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