Silver Ring Value Partners Q4 2021 Letter

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Dear Partners:

I hope that you are doing well. The partnership has compounded capital at an annualized rate of over 10% per year net of fees since inception despite a market environment that has been inhospitable to the kind of value investing approach that I practice. This has been achieved by following the disciplined value investing process that I outlined at the beginning of our journey in the Owner’s Manual. Along the way I have paid, and continue to pay, careful attention to guarding our capital against the risk of substantial permanent capital loss.

Silver Ring Value Partners partnership performance

Silver Ring Value Partners

By mid-January, the portfolio was up over 15% since year-end. I say this not to lead you to believe that this is in some way sustainable or a better reflection of results than the official year-end numbers. To the contrary, by the time you read this the results will have changed yet again, perhaps higher or perhaps lower. Rather, the fact that the same portfolio increased in market value in a span of a few weeks with no material fundamental developments by a multiple of calendar year 2021 “returns” highlights the somewhat arbitrary nature of prices in the short-term.

Despite the recent upward price movements in our holdings, I am excited about the portfolio’s prospects. The portfolio is at an attractive Price to Base Case Value ratio of 56% and is at 6x Normalized EPS. We also have hedges and put options that should dampen even the most severe market downturn, should one come to pass. These hedges would also enhance our ability to bargain hunt in a target-rich environment that would normally be associated with a market dislocation.

The change in the market’s environment to one in which risk is beginning to get acknowledged makes our approach to safely compounding capital over the long-term using a value investing process especially useful. I believe that this is a good time to add capital, and if you know of potential partners who are 1) long-term 2) like value investing and 3) use process rather than short- term performance to measure short-term progress, I think that they could benefit from joining us and I would appreciate an introduction.

Executive Summary

At the end of Q4 2021 the portfolio was very attractively priced, with the Price to Base Case value ratio at 54%. The portfolio had 15 investments plus hedges, cash at 1% and option-adjusted net exposure at 71% at the end of the quarter. My investment decisions are driven by bottom-up considerations, and cash is a residual of that bottom-up investment process. I do not seek to time the market, and I continue to rigorously stick to my criteria for quality and discount to intrinsic value.

Portfolio holdings

Silver Ring Value Partners

Investment Activity

I made the following changes to the portfolio during Q4 2021:

  • Exited the Charles & Colvard (CTHR) to position
  • Increased the Qurate (QRTEA) position
  • Increased the Discovery (DISCK) position
  • Increased the O-I Glass (OI) position
  • Decreased the Sprouts Farmers Market (SFM) position from Medium to Small
  • Started a small position in put options of PetMed Express (PETS)
  • Converted the position in Garret Motion to all preferred (GTXAP) given the better risk/reward
  • Increased our inflation hedge in TLT to include 2024 maturities
  • Exited the Mattel (MAT) put options position

Investment thesis tracker

Silver Ring Value Partners

  • White: thesis is tracking roughly in-line with my base case
  • Orange: thesis is tracking somewhat below my base case
  • Red: thesis is tracking significantly below my base case
  • Dull Green: thesis is tracking somewhat better than my base case
  • Bright Green: thesis is tracking significantly better than my base case

Price % base case value

Silver Ring Value Partners

  • The portfolio was attractively priced at 54% of Base Case value at end of the quarter
  • Option-adjusted net exposure was at 71% at the end of the quarter, reflecting option-based hedges

Operational Update

We are once again planning to get you your K-1s by mid-March. My initial estimate is that we should expect a small short-term tax loss and a medium long-term tax gain.

Portfolio Update

5 Important Things to Do Before the Market Bubble Bursts

Yes, you are living through a bubble in the financial markets. No, this is not about how to time the market. No, you don’t know when the bubble will burst (and neither do I). Yes, there are still things that you can do that will set you up for investing success.

The common argument for the existence of a bubble in the market is based on valuation. You already know that, and don’t need me to re-hash the data. The even scarier evidence of a bubble is behavioral.

