Artko Capital LP 2Q 2017 Partner Letter

Check out Peter Rabover's Artko Capital Q2 2017 investor letter. Peter focuses on US small caps and has a knack for finding interesting situations that are truly under the radar and don't show up in many other portfolios.

In the letter, Peter discusses new investment Sparton Motors (SPA) and a number of existing portfolio companies (HDSN, DXLG, SNC, HTM).


Artko Capital LP 2Q 2017 Partner Letter



Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Jay Regan, Investing Pioneer and Ed Thorp's Partner at Princeton Newport

Another follow-up to the Ed Thorp podcast. Jay Regan was Thorp's partner at Princeton Newport Partners and today runs a family office, Harbourton Enterprises. Morgan Housel did an interview with him for his blog.


Jay Regan, Investing Pioneer and Ed Thorp's Partner at Princeton Newport

Wall Street was a different place back in 1969.

MH: You were a pioneer in quantitative investing. Now it’s a large part of the market, both with hedge funds and factor funds available to public investors. Are we too focused on markets and not focused enough on the people and businesses that underly these stocks?

JR: I teamed up with Ed Thorp. He’s a super-quant, and I was really good at coming up with ideas and then putting his magic to work with models to make it work better.

You just can’t do that today. I’ll give you an example of how much easier it used to be...

Can Anyone Bury Bloomberg

Institutional Investor wrote about the ubiquitous Bloomberg Terminal and the many attempts to dislodge its dominant market position.  

Competitors are mainly attacking with lower pricing. But the user interface and some functionality also seem outdated in the age of Google and sleek mobile apps. However, as of today, the Bloomberg Terminal is still a must-have among market professionals. 

Can Anyone Bury Bloomberg




Ed Thorp: the man who beat the casinos, then the markets (Financial Times)

As a follow-up to the Ed Thorp podcast, here is a Financial Times article from February 2017 with some additional background information.

It's a terrific article highlighting Thorp's long and storied career. It is fascinating how many Wall Street legends he dealt with over time: Warren Buffett, Ken Griffin, Bill Gross.

Ed Thorp: the man who beat the casinos, then the markets

Ed Thorp Interview on Masters in Business

Head over to the Masters in Business podcast for a terrific interview Ed Thorp (you may have heard of his new book "A Man for All Markets"). Masters in Business with Barry Ritholtz

Thorp pioneered card counting strategies and was eventually banned from casinos. He then pioneered statistical arbitrage and quantitative hedge fund strategies.

This interview with a market legend is a must-listen:

Ed Thorp Interview on Masters in Business

Malmgren on China’s OBOR and Its Impact on International Security

Dr. Pippa Malmgren (DPRM Group) spoke to Foreign Policy Concepts about China’s One Belt One Road initiative (OBOR).

OBOR is an important geopolitical and economic initiative and the article highlights many fascinating aspects of this development

In her own words:

It’s China’s effort to strengthen its connections with the world by land, air and sea. It involves the construction of highways, railways and airports that start in Eastern China and link China by land through central Asia into the Middle East and into Western Europe. Call it the new Silk Road. The Chinese have just completed the world’s longest railway link, which runs from Yiwu in China to London.

Note who is not part of the plan: Russia, Singapore and India. The Chinese are effectively bypassing Russia. Yes, the road passes through it. The Circle passes by it. But the aim is to connect China beyond Russia.

There is an “off grid” element to the BRI. The modern confrontations between China and the U.S don’t take place on land. The two countries spar for dominance in space, cyberspace and in extraterritorial locations. Competition is centered around space programs to dominate weapons systems from high altitude satellites. For both sides, cyberspace is an ongoing security issue

Malmgren on China’s OBOR and Its Impact on International Security

Conversation with Mark Zuckerberg: Creating Facebook and Startup Advice

Check out this awesome half hour conversation with Facebook founder Mark Zuckerberg. He talks about building facebook, strategy and leadership advice. I love this great quote about how to build a competitive, fast-learning company (starts a minute 10 mark).

Mark Zuckerberg:

The key is building a company which is focused on learning as quickly as possible. Companies are learning organisms. In a lot of ways building company is like following the scientific method. You try a bunch of different hypothesis and if you set up the experiments well then you learn what to do.

Conversation with Mark Zuckerberg: Creating Facebook and Startup Advice

KKR: Mid-year Update: Five Areas of Focus

KKR has grown from a pure play Private Equity shop to a global alternative asset manager. I always appreciate their macro & asset allocation decks which are chock-full of good charts.

