Investment Partnership Introduction & Semi-Annual Letter
The past seven months have been exciting ones, marking the launch of our new entity, Thirty Seven Capital Management. As our returns below indicate, we are off to an auspicious start.
Performance
Adam Aron’s Portfolio 2009-2018*
+ 662.1%
S&P 500 Index 2009-2018
+ 372.3%
Thirty Seven Capital Series 1 Since Inception
+ 25.4%
After nearly 25 years in the industry – the last nine spent as a portfolio manager at Gilder, Gagnon, Howe & Company, a $5.5 billion equity investment management company focused on growth companies – I decided to capitalize on my decades of experience and strong track record and branch out on my own.
During my tenure at Gilder, my portfolio increased in value by well over 500%. Since inception, Thirty Seven Capital is up over 25%. Combined, this equates to 662.1% and 24% compounded annualized returns after fees. To put that in context, a million dollars invested with me from inception at Gilder is now worth $7,662,000. As illustrated above, from 2009 through mid 2018 we outperformed the market by 289.8%, a significant difference that’s all the more notable because the vast majority of investment managers (over 84%) underperform the market.**
I have spent the last decade honing an approach to equity growth investing that is highly effective and, as evidenced by the numbers above, has served us well. I look forward to continuing to build on these achievements at Thirty Seven Capital Management for many more decades to come.
Portfolio Management
As we embark on our new venture, it seems like an opportune time to review my approach to portfolio management. Though our letterhead has recently changed, my investment philosophy and strategy have not. I always seek simplicity, in both my individual stock selection and my portfolio construction. I look for businesses with extraordinarily strong competitive moats (ideally virtual monopolies) in very large, fast-growing markets with high margins and large recurring revenue streams. If the barriers to entry are extremely high, the growth trajectory vast, and the company valuation reasonable, the stock price should rise significantly over time.
Though I am a generalist and look at all sectors, I often gravitate to technology companies, as the sector produces lots of promising growth stocks. I typically buy large-capitalization, well-established companies as they tend to be the businesses in the largest markets with the strongest competitive moats. I also look for newer, mid-sized and, to a lesser degree, small-cap companies with compelling business models that are disrupting an existing sector or changing the way we live or do business. These companies have the potential to grow substantially and develop stronger competitive moats in the future. When bought at a fair price, both of these types of superior growth stocks are ideally suited for long-term investment. (And at the risk of stating the obvious, for taxable assets this approach offers a clear advantage: an investment in a stock while held essentially acts like an investment in a tax-deferred account.)
Careful stock selection is an undertaking that can seem deceptively simple. I always have an explicit and concise thesis behind every investment I make, and my portfolio is built strictly of companies I feel are exceptional. I’m of the belief that in the majority of cases, if one can’t easily explain why they own a particular stock to a twelve year old in a few minutes, there’s a problem. Clearly this isn’t to say it should only take a few minutes to determine whether or not to buy a particular stock. In fact, it’s more often than not quite the contrary: thoroughly investigating a potential investment is usually a complex process involving an enormous output of time and effort. My investment decisions are based on exhaustive research, a great deal of independent analysis, and decades of experience scrutinizing companies and financial markets. (Though my methods have gotten substantially more sophisticated, I’ve literally been doing this since I was ten.) Many in this business are always certain, and often wrong. I am not a person for whom certainty comes lightly or easily, but when everything aligns, I act without reservation or hesitation, and far more often than not I am proven right. Though my thinking is not always conventional, it has proven to be quite successful.
I tend to own around ten core positions, generally a few more. It’s rare to find great growth companies, and I like to make each one count. Warren Buffet talks about the fact that in this business, unlike in baseball, there isn’t an umpire calling strikes. Since you don’t get penalized for letting good stocks go by without buying them, you can afford to wait patiently for a perfect pitch. One of the most important things I’ve learned over several decades in this industry is that real success is about knowing how to properly size conviction. It’s about having the discipline to pass on good ideas in order to pursue exceptional ones and knowing, when the perfect pitches come, how to take full advantage of the opportunities. And, ironically, embracing risk by making more concentrated investments in fewer companies at the right times leads to much better outcomes. This has been illustrated not just by our own track record, but by the records of both Buffet and my former boss Dick Gilder, who, despite other differences in their approaches to investing, both wholeheartedly share this core belief. Diversification for diversification’s sake, as Dick Gilder use to say, should be called “de-worse-ification” and avoided at all costs. If a stock is part of my portfolio, it’s because I know that company extremely well and see what I believe is inevitability in its future success. It’s a strategy that yields a high batting average for us, and, over time, should continue to produce a winning record.
Selecting superior stocks is, as outlined above, essential to my strategy. But so is continuing to monitor those investments as well as the market as a whole. Contrary to what some might think, it’s my belief that successful growth investing doesn’t just entail buying great stocks and then sitting back to reap the benefits. I remain vigilant, because the economy and the stock market have their own cycles and ups and downs, and each company’s stock price can at times move independently of this. As a limited investment partnership, we have a significant advantage in that we can remain nimble and ready to act strategically to protect our assets or, more often, to take advantage of opportunities.
As important as vigilance is, patience is equally crucial. It enables one to choose stocks with care and thought, to remain centered and focused during chaotic markets, to act opportunistically or, conversely, to consciously not act at all – which can be equally difficult. Growth investing requires patience and fortitude. It is essential to think calmly and strategically, and to concentrate on the mid to long term. I focus on absolute returns and making money rather than relative returns and always beating the market, because the latter often leads to the kind of shorter-term decisions that can inhibit capital appreciation in the long run. I am confident that with my investment approach and with patience, over cycles we can continue to outperform the market.
This is an endeavor I love, and a responsibility I take very seriously. My success to date has come from having a massive respect for the market, an ability and willingness to truly think independently, and the courage of my own convictions. Experience has taught me that in this business it is essential to remain flexible and to always preserve open space for creativity. That will remain integral to my process, as will maintaining the ability to grow and evolve. It was in that spirit that I founded Thirty Seven Capital Management. The fund’s name captures its very ethos: the number thirty seven is a powerful symbol long associated with the values of wisdom and heart and, to add even more symbolism appropriate here, also specifically refers to growing great wealth. This perfectly captures my goals for the future of our partnership: to deploy wisdom and heart while growing wealth for all of us.
Adam M. Aron
* Performance is from 2/27/2009-12/15/2017 at GGHC and 12/15/2017-8/06/2018 at Thirty Seven Capital. ACA Compliance, the gold standard in track record reporting, is currently working with GGHC and Thirty Seven Capital to officially certify all reported numbers. Performance is net of fees. Past performance does not guarantee future results. GGHC performance figures do not include the positive impact of dividends. The S&P Index returns include the positive impact of dividends.
** According to S&P Dow Jones Indices LLC’s SPIVA statistics reports, 84.23% of actively managed funds underperform the market over a five year period.