I could share a dozen data-points about worthless digital tokens sky-rocketing to insane prices, speculators, both retail and “institutional,” rampantly gambling on short-term price movements, or the wave of highly suspect profitless IPOs. However, you probably already know all of that too.

Perhaps you have even become somewhat numb to each additional piece of news about market insanity. Or perhaps there is a little voice inside your head that is starting to ask: “maybe it is different this time?”

Instead, I will share a story from my Value Investing Seminar where I teach college and business school students about value investing. We had already finished studying Benjamin Graham’s Security Analysis and Philip Fisher’s Common Stocks and Uncommon Profits. On a day when Tesla’s stock approached $1,200 per share I mentioned to the students that I had a lot of respect for Elon Musk, and that I had read and thoroughly enjoyed his biography. Nonetheless, I told the class that it was my belief that with a market cap in excess of $1 trillion, the likelihood of attractive returns in Tesla’s shares from this starting point was extremely low.

That afternoon, one of the students sent me an email. The message was written in a very respectful tone, one that younger people might use to show the elderly that they have lost their way without hurting their feelings too much. He wrote that since I had already realized how amazing Elon Musk is, that I was half way there. Half way to where, you might ask? Half way to fully appreciating how amazing of an investment Tesla is. He then proceeded to very earnestly explain to me what I was missing about the stock and why it will be a great investment.

The point isn’t whether he is right or not. The point is that this is a young man at the very beginning of his investing journey. He has much to learn about investing, and he knows that, as evidenced by him enrolling in my completely optional value investing seminar. And yet, he has a very strongly held belief that despite doing very little real analysis he has profitable insights about a very popular stock, which up until that point has been going straight up for over a year.

This isn’t quite the same as getting stock tips from cab drivers in the late 1990s, but it is in the same genre. The point is that a bubble is formed when the following ingredients are mixed together:

  • Belief replaces analysis among many market participants
  • A group of speculators achieve visible success in the markets, driving upward price momentum and attracting other speculators
  • There is a plausible pretext for thinking that “it’s different this time” – a story
  • A combination of financial leverage and trading frequency allows the bubble speculators to displace more fundamentally-driven market participants in setting prices

Taken together, these forces create a disconnect between prices for the favored financial assets and any fundamental reality. All that matters is that there is a story + belief + price momentum + speculators. And so the bubble continues, growing ever larger and sucking in ever more converts until… it bursts.

The bubble is rarely all or nothing. Sometimes almost all financial assets are very dangerously priced. More frequently, there is an area of assets where the bubble rages which co-exists with other assets being priced within the bounds of reason. This tiering of the market into assets swept up in the bubble and those left out is a common bubble phenomenon. So don’t think that just because you can come up with some investments that are not at bubble prices that this represents evidence that we are not experiencing a financial bubble.

You might be thinking: but isn’t it actually different this time? And as this thought occurs to you, your brain might serve up 3-4 genuinely new and important developments that have occurred this time around but not during prior bubbles. Well of course! It would be way too pessimistic a view of human nature to expect us to keep bidding up tulips to insane prices every few decades.

Are there new, valuable business models that have emerged this time around? Ones that actually produce copious amounts of cash flow? Absolutely. Is that different from the profitless internet companies of 1999? Yes it is. Is there intellectual property value and useful applications to block chain technology? Yes. Are crypto-tokens scarce and supply constrained by design in a world where central banks have lost prudence and restraint? Yes.

None of these arguments refute the existence of a bubble. The bubble is created due to a combination of insane or near-insane prices for assets, as well as a behavioral dynamic among participants that significantly over-extrapolates the kernel of truth in the story into a financial phenomenon far out of proportion with reality.

We do learn. For a new bubble to start, it can’t be easily refuted by pointing out that this exact set of assets had already seen a bubble come and burst, leaving plenty of financial pain in its wake. No, there needs to be a story about something new, preferably mysterious and exciting. Because while we do learn, our brains just don’t evolve rapidly enough over a few centuries to get rid of all of the behavioral biases that, combined with the right circumstances, have led to prior bubbles.

