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Rowan Street Q1 2024 Letter


Dear Partners,


This March marked the 9th anniversary of Rowan Street Capital. When you first start a fund, there's this pressure to quickly prove yourself and achieve success by making what may seem like brilliant moves. But with time, the wisdom in Warren Buffett’s words becomes crystal clear:

“Investors achieve outstanding long-term results not by making brilliant decisions, but by avoiding dumb ones.”

As we reflect on our journey, it's evident that our value creation comes from “trying to be consistently not stupid” — a task that is much harder in practice than you may think — rather than chasing after genius.  


Rowan Street gained +25.6% (net) in the first quarter of 2024.  Over the past 12 months the fund gained +70.6% (net), driven by our top 4 core holdings (META, SPOT, TTD and SHOP). Please see disclosures for the historical performance data.  


Our 9-Year Performance History 


Rowan Street’s performance history can be best understood by considering it in three chapters.  In our first chapter, we generated an 18.6% (gross) and 14.1% (net) annual compounded return for the first nearly six years of our history (Mar 2015 — Dec 2020).  In Chapter two, which lasted about two years, we incurred large losses on our investments in Meta, Spotify, Peloton and DocuSign. We ended up selling DocuSign at a loss, but stayed invested in our other positions.  At the end of 2022, we published two articles that highlighted our conviction in our two largest holdings: ‘Does a $750 Billion Decline in Meta’s Market Cap Make Sense?’ and ‘Spotify is Currently Selling for $15 Billion — Does This Make Any Sense? In Chapter three, the fund had a strong rebound of +152% in just 15 months as our top 4 core holdings (Meta, Spotify, Trade Desk and Shopify) had a strong recovery.  


Mr. Market gave us a real education in 2021-22, the kind you can never get from books or classrooms — you have to experience it!  It was a tough period, no two ways about it.  But learning all those hard lessons and being able to persevere with our convictions and to come back from that, I guess that's what really shapes you as an investment manager.  


“In the middle of every difficulty lies opportunity” — Albert Einstein 


That challenging period led us to some serious soul searching and a deep dive into where we went wrong. We spent countless hours learning from our missteps, ensuring we don’t make the same errors again and sharpening our approach. It was a chance to get back to basics, reexamine what made us start this fund in the first place, and double down on the core values that guide our decisions. 


Since our fund's inception in 2015, we have made 48 stock purchases and completed 37 sales. Way too many!  In the past 15 months we have made just one transaction (purchase of Adyen in 2023). Reflecting on these decisions with the benefit of hindsight, it's clear that while we've made many good picks, we've also had our share of missteps. One major pattern that has emerged — and negatively impacted our performance — is what famous investor Peter Lynch describes as “cutting the flowers and watering the weeds.” This means we've sometimes sold our best-performing stocks too soon while holding on to underperformers for too long.


To illustrate what we've learned from these experiences, let’s explore some specific examples where this pattern manifested in our decision-making:


Constantly Trimming or Outright Selling Our Winners (Cutting the Flowers)


The best investment ideas are simple.  We have previously written about Chipotle (CMG). It turned out that this was our best investment idea since starting the fund.  The stock is up 10x since we first invested at the end of 2017 (~47% annualized).  Sounds absolutely incredible, except that your managers sold CMG back in 2018 (thinking that the stock had gotten ahead of itself), and proudly booked an 85% profit in 6 months, patting ourselves in the back. Interestingly, when we wrote about this in our 2019 letter, describing our big mistake to sell, the stock still went up +270% since that letter, delivering an impressive 30% annual return.  This is an incredibly important point!  You do not get many Chipotles in your investing career.  Companies like these are super rare and the opportunity to buy them at an attractive price (which we got in 2017) is even rarer.  Booking a quick profit, paying the capital gains tax and thinking that you will find another CMG to invest your proceeds into is usually delusional. 


Along with our personal investment case of CMG, let us compare that to the experience that Bill Ackman had with the same investment.  He is a famous hedge fund manager that we greatly admire, who has achieved an incredible track record in the past 20 years running Pershing Square. Bill Ackman has owned the restaurant stock since the third quarter of 2016 at an initial cost basis of about $411 per share (our cost basis was $289).  Originally, Mr. Ackman bought 2.88 million shares.  He was wise to hold on to CMG stock and it still is the top position in his fund (18% weight).  But, if you follow his 13F filings, which are the public filings disclosing large investment manager’s holdings of publicly traded securities, he kept trimming his position as the stock went up.  We calculated that if he just sat on his original 2.88 million shares and didn’t sell a share, his position would be worth $8.8 billion today.  This would represent ~50% of his entire firms’ assets under management (AUM). But he only has $1.8 billion invested in CMG as of Q1 2024.  As Charlie Munger said:

“The first rule of compounding is to never interrupt it unnecessarily.” 

And that's the main takeaway!  By no means this is meant to criticize Mr. Ackman or his investment approach, but simply is an effort to learn from other manager’s mistakes in addition to that of our own.  


