2024 Annual Letter

The partnership returned 6.4% for 2024. We were at +17% and change in early December but after Kaspi’s and less so WOSG’s selloff gave back most of the gains. I am certainly not happy with the 6.4%, but given that we were down close to 15% until the end of May it is a result I am willing to live with for now.

More importantly, I am content with being down on Kaspi as the continued selloff gave me the chance to add to the single business I know best led by what I believe to be a one-of-a-kind CEO.

I materially cut Kaspi’s weighting throughout the year at an attractive IRR (initial cost basis in the 40s) and have been happy to materially increase the position once again after the short report.

I am absolutely agnostic to price movements in the medium term as long as I have conviction that over the long-term certain qualitative factors provide a very high likelihood of an attractive return. For example, WOSG (and luxury at large) have been generally out of favor up until this week. Combine this with negative UK sentiment and the underperformance of small and midcaps, and you have yourself a stock most would not want to own. Looking a little further out, however, you have the following characteristics:

1. A+ management in the form of Brian Duffy and his management team

2. A valuation that more than prices in any of the negative sentiment and potential negative outcomes

3. Best-in-class industry relationships with watch brands

4. Quasi-monopoly / duopoly industry structure with a long tail of fragmented and inferior players

5. A substantial runway for growth in the United States

Short-term narratives often cloud the long-term picture. I believe it is the role of long-term investors to exploit such “time arbitrage” opportunities.

My main disappointment this year is twofold – buying stuff I probably should not have and not buying stuff for super dumb reasons.

First come IT VAR (Value Added Reseller) names. These businesses as a whole are attractive and longer term I expected to own many of these names. Bechtle and SeSa, for example, are such large players in their respective geographies (Germany and Italy) that they cannot help but be susceptible to the broader macro and industry trends. Their valuations did not price in this fact when I first bought a starting position.

The same goes for Dicker Data, another name I really like. Their CEO, David Dicker, has been an extraordinary leader over the decades and has implemented a unique compensation for management (check out their latest annual report) but has recently shifted his focus to Formula 1 and cars. I still own DDR but it is not at all a meaningful position. I also did not consider the broader budget shifts among both public and private customers for the industry at large. Oh well.

Bytes Technology is a name I should not have owned outright. Their CEO got fired after not reporting certain trades in the company’s stock. Valuation for Bytes was already rich and I believe it to be inferior to Softcat. In other words, Bytes is a pretty good example of thesis drift.

A name I do not regret buying, but do regret trimming (more on that later) is Softcat. SCT is an incredible business. The IT VAR business is what I call a “competency business.” Your failure and success depend solely on your ability to develop competencies and capabilities and execute on your strategy. It has been my experience that the winners in competency businesses are often those with strong, founder-minded management teams and thought-out and carefully nurtured cultures.

Founded in 1993 by Peter Kelly (now a billionaire), Softcat has dominated the IT VAR space with essentially zero M&A. Their success is built on doing the simple stuff well. In the IT VAR business there are really just two main competencies that matter – IT expertise and sales. You need the salespeople to secure contracts and you need the IT competencies to execute well on these contracts and in turn retain customers and cross-sell other related services. Over time, if you can both secure more contracts and execute on them, you build a reputation which feeds on itself. You are able to build strong relationships with IT vendors and establish yourself as the go-to VAR for CIOs.

There has been a secular trend of both customers and vendors consolidating their VARs for more of their IT spend (perhaps akin to what is happening in the software space). Vendors need VARs who understand the technology and are able to implement it successfully (and in turn assist in building market share and reputation) and customers want to have a go-to service provider where they can consolidate their spend, reducing both costs and project execution risks. Softcat has been able to capitalize on this trend successfully. They have the breadth of services where they can cater to a large portion of an organization’s IT needs and they have the culture and the IT competency to execute on their projects extremely well.