Tulips had never been in a bubble until the tulip-mania. Besides, there had never been such new, rare and beautiful varieties. Surely these were worth almost any price? Especially since many other people would gladly pay you even more for them… until they no longer were willing to do that.

Radio companies were among the bubble darlings of the late 1920s. Such amazing new technology with such great growth potential had never been seen before, the thought went. In September 1929, Yale economist Irving Fisher said that “Stock prices have reached what looks like a permanently high plateau.” He was right. For another couple of months. Oops.

If you haven’t studied the go-go market of the late 1960s, I highly recommend the informative and very entertaining Money Game by “Adam Smith.” Remember the Nifty-Fifty and the one-decision stocks? The companies in most cases turned out to be quite good for many years. However, many of those investments proved to be one bad decision…

Then of course there was the Internet and Telecom bubble of the late 1990s. Remember “new era economics”? Price-to-eyeballs ratios? Of course it should be different this time – look at the massive innovation that the internet was producing.

Finally, the housing bubble of 2005-2007 deserves an honorable mention in the “also ran” category. Chuck Prince, then CEO of Citigroup, said it well in 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.” Those of you who started investing in the last decade or so probably haven’t heard of Chuck Prince. That’s probably because things got complicated for him and his company while he was still dancing.

Chuck, at the helm of one of the largest financial conglomerates of the time, didn’t get the advance warning that the bubble was about to burst. Chances are, neither will you. When I joined Fidelity in 2001 at the tail-end of the internet bubble, they just finished firing a few grizzled value investing veterans and replacing them with growth-and-momentum favoring analysts. Those old value fuddy- duddies had been predicting doom and gloom for too long.

Alan Greenspan used his famous term, irrational exuberance, in 1996. The bubble raged for another 3+ years. Perhaps it is this concerning example of leaving the dance floor while the party was just getting started that caused Chuck Prince to err in the opposite direction. We will never know.

So far, I hope I have convinced you that 1) there is a bubble and 2) neither you nor anyone else will know when or how it will burst. If you are not convinced, please feel free to stop reading and get back out on the dance floor.

Bubbles are frequently accompanied by a tiering of the markets. There is usually a group of securities (e.g. radio companies, internet/media/telecom companies, conglomerates, housing- related derivatives) that are trading at astronomical prices. Alongside, there is frequently another tier of securities which are out of favor or at least not caught up in the bubble to the same degree.

For example, during the internet stock bubble of the late 1990s, you could easily find good, predictable industrial companies trading at very cheap valuations. They were called “old economy” companies, in contrast to the new-economy bubble names that were the market darlings of the day.

It was a broad group of undervalued securities, allowing the careful investor to construct an attractive portfolio while the rest of the market was too busy bidding up the bubble names.

Which brings me to today. The market is comprised of three tiers. The first is the bubble tier composed of securities whose prices are completely disconnected from their fundamentals. The second, broad, tier is of high quality businesses that are valued at very high, but still rational prices. The problem is that these prices are only rational if you believe that long-term interest rates manipulated for a number of reasons by the central banks will remain at these depressed levels for decades to come. And then there is the narrow tier of cheap securities.

The problem is that, unlike in the late 1990s, this tier of cheap stocks is comprised of many companies that are experiencing real secular issues. Some might go bankrupt or see their profits greatly and permanently reduced, making them not at all undervalued in hindsight. And among these problematic securities there are a few hidden gems here and there where the prices are indeed unreasonably low and offering a high prospective return to the discerning investor. Unfortunately, these are few and hard to find.

So what should an investor do in such an environment?