Not all of our ideas are going to be winners, and that's perfectly fine.  If we are lucky and do our job right, we will get 2-3 big winners over time.  And that is all we really need to drive our long-term performance.  The key is to let these big winners work for us and pay for all the other mistakes, which we make plenty of.  Sounds straightforward, right?  Yet, it’s difficult in practice. Many investment professionals simply aren’t structured to let their winners run due to various operational and/or emotional factors.  


If you study the successful investors that made the most money, generally, all had one thing in common: the presence of a couple of big winners in their portfolios.  Letting winners run is the most common trait amongst great investors.  Yet selling winners too early has been a persistent problem for the majority of market participants — they either get bored or scared out of them. It's a mistake we’ve certainly made ourselves, but we’re committed to learning from that and improving our approach going forward.  


Trade Desk (TTD) — An Example of Learning from Our Past Mistakes


We bought TTD stock exactly 4 years ago at an average cost of $17.40 (split-adjusted).  Since our purchase we have made 5x on our original investment, translating to ~50% annualized return.  But it's our journey to the 5-bagger return that is most interesting here.  About 1.5 years following our purchase, the stock had skyrocketed to the highs of $107 in November 2021 as NASDAQ peaked.  At the time we knew very well that the stock was overvalued and had gotten ahead of itself.  After all, this was a 6-bagger in just 1.5 years, so the conventional wisdom would suggest to bag your profits. “You don’t go broke taking a profit” they say, which is the biggest lie on Wall Street in our opinion.  


However, we decided to keep the stock, knowing that it will likely experience a correction sometime in the near future.  And here is our rational…  First of all, we had gotten to know Trade Desk and its management team relatively well during our 1.5 years of ownership.  We were convinced that we had stumbled upon a great business with excellent long-term growth prospects.  We were fortunate to establish a position at an attractive price as this stock has always been very expensive.  If we were to bag our profits at the time, no one would criticize a 6x return over the course of 1.5 years.  But…  what would we do with the cash proceeds?  First, our investors would be faced with a capital gain tax bill at the end of the year.  Would we sit there in hopes that we can buy it back at a lower price?  And if it dropped, would we have bought it back? Our experience has taught us that it sounds nice in theory but very unlikely in practice! Could we have avoided a setback? Yes, but who could be sure we would return to the stock in time before an important rally (close to impossible and not what we are good at).  So 5x in 1.5 years is very nice, but 5x in 4 years as of now is still an amazing return.  And… we still own a great business that will likely do well over time and we didn’t take all that capital and plow it into something we don’t know very well or is likely a mistake.  There are not a lot of TTDs around! Truly exceptional companies are rare and our job is to buy right and to hold on!


The Risks of Overweighting Favorites as Prices Decline (Watering the Weeds)


In the past, we heavily favored certain stocks like Under Armour, PRA Group, Spotify and Alibaba, attracted by what appeared to be irresistible prices. Upon reflection, it's clear that these heavy investments were more influenced by price than by the robustness of their business models. Although these investments did not result in losses and even generated small profits for the fund, they disproportionately tied up our capital and energy in opportunities that were less than optimal.  


We all make mistakes. In a batch of ten investments, maybe one or two will be standouts, a few will be okay, and a few won't pan out. Ideally, the standouts pay for the mistakes. But when we first invest, it’s tough to tell which will be the true winners over the next decade. By investing, on average, the same amount of capital at cost into our best, well-researched ideas, we allow Mr. Market to determine who the winners are really going to be. The positions that go up and become larger pieces of the portfolio (naturally) have earned that right. The ones that go down and become less significant have earned their fate. The reality is that our portfolio wants to be in winners and it will concentrate itself more and more into winners if we just let it.  Simply put, it’s easier to sleep at night when our largest position got that way by going up (earned the right) vs. an underperformer we keep adding to trying to prove to the market that we are right.   


Updating Our Investment Principles


When we started Rowan Street Capital, we laid out our guiding principles to serve as a compass for our thinking and decision-making.  Over the past nine years of managing the fund, we've learned a lot — enough to fill a book or two — and we've always believed in the power of writing things down to really embed those lessons into our minds.  As we went back and reviewed those original principles, it became clear that it is time for an update in order to better reflect our evolving approach and lessons learned.  


These principles aren't just something that is nice to have on our website. They're the very foundation of how we operate and make investment decisions. Our primary goal in updating these principles is to provide clear guidance for our future investment decisions, ensuring that we, as managing partners, remain grounded and avoid costly distractions.  Additionally, we hope that these 13 investment principles will help new investors understand the investment philosophy behind the selection process for the companies in our portfolio.  We strongly encourage you to review our updated Guiding Principles.


We are proud of the path we've taken so far, and these refreshed principles are a renewed commitment to our journey.  We are looking forward to continuing this adventure with all of our partners.


Best regards,


Alex and Joe




DISCLOSURES



The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our Fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot assure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee The top 5 will continue to perform and, more generally, there is no guarantee the fund will meet any specific level of performance .

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