Good Morning!

As 2023, is coming to a close and a new year is on the horizon, I wanted to take a few moments to reconnect with The Crossover subscribers.

I appreciate all of your messages about the status of the newsletter, and I am excited to share that I will be aiming to send The Crossover monthly in 2024! If anything changes, I will be sure to keep you all updated.

Wishing you and your family a continued joyous holiday season and a happy and healthy 2024!

-Alan

Three quick housekeeping announcements/reminders before we get started:

1. All opinions in The Crossover are 100% my own.

2. No Artificial Intelligence/ChatGPT is used in writing The Crossover. (Who needs AI when you have AL!)

3. The Crossover is not investment advice and is for education and entertainment purposes solely.

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THE BIG THREE

1. A Farewell to a Giant

As we all go through life, I think it is pretty rare for someone to find themselves in a situation where the death of a 99-year-old whom they have never met makes them pretty sad.

However, the passing of 99-year-old Charlie Munger, Vice Chairman of Berkshire Hathaway and Warren Buffett’s long-time right-hand man, did in fact make me pretty sad.

In the weeks since Munger’s passing, I have spent some time wondering why his passing had a meaningful impact on me.

Sure, his investment quotes were timeless and he had hilarious one-line zingers, but I do not think a quote like “The big money is not in the buying and the selling, but in the waiting,” would make me emotional — albeit being very wise.

So what was it?

With the perspective of a few weeks, giving time for the emotions to turn into thoughts and words, it is clear to me why I was impacted by Munger’s passing.

Charlie Munger was not just another investment legend that I learned investment principles from. He was someone who taught me powerful life lessons.

The investment lessons were secondary by a large margin.

In the first ~30 years of Munger’s life, he overcame serious trials and tribulations. Whether it was growing up in the heart of the Great Depression, or his first marriage ending in a difficult divorce where he basically lost everything, or the devastating passing of his 9-year-old son, Teddy Munger, to Lukemia, Munger faced immense challenges.

Specifically, in regard to the passing of Teddy, Munger’s friend, Rick Guerin describes just how crushing the loss was for Charlie by saying “he would visit the hospital when his son was in bed and slowly dying, hold him for a while, then go out walking the streets of Pasadena crying."

Heartbreaking.

In his early 30’s, Mr. Munger was sitting there with a canvas of life that appeared to depict a dark and ruined painting. However, Munger soldiered on and continued to try and build a positive life for himself, slowly and consistently painting around the darkness to ultimately create a life that was a masterpiece.

Munger went on to re-marry in a long and happy marriage that lasted for over 50+ years until his wife passed away. He was a family-oriented, charitable man who lived in the same humble Omaha, Nebraska house he always did as he thought anything grandeur wouldn’t be good for the kids.

Oh. And he built one of the most valuable companies ever.

However, after reading about his life, the business aspect is not the heroic or impressive part, the personal accomplishments are.

Munger serves as a true model to anyone who encounters difficult times and challenges in their life — therefore, a possible role model to everyone.

Mr. Munger — Thank you for all of the lessons I have learned and laughs I have had over the years. Your legacy will live on for generations to come.

“You can cry, all right. But you can’t quit… Somehow you soldier through. If you have to walk through the streets, crying for a few hours a day as part of the soldiering, go ahead and cry away. But you can’t quit.”

-Charlie Munger (1924-2023)

2. Splunk Was a Slam Dunk

Easily, my investment highlight of 2023 was when Splunk announced in September that they would be acquired by Cisco for $28B, or at around $157 a share. 

This was so exciting not because I am particularly passionate about legacy “American multinational digital communications technology conglomerates,” but rather, on December 16th, 2022, I wrote a piece in The Crossover titled “Is Splunk a Slam Dunk?”

At the time the article was published, the stock was trading @ ~$86 a share. The $86 share price at the time of the original piece to the $157 acquisition price represents an 80%+ increase in valuation, hence confirming that Splunk was in fact a slam dunk. 

When reflecting back on the Splunk investment, there are a few key highlights/lessons that stand out to me: 

1. Free Cash Flow was the Key Financial Metric – not EBITDA, EBITDAR, adj. EBITDA, or OIBDA. Simply, FCF. 

2. A CEO with a track record – New Splunk CEO Gary Steele was an experienced CEO who had successfully scaled Proofpoint to a $12.3B acquisition 

3. Private Equity’s Growing Stake – H&F Corporate Investors, a $90B+ PE fund, made a $1.3B+ investment in Splunk in March ‘22, at ~$115 a share & added to the position in September ‘22 at ~$90 a share.

4. Post-Investment Period – My bullishness for Splunk began after the expensive investment period of moving from on-prem to the cloud & after Wall St. punished them for this. 

Throughout the year, even before Splunk was acquired, I thought that the Splunk piece symbolized a meaningful step in my maturation process as an investor. 