You can find the full KKR mid-year macro and asset allocation deck here:

KKR: Mid-year Update: Five Areas of Focus

Some good charts:

KKR  is forecasting a 2019 recession:

Always interesting to get the update on stimulus and credit growth in China:

Chart on US brick & mortar retail..

The KKR cycle dashboard. Valuations are expensive, especially in the US.

BIS 2017 Annual Report - Zombie Firms

The Bank for International Settlements in Basel is the worldwide central banks' joint organization. The BIS annual report is usually a good read on global monetary and credit conditions, chock-full of data.

The 2017 report includes a section on so-called zombie firms, companies whose weak balance sheets and performance would have led to bankruptcy in a higher interest rate environment. It is possible that low interest rates and zombie firms could be part of the puzzle of persistent low productivity growth.


BIS 2017 Annual Report - Zombie Firms


The Bank for International Settlements is an international financial institution owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks".

Absolute Return Partners July 2017: Are Robots Disruptive?

Absolute Return Partners July 2017 letter is up. This letter is all about automation and robots the impact on productivity and the labor force.


Absolute Return Partners July 2017: Are Robots Disruptive?

The letter has some terrific charts on the robot market.

High-tech, high labor cost export nations are leading at this point.

Wachtell, Lipton, Rosen & Katz: Spin-Off Guide

Spin-off transactions are a common sight in special situation investor portfolios. In some cases activist investors will argue for spin or split-offs. Law firm Wachtell, Lipton, Rosen & Katz published a 73 page paper covering spin-offs. The paper covers everything from the legal transaction structure to tax issues and trading considerations. 

Wachtell, Lipton, Rosen & Katz: Spin-Off Guide

From the introduction:

A spin-off involves the separation of a company’s businesses through the creation of one or more separate, publicly traded companies. Spin-offs have been popular because many investors, boards and managers believe that certain businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. An added benefit is that a spin-off can often be accomplished in a manner that is tax-free to both the existing public company (referred to as the parent) and its shareholders.

The issues that arise in an individual situation depend largely on the business goals of the separation transaction, the degree to which the businesses were integrated before the transaction, the extent of the continuing relationships between the businesses after the transaction, and the structure of the transaction. For example, if the businesses were tightly integrated before the transaction or are expected to have significant business relationships following the transaction, it will take more time and effort to allocate assets and liabilities, identify personnel that will be transferred, separate employee benefits plans, obtain consents relating to contracts and other rights, and document ongoing arrangements for shared services (e.g., legal, finance, human resources and information technology) and continuing supply, intellectual property sharing and other commercial or operating agreements

Tom Russo on Shareholder Value Creation and Global Brands

Here is another piece on Tom Russo, consumer brands-focused value investor. This is a transcript from the Wide-Moat Investing Summit 2017.

Tom's investment philosophy:

In the extreme, we own businesses like Cartier, Johnnie Walker, Chivas Regal Whisky, and Martell Cognac. There is even an argument that at the very high end of businesses in which we have invested, their products ascend to “Giffen good” status, i.e., the more you charge, the more they are in demand, because the brands stand in part for “the price paid is the value received”. 

Tom Russo on Shareholder Value Creation and Global Brands

Be sure to check out his comments on the impact of ecommerce and new consumer brands:

Dardashti: Looking at the bigger picture, it has never been cheaper, better, and faster to build a challenger brand. You have Warby Parker, Away, Harry’s, Dollar Shave Club, Casper. How do you think about threats or opportunities posed by challenger brands?

Russo: It’s exactly as you say. The tendency for moats to fill and narrow is accelerated because of the ease at which challenger brands come about. [...]

Bad Experiences

Morgan Housel wrote another terrific post on how personal experiences shape our risk preferences. Experiencing market bubbles and crashes can can influence our view of investments for years or even decades.

Bad Experiences

People who live through highly adverse markets become more conservative:

Living through a crash, or high inflation, or a deep recession, when you were young made you far more conservative later in life compared to those who didn’t, and vice versa.

Marc Andreessen argued that in the wage of the 2000 tech bust, successful tech stocks were undervalued for a long time.

I wasn’t an investor in 2000. So people like Tren are better at spotting bubbles than I am. On the other hand, Andreessen says tech stocks have been consistently undervalued since 2003, because investors who lived through the crash continued to see everything through the lens of excess and folly, leading them to shun legitimate opportunities. When is stuck in your head, Facebook and Netflix run right past you.

FT: Smart beta funds stalked by chaotic ‘factor zoo’

The Financial Times highlighted new research about the problems with the proliferation of smart beta strategies. Many strategies based on "factors" are not performing as the research and backtesting suggested.

FT: Smart beta funds stalked by chaotic ‘factor zoo’


The research warns of a problem with so-called data-mining — when companies keep testing different figures to obtain a desired result. It also found a “lack of robustness in trading strategy performance” when smart beta strategies go live.

