2017 Annual Shareholder Letter

My 2017 annual letter is linked below. If you’re interested in the below topics you should probably check it out 🙂

  • Why I think Issuer Direct has a durable competitive advantage and can grow for many years
  • How undervalued Parks! America is
  • What I learned about myself as an investor through investing in New York REIT
  • Setting short-term goals that don’t hinder long-term goals
  • Other general musings and portfolio updates

Wiedower Capital 2017 Annual Shareholder Letter
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My Favorite Books of 2017

My biggest goal for 2017 was to read 24 books and so far I’ve finished 30 (and not finished another 15-20). I keep track of all the books I read and give them a rating of 1-5 after finishing. Below are the seven books I rated a five from the past year.

Mistakes Were Made (but not by me)

Probably the most influential book I read this year. I think it’s right up there with Thinking, Fast and Slow as the best books that helped me to understand my own brain and cognitive biases. I love the idea that each of us is ruled by a totalitarian ego “that ruthlessly destroys information it doesn’t want to hear and rewrites history” in our own favor. Our totalitarian ego subconsciously justifies actions that we would demonize others for, fills in gaps in our memories (with a positive spin of course), and ignores evidence that counteracts our own personal story line. This book also has a great analogy using a pyramid to explain how two seemingly normal people can become so diametrically opposed on some issue. The pyramid is something I still think about on a regular basis, mostly when I’m trying to figure out how in the hell our political system became such as mess.
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Lessons from Jeff Bezos

I recently read through all of Jeff Bezos’ annual shareholder letters and wanted to summarize some of my takeaways. I’ve loosely followed Amazon for years just because of how interesting of a company it is (and how much of an effect it has on our economy), but I never went back and read the older shareholder letters until now. I wouldn’t say there was anything too surprising in the letters (everyone knows how obsessed with customer satisfaction Bezos is), but I came away even more impressed with Bezos than I already was. Many people refer to him as one of the best CEOs in the world and I can’t disagree—he has a combination of traits that are very rare.

Business manager + financial expertise

It’s not often you find a CEO who is both a visionary for the business and also understands the financial drivers behind it. This makes sense when you think about it. Most CEOs got to their position by being great marketers, salespeople, or inventors, but none of those roles prepare someone for being the chief capital allocator. A hired CEO may work his way through a company’s corporate ladder, never once needing to really allocate capital on a large scale, and then all of a sudden he’s promoted to CEO and that’s one of his main job roles. Likewise, a founder spends many years just growing their company any way they can—and suddenly one day the company is large and more in-depth capital allocation decisions must be made.
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Position Sizing with the Kelly Criterion

The Kelly Criterion is a mathematical formula to determine the optimal dollar amount to bet in a given wager or investment. Say you’re offered a bet where you are a 60% favorite to win and it pays 2:1 in your favor—Kelly suggests betting 40% of your net worth. If you were offered this exact bet a million times, betting 40% of your net worth each attempt (adjusting as you go) would net you the most amount of money in the end. Thus, 40% is the optimal bet size given those odds and payouts.

I’m betting no one (myself included) would actually bet 40% of their net worth in the above scenario—even if they knew the odds and payouts were legit. Most of you probably read that previous paragraph and thought 40% was insanity. I think one of the more interesting takeaways from the Kelly Criterion is how few people live their life in a way that optimizes their net worth over the long-term (again, myself included). And most of us aren’t a little off the mark, we’re not even in the ballpark of what’s optimal. If the above offer was made to all Americans, the average bet size would probably be less than 1% of each person’s net worth (with many doing a nominal amount like $10 per bet).
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How much do we really know about our investments?

I’m a big space nerd. To the point that for my birthday two years ago my girlfriend flew us down to Houston to tour the Johnson Space Center (spoiler alert: it was awesome). Some of my favorite books the past few years have either been about the Apollo missions or how we’re going to get to Mars. So you can imagine how excited I was last year when we were out getting drinks with friends and one of the friends-of-a-friend was a woman who works at NASA. I basically bombarded her with questions the entire night.

One of the main things I was asking her about was what obstacles they still need to overcome to be able to get to Mars. She was giving me some pushback on what I thought I knew about space radiation and I remember starting the next sentence “I know [random blurb about space radiation].”As soon as I was done blabbering I thought to myself “why the hell did I just start that sentence with ‘I know’? I’m talking to a freaking NASA scientist about space travel and all I’ve done is read some books and online articles about the topic. That hardly counts as knowing.”
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How to Value Bitcoin

I’ve done a lot of reading up on crypto currencies and blockchain the past month—not because I want to invest in it, but because I find it fascinating and potentially life-changing. Just last week I was traveling internationally and I can’t tell you how many times I thought to myself “this would be so much easier if everyone was using a Bitcoin app on their phones.” I have no idea if Bitcoin is the MySpace or the Facebook of the cryptocurrency future, but it’s fun to learn about either way. One thing I haven’t seen much of is people attempting to value Bitcoin.

I’ve read plenty of logical sounding arguments for why Bitcoin will be $20,000 or $50,000 in 10 years, but those people rarely mention the discount rate that needs to be slapped on those estimates. Even if you’re a Bitcoin bull, you have to admit it’s an incredibly risky asset and there’s a chance it’s worth $0 at some point in the future. Given that, a high discount rate is required. When I value profitable, growing public companies that have little debt on their balance sheet I use an 11% discount rate. Thus, I’d say any discount rate on a Bitcoin valuation needs to be significantly higher than that—maybe 30-40%—though I wouldn’t fault anyone for going even higher.
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Why I Prefer Founder-Led Companies

Followers of this blog won’t be surprised that I much prefer investing in founder-led companies. I will admit I am very biased when it comes to founders. I have started a couple companies myself, am a member of Entrepreneurs’ Organization, and tend to love all things related to entrepreneurship. I believe companies led by their founders often have intangible assets that are nearly impossible for a professionally managed company to replicate.

How many times have you heard a hired CEO describe the company as their baby? Probably never. But I have heard many entrepreneurs describe their own companies this way. Loving a business like it’s your own child doesn’t guarantee you’re a good CEO, but that obsession can make up for a lot of faults.
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