I no longer would get excited about companies that did not have meaningful earnings. I would prioritize strong companies with strong financials in strong industries who either had a strong trajectory and/or that the market was misunderstanding in that moment.

These values also led to my bullishness for Digital Ocean that I wrote about a few months later and will discuss briefly in the next section.

Click here to read my original piece on Splunk

3. Digital Ocean & Dollar Cost Averaging 

On June 26, 2023, I wrote a piece in The Crossover on Digital Ocean ($DOCN) titled: “Digital Ocean: A Fundamental First Investment.” On the date the article went live, the stock was trading @ ~$37.70. 

How did $DOCN reward me by sharing my confidence in them with thousands of people? 

By proceeding to drop by 50% in the next several months, hitting as low as $19.39 in the fall. 

Thankfully, in the months since, the company has recovered and bounced all of the way back to $36.91 (as of market close on Friday) taking most of the pain away. 

Why did the stock plummet? Why did it rebound? What are my thoughts on the company going into ‘24?

These are questions I will probably answer in 2024, however, today, I think there is a much more valuable lesson to be learned as it pertains to position building. 

One of the most widely accepted and respected strategies to buying a stock is “Dollar-Cost-Averaging (DCA).” Investopedia defines DCA as the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security.” 

This strategy allows you to build a position in a stock that you like while overcoming the impacts of volatility due to the periodic, systemized purchases of the stock. 

Let’s take a look at three different purchasing strategies with $DOCN and where that would leave you today. 

• Scenario 1: A $1,000 Lump-Sum investment at the open on June 30 (No DCA)

• Scenario 2: A $500 initial investment on June 30th & $100 on the last trading day of each month for the next 5 sequential months (Partial DCA)

• Scenario 3: A $100 investment on June 30th & $100 on the last trading day of the next 5 sequential months (Full DCA) 

Here is what your returns would look like (data as of market close 12/22):

• Scenario 1: -7%

• Scenario 2: 12%

• Scenario 3: 25%

As you can see, the “Full DCA” strategy led to the best returns, and it was not particularly close. Does this strategy always provide the best results? Why doesn’t everybody always do it? 

1. People have confidence in their analysis and do not want to miss a big move before they have the correct sizing of their position

2. Because the strategy requires patience, which could be the toughest part of the market

Specifically, the way I think about the first point is that an environment where I could be earning 5% on your cash while DCAing, being worried about a stock getting away from me should not be a guiding concern. I am definitely not that good, and honestly, I don’t know if anyone is.

Moving into 2024, the power of DCA is at the top of my mind.

THE INTERVIEW

Seth Klarman on CNBC

One of my favorite interviews of the year came from another legendary investor cut from the Graham and Dodd philosophy, Seth Klarman, Founder at The Baupost Group.

Klarman very rarely makes media appearances, but made a few exceptions to promote the 7th edition of Security Analysis by Graham and Dodd, after he was asked to be the editor for the book.

My favorite excerpt from this interview can be seen below as Klarman shares his thoughts on the efficiency of the markets:

“I think that markets can become more efficient. There is a question in my mind about once a market becomes more efficient, whether it actually does have the likelyhood of becoming less efficient afterwards. So, for sure, there is more money in the public markets, things have become somewhat more efficient, but I also see a short term orientation that tells me its possible some pricing has become less efficient.

I think when you look at $META, the stock has been all over the place in a reasonably short period of time, falling under $100 than rising up to almost $300, literally months apart, for a large well established company that I think everyone can analyze.

In a world that is moving faster and faster and people are seemingly demanding profits at an even faster speed, Klarman identifies that the rapid shift in consensus regarding stocks — even blue chip names, could lead to phenomenal opportunities.

I think Klarman is spot on and this is something I have incorporated into my screening process for new investments.

At the same time, if I had the chance, I would actually love to ask Mr. Klarman why he thought $META was a slam dunk.

If you recall, $META, who at one point was gushing $8-$10B in FCF a quarter, saw its FCF drop to $173M in Q3 ‘22 (vs. $9.5B in Q3 ‘21) as Mark Zuckerberg invested billions and billions of dollars into the Metaverse.

In my eyes, there was no guarantee that Zuckerberg would reel back spend and prioritize profitability. It is also my understanding, that there would be no governance that could force him to do so due to Zuckerberg’s “Super Voting” shares.

Therefore, it was only Zuckerberg’s decision if profitability would become the priority, and I do not see how that is something that someone (outside of Zuckerberg) can predict.

THE CHART

A World of Investing or Trading?

Building off of Klarman’s thoughts above, Brad Freeman, “The Stock Market Nerd,” shared this great chart breaking down the average US equity holding period.

By looking at the chart, it is clear that the average holding period has decreased significantly from years in the 70’s to months today.

This begs the question: Do we live in a world of investing or a world of trading?

GOLDEN NUGGETS

1. Housel’s Wisdom

2. The Power of Saving Early & Often

3. Buffett the Tech Investor

THE MEME

Too. Real.

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.