  1. Have A Written Plan and Stick To It! While at your most calm and rational, write out what you think your plan should be and how you will go about executing it. Are you someone who is just dollar-cost averaging into low-cost index funds? Terrific! Write down how much you will buy each period, which index funds you will use and when you will rebalance. Then do exactly that, regardless of what you hear on the news, what the stock market is doing, or how excited or scared you might feel. Better yet, commit to this plan by sharing it with your significant other or someone else who has a stake in your financial success. Hold yourself accountable by explaining your future actions in the context of that written plan. Why write it down? When I put together Silver Ring Value Partners’ Owner’s Manual, I described in it exactly how I will be implementing my investment process. Every time that I write to you, I explain my action in terms of how they fit into the investment process that I have committed to follow. This serves to both provide transparency and to hold me accountable. Not to how our portfolio wiggles arbitrarily in the market quarter-to-quarter, but to the quality of my decisions within the context of my investment process.
  2. Avoid Margin or Portfolio Leverage. This one is easy. There is no shortage of examples, from the Archegos implosion in 2021 to many a person who lost all their money gambling with money that wasn’t their own. Just don’t do it. You can’t be careful enough when your fortunes are at the whim of short-term market gyrations. You never want to be a forced seller. As a value investor, I particularly enjoy buying undervalued securities from forced sellers – those who are selling irrespective of price, simply because they must. Don’t reach for that extra dollar of return and risk losing it all. Compounding your capital slower, but safer, is the better way.
  3. Raise Your Standards. It’s easy to let your standards slip in a tough market environment where there are few obvious bargains. Being a wallflower is no fun, when Chuck Prince and those following his lead are having all the fun on the dance floor. So guard your mind against the impulse to convince yourself that an investment you are considering is good enough, either in terms of quality or in terms of price. If you have to think about it long and hard – just pass. Good investments might require a lot of research, but once all the facts are assessed it should be obvious to you that it’s a no brainer. Otherwise wait.
  4. Don’t Be Afraid To Do Nothing. The math of waiting is very forgiving. You can earn zero for a number of years, and as long as you invest your capital down the road at an attractive rate of return, your overall result will still be good. It won’t be so good if you force yourself to act and lose a bunch of your capital.
  5. Factor In The Likely Future Opportunities. Many make the mistake of convincing themselves that they must choose among the current opportunity set. Most mutual funds fall into this category. This leads to sometimes picking the least unattractive investments among a bad set. Don’t do this. Hundreds of years of market history suggest really good investment opportunities intermittently appear. There is no reason to think that this has changed. So set an absolute return threshold, and don’t put in even a penny unless you are highly confident it will be exceeded. Leave the short-term relative performance chasing to others.

Here is something that Benjamin Graham wrote in The Intelligent Investor that could well turn out to be applicable to the current investing environment. There is very little, if anything, that is new in the stock market:

“The extent of the market’s shrinkage in 1969–70 should have served to dispel an illusion that had been gaining ground during the past two decades. This was that leading common stocks could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels. That was too good to be true. At long last the stock market has “returned to normal,” in the sense that both speculators and stock investors must again be prepared to experience significant and perhaps protracted falls as well as rises in the value of their holdings.

In the area of many secondary and third-line common stocks, especially recently floated enterprises, the havoc wrought by the last market break was catastrophic. This was nothing new in itself—it had happened to a similar degree in 1961–62—but there was now a novel element in the fact that some of the investment funds had large commitments in highly speculative and obviously overvalued issues of this type. Evidently it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”

Portfolio Activity

Charles & Colvard (CTHR)

Charles & Colvard (CTHR) was an investment that was initiated in late 2016. The company is a maker of moissanite-based jewelry. Moissanite is a much cheaper, lab-created alternative to diamonds with almost the same hardness and similar sparkle. At the time of the purchase, the company had no debt, substantial cash, and inventory that exceeded the market capitalization of the stock. However, the company had had years of small losses as prior managements tried to turn it around. A new CEO was brought in with an online-marketing background and the company was now pursuing a new digital marketing strategy. At the time of purchase, the downside to my liquidation-analysis based Worst Case was less than 25%, the upside to my Best Case was > 10x and the expected return to my Base Case was 165%+.

