Out of chaos comes opportunity

Commentary2 months ago
As longtime readers of ours may be aware, many companies in our portfolios have built their position of success on top of disruptive business models.
Disruptive companies create new markets and networks, upend existing ones, and have the potential to displace formerly leading products, companies, and alliances.
A winning formula for investors has always been to identify the most durable of these disruptive businesses and hold them over a very long period of time. Charlie Munger (Warren Buffett’s right hand man) describes this concept as akin to surfing: “When a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows.” This concept is one of the key frameworks we use when assessing our landscape of investable opportunities. We look to identify emerging disruptive “waves” that are misunderstood or not fully appreciated by the market, and as such may not yet be fully reflected in valuations. As the very best of disruptive companies mature, they tend to become recognized as “compounders” by investors over time: high-quality businesses, built on top of durable assets, that can “compound” earnings at high rates of return over a very long period of time. That said, it isn’t easy to determine if (or when) a disruptive company will truly become a compounder, no matter how disruptive they are. Many disruptive companies may have poor economics, low pricing power, or are at risk of competition that erodes their abilities to sustain above-average returns on capital. Therefore, when underwriting each investment, we look for signposts to make sure that the “wave” we are looking at, is in fact, the right one to “surf.” These signposts can come to light in a variety of forms, whether its quantitative metrics like pricing power and gross margin expansion, or more qualitative factors like commentary from competing businesses. Like most aspects of investing, there is no perfect formula for how to go about tracking these signposts. However, this is what we aim to do for you at Titan every day: look far and wide to find the most durable of disruptive companies that will become dominant players within their respective industry, and hold tight for the long-term.

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