Saturday, May 20, 2023


 Disclosure: you shouldn't rely on a stranger's opinion for your investment decision.

Sold RH 

My original investment thesis was primarily based on: 

  • Berkshire owns it, and kept buying even in a quarter RH's minimum price was above $300. Probably Ted Weschler was the one who bought it and he knows the furniture business well. 
  • I like that the CEO has a long-term vision for running the company and he doesn't sugarcoat things in earning calls. He also owns ~25% of the company taking account into all the stock options and RSUs. There was some complex interest-free convertible financing, but I was comfortable with that.

  • Solid growth over the last couple of decades and the business model were able to increase its gross margin over time with the 'climbing the luxury mountain' strategy. They were acquiring higher-end customers while ditching lower-end customers by offering more premium products with higher price tags. This means pricing power, which is what we need in an investment for the inflationary environment. 

  • The stock wasn't insanely expensive after falling back from the $700 level.
BRK has sold all of its positions in RH in Q1 2023. Since half of my investment thesis was based on BRK owning it.  I sold all my RH position at $254/share.  

I think recording the thought process for each position really helps. It makes me more decisive when the factors I initially considered changed. 

Added American Express (AXP)

Amex has been on my radar for a while. I was taking my time to get to know this company better and waiting for the right price. 

One of the reasons I find credit card companies appealing is they provide a hedge against inflation. They generate revenue from two sources: merchant transaction fees and the sale of consumer transaction data. These revenue streams are split about 50/50. As inflation increases transaction value, which is a key driver of revenue, credit card companies naturally provide a hedge against inflation.

But why Amex? Why not Visa or MC? Visa and MC are both excellent companies with super high net margins at around 50%, but they are trading at 30x P/E (I'm rounding up numbers for convenience). If their multiples were to drop significantly in the future, I would consider buying V and MC as well. Amex, on the other hand, is cheaper, trading at 16x P/E.

Visa and MC don't issue cards directly to consumers. Instead, banks would issue credit cards on Visa/MC platform and take the full credit risk of customers not paying back the credit card debt. 

Unlike Visa and MC, Amex issues its own cards and takes credit risk. This means Amex also has a banking business, accounting for about 20% of its profit, while the remaining 80% comes from credit cards. Despite the additional complexity, the significant valuation gap makes Amex a relatively attractive investment. Amex issuing its own cards creates a great ecosystem for itself and its customers, giving them control over the customer experience.

I recently became an Amex customer, and I must say their customer service is unmatched by any other bank's credit card. Whenever I call Amex customer service, there is no wait time. Their customer representatives sound genuinely happy to solve problems. It's a different story with Visa and Mastercards issued by different banks. Some of them can take up to 20 minutes to answer your call, and the attitude of customer reps varies.

Although Visa and MC have a cleaner balance sheet and business model without a banking business, such big gap in valuation makes Amex a relatively attractive investment.  

To sum up, here are the main points of my Amex investment thesis

  • BRK owns 20%. If Buffett sells all Amex shares, I will probably follow. Since he is the expert on banks and financial institutions. 

  • Quality business with a long runway and the price is not unreasonable. Although Amex may not be a huge bargain like those "cigar-butt" opportunities with a clear discount to net cash value, I see it as a quality business with a long runway for growth. It should deliver a decent return on investment over time. So I see buying it as paying a fair price for a good business. 

I've allocated 6.4% of the portfolio at $154/share.

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