CTHR investment history

Silver Ring Value Partners

  • The investment was exited during Q4 2021 and has produced an IRR of ~ 51% and has been one of the big contributors to long-term results
  • I substantially increased the position in 2020 with the stock at/below my Worst Case value, which had a large impact on the ultimate IRR. This is an example of temperament in action given the turbulent stock market and the rapidly falling stock price of the company
  • The IRR of the initial December 2016 investment was “only” ~ 27%

CTHR liquidation value analysis Sep 2020

Silver Ring Value Partners

  • Actual liquidation analysis that was updated prior to substantial increase in the position size in 2020

CTHR private market value estimate

Silver Ring Value Partners

  • Conservative private market value analysis sent in a letter to the Board of Directors and filed as part of a 13D filing in September 2020

I exited our CTHR position for three reasons. First, the price was within 10%-15% of my Base Case value estimate. Second, our other investments were much more undervalued, presenting attractive alternative uses of capital. Third, the nature of the thesis has changed from what it was originally.

What started as a stock trading near liquidation value, became a company highly reliant on long- term growth and execution for the stock to be a good investment. I think the management has been doing a good job, and I have no reason to doubt that they are likely to continue to execute well.

However, betting on “this time is different” and that a company that has been a perennial turnaround will become a long-term growth company is outside of my circle of competence. If the management executes and macro trends cooperate, selling now will cause us to miss out on meaningful upside. However, I believe it is the right decision based on my investment process, what I know today, the opportunity cost and my circle of competence.

Sprouts Farmers Market (SFM)

If you look at the Thesis Tracker earlier in the letter, you will notice that SFM has moderately missed my expectations for two quarters in a row. Specifically, the company’s 2-year comparable store sales remain slightly negative, and their store growth remains depressed vs. my expected long-term trajectory. Offsetting these negatives is the fact that Gross Margins have been holding up well.

The management’s thesis on their turnaround plan was that they had a very small, ~ 6%, group of customers who cared about deep discounts. These customers were unprofitable, and the pressure on overall Gross Margins wasn’t worth their business. So getting rid of deep discounts and increasing Gross Margins would be overall accretive to business value as this small group leaves and is replaced over time by better customers.

The problem with having a negative two-year comparable sales growth number at this point, is that it is becoming harder and harder to explain it purely by the run-off in this small group of unprofitable bargain hunters. With well over a year having passed since the change in pricing strategy, shouldn’t this group have already left? So either there are other issues that are causing share losses among the desirable customers, or the company’s management hasn’t been able to fine-tune its marketing yet to attract new, good, customers in sufficient numbers to grow.

Management believes in the latter explanation, and that the issues will soon be fixed. However, after two quarters of counter-thesis evidence, it is fair to ask: what evidence do they really have to support their belief? On the Q3 2021 conference call, they didn’t make a strong case that they can exclude other problems with the business being the underlying issue.

I believe in being responsive to new information in updating my value range. The difficult part is always in responding proportionately to the value of the new information. That is certainly an art as well as a science. In this case, the new information made me re-assess my Worst Case. Previously, I thought the Worst Case would be no square footage growth combined with a low-single digit positive same-store sales growth. Now, I believe it is possible that the Worst Case will have same- store sales declines.

This change to the value range substantially increased the downside of our investment. While the stock was still attractive relative to my Base Case value, the much larger downside to my Worst Case made a Small rather than a Medium position size more appropriate, and I made the change during the quarter.

PetMed Express (PETS)

PETS was one of the original online sellers of pet medication directly to consumers. Once upon a time this was a growing business, given that they offered much lower prices than those which could be obtained at the vet’s office. However, with Chewy’s entry into the pet pharmacy business and Covetrus’s online offering that allows vets to sell drugs online at only a small premium to PETS’s prices, the value of PETS’s customer proposition has greatly diminished.