According to the study, there was a median 73 per cent deterioration in Sharpe ratios, a measure for calculating risk-adjusted return, between back tested and live performance. Hortense Bioy, director of passive fund research in Europe at Morningstar, says concerns about back testing in smart beta funds are rising. “The joke in the industry is that you’ve never seen a bad back test and you will never see one. Investors should always take back tests with a massive pinch of salt.

Capital Allocators Podcast: Tom Russo of Gardner Russo & Gardner

Check out the latest episode of Ted Seides's Capital Allocators podcast. This episode is with Tom Russo. Gardner Russo & Gardner manages more than $12 billion in a value equity strategy. Tom previously worked at the famous Sequoia Fund.

"Our conversation covers how Tom created an investment strategy by personalizing early lessons from Warren Buffett, the capacity to re-invest, the capacity to suffer, and what it takes to own a stock for decades.  Tom’s time horizon and fortitude as an investor parallels those of institutions with permanent capital. Listeners will get a fresh perspective on what it means to be a long-term investor."


Capital Allocators Podcast: Tom Russo of Garner Russo & Gardner

Peter Lynch: How To Pick Stocks

Check out this old video of Peter Lynch (of the Fidelity Magellan Fund) and his advice on investing in stocks.

His book One Up on Wall Street is a fantastic introductory read. You have to take all of his lessons with a grain of salt, however - picking stocks is not generally something a retail investor with no experience should do.

Peter Lynch: How To Pick Stocks

Ray Dalio: Central Banks’ Reversals Signal the End of One Era and the Beginning of Another

Ray Dalio of Bridgewater Associates published his latest global macro investing thoughts on LinkedIn. Dalio focuses heavily on central banks and the credit cycle. He has coined the term beautiful deleveraging and continues to see no imminent crisis. However, he believes high debt levels are creating a "squeeze" on the economy longer term.

Ray Dalio: Central Banks’ Reversals Signal the End of One Era and the Beginning of Another

Generally speaking (depending on the country), it is appropriate for central banks to lessen the aggressiveness of their unconventional policies because these policies have successfully brought about beautiful deleveragings. In my opinion, at this point of transition, we should savor this accomplishment and thank the policy makers who fought to bring about these policies. They had to fight hard to do it and have been more maligned than appreciated. Let’s thank them.

As you know, looking ahead, we don’t project a big debt bubble bursting any time soon (because of the balance sheet repairs that have taken place), though we do see an increasingly intensifying “Big Squeeze” (see the Big Picture).

‘Chinafrica’ is a macro megatrend set to impact everything from Silicon Valley to Wall Street

Josh Wolfe, VC at Lux Capital, posted wrote about Chinese influence in Africa as one of the major under the radar macro trends. China is investing heavily in Africa to develop access to raw materials and establish markets for its exports.

‘Chinafrica’ is a macro megatrend set to impact everything from Silicon Valley to Wall Street


"As parts of China’s economy emphasize technology and services, it will for better or worse export to other low-wage developing nations its best and worst practices and its expertise in manufacturing, managing labor and building mass infrastructure. China will help set up, and in many cases, co-own or operate manufacturing facilities, infrastructure (rail, water, mining, electricity) and transportation and shipping hubs.

It’s classic mercantilism: China through trade gains geopolitical influence. It will grow both its economy and its projection of power beyond the Asian Pacific rim, leveraging the African continent to project trade and power into the Atlantic Ocean on Africa’s west coast and the Indian Ocean, Arabian Sea and beyond to Africa’s east coast."

Adventures in Capitalism: Mall Tour 2017

Kuppy of Adventures in Capitalism recently posted about his experience traveling to dying malls. His two posts highlighting this phenomenon are recommended reading for anybody involved in retail or commercial real estate.

His conclusion:

Go onto any real estate website and you will find out that huge plan space is nearly free. No one knows what the hell to do with it and the waves of bankruptcy in big box are just starting. As online evolves, these waves will engulf other segments of retail as well.

Retail’s problems are about to become everyone’s problems in CRE. When the old Macy’s rents for $2/ft, what happens to everyone else’s rents?

Think of the two malls that I spoke about in the last piece—they weren’t done in by the internet, they were done in by a tripling of retail space in a cities that are barely growing. These cities simply ran out of shoppers for all of this space. Now the mall is empty—heck the strip retail is only partly filled in. The next step is that rents will drop—dramatically. The owners of each asset, the mall and the strip center will go bust. 

Mall Tour 2017 (Part 1)

Mall Tour 2017 (Part 2)