Crystal Cove Capital Q2 Letter: The Evolution of CooperationVW Staff
Crystal Cove Capital Management letter to investors for the second quarter ended June 30, 2015.
From inception to June 30, 2015 investors of Crystal Cove Capital experienced a 16.1% return compared to an 11.7% return from the S&P 500. Below, I share thoughts on trust as it applies to businesses and investment organizations as well as declining stock prices.
Crystal Cove Capital Management – Trust
I recently read a book on game theory titled The Evolution of Cooperation by Robert Axelrod. What I found particularly interesting is the book’s implications on the benefits of mutual trust: you can maximize positive outcomes for all players through reciprocal trust. This conclusion has all sorts of interesting implications for businesses. Indeed, when you analyze many successful businesses, you will find that they are built upon a foundation of reciprocal trust. If you look at retailers such as Amazon, Wal-Mart, and Costco, they have experienced staggering success by establishing trust with their customers with the promise of low prices. Some acquisitive organizations have been able to grow dramatically due to extreme forms of decentralization that is made possible due to trust between different layers of management that allows for very high levels of scalability.
This is particularly evident in businesses such as Berkshire Hathaway and Constellation Software. In contrast, in many investment organizations, a lack of reciprocal trust leads to very compressed time frames. If an investment fund has a bad quarter or a bad year or two, it can easily mean that it goes out of business due to the lack of trust on the part of the investor base. This leads to a vicious cycle in which mistrust by the investor base leads to a compressed time frame, which leads to worse performance due to the amount of competition in these short time horizons, which leads to even more mistrust among the investor base. If you analyze many of the most successful investment funds they tend to have the opposite cycle. They have an investor base that trusts them which allows them to take on a longer time horizon and compete in less competitive fields and perform well over the long term which leads to even more trust by clients.
Crystal Cove Capital Management - Declining Stock Prices
Given the volatility of stock prices during the quarter I thought now would be an appropriate time to discuss declining stock prices. Declining stock prices are beneficial to you as an investor. This is the case for two primary reasons. First, given that most of you are at the point in your life where you are saving more money than you are spending, you will continue to generate increased funds for investing for a very long period of time. It will be much more beneficial to you to invest those incremental funds at lower stock prices compared to higher stock prices as that will increase the rate at which your money compounds over time. One useful analogy I’ve heard is to think about buying stocks as similar to shopping for items at the grocery store. Indeed, at the grocery store, lower prices on products are good for the buyer and bad for the seller. Similarly, when you are purchasing a portion of a business in the stock market, lower prices are good for buyers of businesses and bad for sellers of those businesses.
The other reason lower prices are beneficial is because share buybacks are more accretive. Our portfolio of investments has shareholder oriented management teams that tend to do share buybacks. Share buybacks executed at lower stock prices increase your proportional interest in the business at a faster rate compared to share buybacks at higher prices. If stock prices stay low for extended periods of time, this will have a very positive effect on the future compounding of your investment due to continued share buybacks at low prices.
I want to thank you for the trust you have placed in me and for giving me a long time horizon over which to compound your money. Please feel free to contact me at any time with any questions you may have.
Crystal Cove Capital Management, LLC
[email protected] cove capital.com
http://www. crystal cove capital.com