The company has been squeezed out of obtaining new customers through paid search by Chewy’s massive ad blitz. This is a situation that is likely long-term in nature. As a results, PETS’s business has entered into a decline in terms of both existing and new customers. This is a trend that I view as likely to continue over the long-term. Essentially, there is no longer a strong reason for PETS to exist as a business – it is neither the lowest priced nor the most differentiated, and is facing bigger competitors that are muscling it out of the business.

As a result of these structural changes, I believe the business is going to continue to decline for a long time, resulting in a far smaller business value than the recent price. I purchased a small put option position during the quarter. My plan is to stick to a total budget of no more than 2% cumulatively over the life of the investment. I will be monitoring new information, and if my thesis appears to be validated by the facts, I will likely continue with the position up until the 2% threshold.

Performance Discussion and Analysis

I encourage you to consider the results summarized below in conjunction with both the investment thesis tracker as well as the discussion of the individual companies in this letter. Any investment approach that is judged over less than a full economic and market cycle is liable to appear better than and worse than it really deserves at different points. Ultimately, it is the quality of the investment process and the discipline with which it is implemented that determines the long-term outcome. Therefore, I strongly encourage you to focus on process over outcome in the short-term.

performance analysis 12/31/21

Silver Ring Value Partners

Your Questions

As I have committed to do in the Owner’s Manual, I will use these letters to provide answers to questions that I receive when I believe the answers to be of interest to all of the partners. This quarter I received two questions that I thought would be helpful to address in this letter. (Please keep the questions coming; I will do my best to address them fully.)

How have the shares of companies we owned performed after being sold?

exited investments

Silver Ring Value Partners

  • Calculated using a weighted average by share count in cases of multiple sales dates
  • Data set is still short, but so far over 75% of securities have underperformed the stock market after being sold

How have Discovery (DISCK)’s fundamentals done since we initiated the investment in 2016 vs. your thesis?

At a very high level, my thesis on Discovery has been and is that the market is misconstruing it as a declining business, whereas I view it as a moderately growing business. The market views the ratings declines and Pay TV universe declines as implying that the company’s revenues should decline as well. I had disagreed and still do. I believe the market is misunderstanding how clients allocate their advertising spend and the resulting pricing power that the business has even in the face of declining volumes.

Starting in Q4 2016 and through Q3 of 2021, organic sales growth has averaged almost +4%. This is despite the cyclical pressure caused by COVID. It is also despite the large annual ratings declines and Pay TV universe declines, which have been substantial. So at a high level my thesis has so far been correct – the company has been a growing, rather than a declining, business as the stock market had been, and is, pricing in the stock.

To answer the question at a more granular level:

  • My original 2016 model (pre SNI deal) called for 2.6% US organic growth and 11.7% international. The actual average for 2016-2020, not making any adjustments for COVID was 2.2% U.S. and 2.8% International. So almost in-line in the U.S. and clearly below internationally.
  • Post the SNI deal, mid-2018, my model called for EBITA of $4.2B in 2020, composed of $3.4B in U.S., $1.3B International and -$0.5B Corporate. The actual numbers for 2020 were $3.9B in the U.S., $700M International and -$600M Corporate. Keep in mind that this includes $500M+ of investments in building out Discovery+ content.

So overall, I would say that the U.S. business has been roughly inline with original expectations. It has maintained positive organic growth despite severely declining ratings and ad pressure from the 2020 recession, which was a key part of the thesis. Profits ended up higher than expected mostly due to higher than expected synergies from the deal. International has been clearly below my original forecasts, both top and bottom line. However, it is by far the smaller of the two, and there have been a number of issues that could be used to argue that the performance there is temporarily depressed. In my current, pre-AT&T deal model I am assuming that international improves from $700M to $1B in EBITA in a few years – certainly not material enough to the whole company given that this improvement is less than 10% of EBITA. I think EBITA overall troughs in 2021 due to Discovery+ investments and surpasses 2019 levels in 2023. I estimate EPS and FCF per share of ~ $4.25 in 2023 pre-AT&T, which I expect to grow low single-digits from there. Compared with a $25 stock, this suggests very attractive returns if my expectations are realized.