And here, in essence, is their secret sauce – Softcat’s culture. For one, Since 1993, Softcat has had just 4 CEOs, 2 of which are still involved with the business (the Chair and the CEO). Current CEO Graham Charlton is a CFO by training (much like WOSG’s Brian Duffy) but has wanted the top job at Softcat for some time. The legendary CEO Martin Hellawell at the time thought that Graeme Watt would be a better fit and passed on Charlton for the time being. Within ~5 years Watt decided to step down and become Chair, and Charlton was finally able to get the top seat. Charlton knows Softcat’s culture through and through, having worked with the reseller since 2015. As he said in an interview, “joining Softcat has been the easiest decision of my career by a mile.” Here are some of his quotes:

• “I think it's probably the best job in the U.K.. And I know I'm biased because I love the company, but it's such a privilege to be in this position.”

• “We have a terrific culture and a simple strategy and these will be two key features I will nurture and protect.”

• “When we were doing our roadshow for the IPO we were very clear in explaining that this is how we operate and this is why it works.”

• “We know the magic comes from the customer service which comes from the culture.”

• “Lots of people can provide Dell or Microsoft technologies to customers. The manner in which you provide it – the advice and support that you offer – and the human way that you deal with customers all really matter. What we’ve been able to do is create an internal culture which comes from our founder. His main goal was to create a fun place to work and I think he did a great job of that. Softcat is certainly the best place I’ve worked at. People care about the company they work for. It comes across in a much more authentic fashion when people really care.”

I have talked to former employees, customers, and IR and the message is uniform – Softcat wins not just because of WHAT they do, but HOW they do it. Customers go above and beyond for their clients. I have had people tell me about responding to customers in the middle of the night. Others shared how their colleagues rallied to help them during a tough period in their life. FUN is one of the core values of the business and employees echo this.

Softcat’s unique culture in turn allows it to attract and retain the best industry talent. These two variables (culture + talent) combine to create a best-in-class service in the IT VAR space.

Here we come to the issue. After talking so much about Softcat, what was it I did to profit from this remarkable business? I bought shares in the low 1,300s and sold in the 1,600s. While shares are trading in the high 1,490s right now and I have begun building back a small position, I cannot fathom why I sold. Did I miss some gains? Not really, the shares traded up to the low 1,800s and came back down, but your PNL over less than 6 months is not what matters. At a cost of 1,300 Softcat was the type of business I could happily own for 5+ years and likely generate a nice IRR over that period. Selling did not cost me much, but I am very frustrated with the decision for what I believe are obvious reasons for the reader.

Softcat wasn’t that painful, but what was? I’ll list a few and go into details on some. I did not buy Capcom, Games Workshop, Jumbo Interactive, Texas Roadhouse, Prada, Nu Holdings, and several other names when I knew they were a buy. As one intelligent investor would have put it, I was sucking my thumb.

Let’s go over Capcom. I spent ~2 weeks researching the name every single day of the week. I loved their management. Their games were incredible franchises. Their in-house engine was a meaningful competitive advantage. The price was fair. So please pause and ask yourself why I chose not to buy this business. The answer? I couldn’t model it. I’d rather the mistake be anything you thought of! I pulled data from SteamDB, Capcom’s own releases, several other databases, and connected the numbers together. I knew what their best and worst selling games were for each franchise. I knew how the games behaved in terms of player retention year by year. I knew what their batting average was for each franchise, and could parse it by periods / cohorts. I had all the numbers you can think of. Then I sat down and looked at FY28 and said to myself, “hey, I can’t really model the new games' units easily – this is risky!” There are words I would like to use to comment on this decision which would not be appropriate for an annual investment letter. Rest assured, I have repeated these words in my head multiple times this year as I watched this tremendous organization march up in value.

Nu Holdings is another one. After watching firsthand Kaspi’s rise to dominance and profiting from it, I stumbled upon Nu first in early 2023 and then later in September of the same year. I liked management, I liked the business, the valuation seemed sharply dislocated, and for some reason I cannot explain I did nothing. From my first encounter with Nu the price has since increased over 150%.

Texas Roadhouse is another name I simply do not understand why I did not buy. After trying TXRH for the first time with my investment club in Charlottesville after a hiking trip, I got back to my dorm and opened up TXRH’s 10K. I spent the next two weeks looking at the name. Jerry Morgan was my type of CEO. I saw steakhouses as an attractive category in the casual dining segment. The business had an impeccable track record, a unique culture, and a decent runway. If I remember correctly I passed because I thought the stock was expensive in the 20x P/E range. I find this confusing, because I bought Bytes Tech at 25x+ multiples and didn’t seem to mind it at all, despite Bytes being an inferior business to TXRH in almost every way.

