The Swell 80/20 rule

Clients often ask us how we allocate our time to investing each day. We spend 80% of our time on existing portfolio investments, and 20% on prospecting for new ideas. The reason we allocate so much time to existing investments is a function of our concentrated approach to investing and our focus on downside protection. When you own a concentrated portfolio, it is critically important that you understand your investments better than the market.

As the Portfolio consists of some of the largest and most complex businesses in the world, the news flow can be substantial and staying one step ahead requires a lot of work. The biggest challenge we face is wading through mountains of information, selecting the important data and disseminating the information within the investment team. Once we have shared the information, we go about analysing its impact on our investments.

To illustrate, consider Alphabet, one of our largest holdings. While the company is better known for its popular search engine, Google, it has made a substantial investment in driverless vehicles. We love companies with hidden value!

Delving into Waymo, Alphabet’s driverless vehicle investment, we can identify three signposts we have used to assess the value of the business (which is only a very small component of Alphabet).

In the same way that human experience counts behind the wheel, so do miles driven by a computer. Computers learn from experience too. But how can we assess this technology? Fortunately, the US state of California issues autonomous vehicle disengagement reports identifying the number of times a human overrides an autonomous car’s computer. While it does not make for terribly exciting reading, it is an important part of our investment thesis and therefore needs to be monitored closely. Incidentally, Waymo has driven 2.3 million miles, significantly more than its nearest competitor.

Secondly, we evaluate both private and public market transactions within the driverless vehicle space. The industry structure is an expanding and complex web of inter-business partnerships and investments. A recent indicator of value was Intel’s purchase price of US$15B for Mobileye, a company providing vision based, advanced driver-assistance systems. We spent days reviewing Mobileye, its technology and its impact on Waymo.

Lastly, we need to stay abreast of the regulatory and legal skirmishes involving the sector. Currently, we are searching through details arising from the legal battle between Waymo and Uber in what appears to be a clear case of corporate espionage. Waymo is seeking US$1.5B in damages as a result. We also pay close attention to US state and federal government legislation for new updates.

As you can imagine, applying such a thorough process to every business within our portfolio is time consuming. However, the benefit is that we find pockets of value the market misses or underestimates and we are able to act swiftly on this new information.

Disclaimer:
The information provided in this document is of a general nature only, is not personal investment advice and has been prepared without taking into account your investment objectives, financial situation or particular needs (including financial and taxation issues). Investors should read and consider the investment in full and seek advice from their financial adviser or other professional adviser before deciding to invest.