Y H & C Investments November 2024 Update

Scarcity- Not plentiful-

Y H & C Investments: The Economic Reality of Supply and Demand-

(Return figures come from the October 31, 2024, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

There is only one person who is elected as President of the United States during a four-year term. As of October 27, 2024, there are a little over 346 million people who reside in the country, making it the third most populated country in the world. One official position to lead nearly 350 million people. Politicians from both parties desire the job and every four years there are typically many candidates from both parties who seek the position. Clearly, supply is constrained, and demand is high. It is a very important and valuable position. Why do I bring this up?

It is not because in a little less than a week the United States will go to the polls to elect the next President. It would be understandable if that was the case, but no, I think it highlights the law of supply and demand quite well. In order to understand why something is valuable, the laws of supply and demand are like the law of gravity. In applying supply and demand to the capital markets, it becomes evident to look for situations which are quite rare. Unique. Special. Not existing in abundance. Of course, every company one talks to believes they are different and one of a kind. Instead, we can apply the laws to specific characteristics of the capital structure to determine if a company starts with a run of the mill circumstance, versus something which is potentially more advantageous to its owners.

One of the most highly regarded companies in the globe is Berkshire Hathaway. Yes, much of it is because of the popular CEO Warren Buffett. However, if we look at its capital structure, there is something quite unique about Berkshire. There are only 1.46 million shares available for the public. Of those, 38% are held by insiders, meaning Mr. Buffett or members of the management team. If we take those out of circulation, let’s call it 60% or 840 thousand shares are available for purchase to the public. As the company has grown its business to become both enormous and profitable, there are very few shares available. If one looks at the current stock price, it registers in at $681,999 for one class A share. Now, this is at the end of nearly fifty years of building the value of the enterprise, so it is important to keep that in mind. Let’s turn to a few other situations to get more understanding of why supply and demand is important for value creation.

Dillard’s is a department store which does business across the United States. Over the last ten years, it has bought back nearly 2.2 billion dollars of its own stock. The current market value of the stock is a little over 6 billion dollars. Shareholders have seen the stock go from just under $120 per share to nearly $380 over the last decade, or close to a 20% annual rate of return. Another similar example is AutoZone. It currently has a little under 17 million shares outstanding. From 1997 to 2022, the company bought back 84% of its shares outstanding. The stock price moved from $550 per share to over $3,100 per share during this time frame, an annual return of greater than 50%. These situations are what Charlie Munger refers to as share cannibals, meaning the company is retiring a large number of shares over time, and usually it makes them far more valuable. One caveat to keep in mind is many companies buy back large amounts of their own stock at prices which later turn out to be far too high, thus destroying value. The key is having a business which is growing revenues and profits in order to both reinvest in the business and buy the stock back. These examples highlight the importance of understanding supply and demand as a way to earn higher rates of return when investing.

Spanning the Globe: The ECB and Canada Lower Rates, Japan’s Won’t Raise, and Pay Attention to the Beef!

With the international community intently watching our upcoming election, the trend across the world for central bankers is to follow the lead of the Fed and lower interest rates. As elections were just held in Japan, the dominant party lost, and the new prime minister (Mr. Ishiba- a Liberal Democrat) is against the Bank of Japan embarking on a tightening program. Remember those thoughts about a stronger Yen, uh, yeah, scratch that. Welcome to the vagaries of the foreign exchange market. Consistent with our Fed heads here in the US, the ECB and Canada also dropped their interest rates in an effort to stimulate economic activity. The investment world won’t know for six or nine months how effective the central bank moves are in promoting growth. It is why many investors swear off macroeconomics as a waste of time. From my perspective, maybe the most interesting foreign situation which bears watching is the home of great beef. Not Wendy’s, but Argentina. Mr. Milei, who campaigned on taking a chain saw to government spending, walks it the way he talks it. Argentina is loaded with one of the largest oil and gas deposits in the world, the Vaca Muerta (love that name). Gas production is active and the largest oil companies in the world are licking their chops to help drill and have access to pipelines and ports. In the event Argentina becomes not only a gas producer but can establish consistent domestic oil production, the entire Western Hemisphere will be impacted. Some legendary investors are heavily involved with Argentina, so it is very much worth keeping your eye on.

Y H & C In October- Patience Benefits Long Held Positions, and the Joy of the LD Conference-

As earnings season arrived and progresses, the month shaped up with pleasant surprises on a number of fronts. A few companies we have owned for many years reported their best figures in a long time. One is a large health care diagnostic and testing leader, and the other is the market share champion of both cable and telecom in Canada. On the opposite side of the spectrum, the most frustrating area in the market remains the energy space. Upstream, downstream, midstream, sidestream, backstream, for the most part, energy is the market’s whipping boy. When in doubt, investors sell energy. So why own it? Well, hypothetically, what if say, the conflict in the Middle East were to expand, or Russia were to succeed in the Ukraine, and continue westward into Poland? Do you think oil supplies might be even more important? Companies that produce one or two or three percent (or more) of the world’s oil supply become even more critical across the globe. I know, the returns in energy have been terrible. It does not mean they will remain terrible.

The other important item to discuss during the month was staying up to date on all the company earnings and conference calls of our portfolio companies. In addition, I prepared for the meetings at the LD conference, so they are as productive as possible. The big takeaway is the companies Y H & C Investments has positions in are executing nicely. Some of the companies I have been tracking for a year are two are starting to show promise, which makes it more difficult on the hard-working investor to decide where the best places are to allocate capital. I can feel your sympathy!

You will be pleased to know nearly every meeting went very well and the LD Main Event is exceptional. A big shout out to the hard working and great leadership and LD Micro, specifically Chris Lahiji and Scott Kessler. Simply incredible. Looking ahead, November 5 is days away and you know what that means. The results will be interesting and digesting the repercussions might be more important, especially the control and makeup of the House of Representatives and the Senate. I very much appreciate your interest and if you have any questions or comments, please say hello at information@y-hc.com.  Thanks for your continued support! I hope you have a great month and enjoy your turkey and pumpkin pie!

Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)