Portfolio Metrics

I track a number of metrics for the portfolio to help me better understand it and manage risk. I track these both at a given point in time, and as a time series to analyze how the portfolio has changed over time to make sure that it is invested in the way that I intend for it to be. Below I share a number of these metrics, what each means, and what it can tell us about the portfolio. As time passes, you should be able to refer to these charts and graphs to help you gain deeper insight into how I am applying my process.

Price % Base Case Value

This metric tracks the portfolio’s weighted average ratio between market price and my Base Case intrinsic value estimate of each security. This ratio is presented both including cash and equivalents, which are valued at a Price to Value of 100%, and excluding those. All else being equal, the lower these numbers are, the better. Excluding cash and equivalents, a level above 100% would be a red flag, indicating that the portfolio is trading above my estimate of intrinsic value. Levels between 90% and 100% I would characterize as a yellow flag, suggesting that the portfolio is very close to my estimate of value. Levels between 75% and 90% are lukewarm, while levels below 75% are attractive.

price % base case value

Silver Ring Value Partners

Quality Quintiles

As outlined in the Owner’s Manual, I evaluate the quality of the Business, the Management and the Balance Sheet as part of my assessment of each company. I grade each on a 5-point scale with 1 meaning Excellent, 2 Above Average, 3 Average, 4 Below Average and 5 Terrible. The chart that follows presents the weighted average for each of the three metrics for the securities in the portfolio.

quality quintiles

Silver Ring Value Partners

Portfolio at Risk ((PaR))

I estimate the Portfolio at Risk ((PaR)) of each position by multiplying the weight of each position in the portfolio by the percent downside from the current price to the Worst Case estimate of intrinsic value. This helps me manage the risk of permanent capital loss and size positions appropriately, so that no single security can cause such a material permanent capital loss that the rest of the portfolio, at reasonable rates of return, would not be able to overcome. I typically size positions at purchase to have PaR levels of 5% or lower, and a PaR value of 10% or more at any time would be a red flag. The chart below depicts the PaR values for the securities in the portfolio as of the end of the quarter. Positions are presented including options when applicable.

portfolio at risk

Silver Ring Value Partners

Normalized Price-to-Earnings (P/E) Ratio

I supplement my intrinsic value estimates, which are based on Discounted Cash Flow (DCF) analysis, with a number of other metrics that I use to make sure that my value estimates make sense. One of the more useful ones is the Normalized P/E ratio. The denominator is my estimate of earnings over the next 12 months, adjusted for any one-time/unsustainable factors, and if necessary adjusted for the cyclical nature of the business to reflect a mid-cycle economic environment. The numerator is adjusted for any excess assets (e.g. excess cash) not used to generate my estimate of normalized earnings. One way to interpret this number is that its inverse represents the rate of return we would receive on our purchase price if earnings remained permanently flat. So a normalized P/E of 10x would be consistent with an expectation of a 10% return. While the future is uncertain, it is typically my goal to invest in businesses whose value is increasing over time. If I am correct in my analysis, our return should exceed the inverse of the normalized P/E ratio over a long period of time. The graph below represents the weighted average normalized P/E for the equities in the portfolio.

normalized P/E ratio

Silver Ring Value Partners


One morning in December, I was about to start the chess lesson with my youngest son, Jacob. As we were sitting down on the couch, I shook my head and sighed: “This market is crazy.” Jacob looked at me and said: “No Papa, you are crazy. Just stop thinking about it.” Sometime 5 year-olds have just the perspective that we need. Stop thinking about the market – focus on your process and judge yourself based on how well you are executing it.

I am happy to answer any questions you have. Your feedback is important to me; please let me know how I can improve future letters. I greatly appreciate your trust and support, and I continue to work diligently to invest our capital. I wish you and your family a healthy, happy and prosperous New Year!


Gary Mishuris, CFA,

Managing Partner, Chief Investment Officer Silver Ring Value Partners Limited Partnership

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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