Games Workshop is a similar story. I spend around 1.5 weeks looking at GAW and then another week around a month after that. I absolutely loved Kevin Rountree. In my email to him I asked what has enabled GAW’s impressive track record. Mr. Rountree replied with “one that works as a team, with no egos.” GAW is an incredible franchise. Their management tenure is hard to come by. Their strategy is simple yet so incredibly powerful. The stock had a free option on Amazon’s production. I think you see the trend here.

Despite making some OK investments and missing some tremendous ones, our portfolio saw relatively few losses. This is not surprising when the broader indexes are up, but the point is that our returns have not suffered from making a mistake and losing a lot of money on it. Rather, our mediocre performance stemmed from a lack of winners. In fact, since I began really focusing on running the portfolio several years ago I never really had any meaningful realized losses on a NAV basis (and no material losses on an unrealized basis). WOSG was probably the biggest one and it is now one of my biggest contributors.

Previously I was allergic to positions below 5%. I enjoy making big bets on stuff I have researched extensively and which I have enormous conviction in. My batting average on these names has been very good thus far. While we only have 2 names in this category (Kaspi and WOSG), that is actually a lot. I do not expect to come by more than one such name a year, and I would be happy if I could find one such idea every 2 or 3 years. As my universe of excellent companies expands, I expect these ideas to come to me rather than my identifying them. Hence, my forward returns are to some degree dependent on any one of these excellent businesses selling down a point I view as a no-brainer price. Unfortunately, it is highly likely that these businesses never sell down that much. In the meantime, I have loosened my hand a little and am willing to take even 1-2% positions in names I think make sense.

The issue with concentration is that once you own something in size, it is hard to average down and pointless to take losses if you believe you are right (which is a given since you wouldn’t have bet that much if you didn’t think that in the first place). Once you have a large position that goes against you, however, you are forced to sit and wait and let it work itself out. In effect, that money becomes locked money until the thesis eventually works out or, much worse, you got the thesis wrong. So while you are stuck with a down position, you generally need to make room at the expense of other positions for new ideas. I am not a fan of trimming concentrated positions because these are far and away my best positions and are done in situations where for qualitative reasons I see a very, very minimal chance I don’t make money. For example, there have been recent talks on X about EVO. While the business is good and so is management, it would never be something I would concentrate in. Those who are also long WOSG might think of the Rolex relationship risk, but I have spent maybe 25 hours researching this and talking to people and I just don’t think this is a meaningful possibility, and even if it is there are ways management can crawl out of the loss over time.

So, now I am more willing to take small bets and once Kaspi works itself out I’ll cut it to a maybe 15% position and wait for the next fat pitch while having a broader number of still excellent companies with still excellent management teams at well-capitalized balance sheets and attractive valuations. I have already established 5 such positions which are showing me that this is the right way of going about things. I will be able to cut my losses and let my winners run, and at the same time recycle into higher IRR ideas when I find it appropriate to do so. I won’t be at 30-40 stocks, but I foresee as many as 20 names in the case that I don’t have a meaningful position I have substantial conviction in.

As always, my strategy is one of partnering with excellent management teams – Lomtadze of Kaspi, Galperin of MELI, Ruffini of Moncler, Duffy of WOSG, Indy Singh of Fiducian, Veverka of Jumbo Interactive, and so on the list goes.

Last year I recommended reading Drucker. This time I’ll go with the Santa Monica Partner Letters.

I am also in the process of registering a fund here in Kazakhstan for my own savings (which thanks to the government’s foreign investment initiatives is going to be tax-free for me) and for friends and family. I decided to name the fund CL1 Partners after the Clemons Library at UVA where I spent an enormous amount of time reading and studying companies. The “1” is for the library’s first floor, which also happens to be where I first encountered Drucker who has helped me develop my approach to studying businesses. I am unsure of whether I will be able to write a letter next year, but my guess is I will.