Sahil Khetpal
@skhetpal
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Former hedge fund investor turned entrepreneur. CEO @thetikr . Teach @super_investing . Talk about hedge funds, stocks, entrepreneurship, and life's journey.
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Billionaire investor Dan Loeb believes studying this one company is worth more than a 2-year MBA.
Surprisingly, it isn’t Amazon, Apple, or Berkshire Hathaway.
As one of the all-time best-performing stocks, it’s delivered 4,500%+ returns over the last 25 years.
Let’s dive in!
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There’s a $13 billion fund that you likely have never heard of that has tripled the returns of the average hedge fund over the last 20 years.
The most surprising thing is that their investment strategy involves buying and selling the same few hundred stocks.
Let’s dive in!
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This individual investor has made 8,000%+ returns over the last 25 years to build a $250 million portfolio.
The most surprising thing is that he has sent 1,000 letters to the government to close the loopholes that gave him his advantage.
Let's dive in!
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Danaher used DBS to build a $200 billion company and generate a 45x return.
Billionaire investor Dan Loeb believes studying Danaher is worth more than a 2-year MBA.
In this thread, we’ll dive into the actual tools & tactics behind their success - Danaher Business System (DBS):
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An inside view of one of the best performing VC funds of the last decade: Greenoaks Capital.
Greenoaks has reportedly generated 50%+ returns annually after fees since inception!
So how did they achieve this? In this thread, I’ll explain their investment strategy & process.
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The company is Danaher and the secret to its success is the Danaher Business System (DBS).
In this thread, I’ll give you an overview of Danaher, DBS, and their M&A strategy.
Let’s start with Danaher’s history! $DHR
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An inside view of a $30 billion hedge fund that you might not have even heard of: Select Equity
In this thread I’ll go over the fund’s story, their investment strategy, historical returns, couple of their actual stock pitches, and the current holdings in their portfolio 👇
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An awesome list of books that a close friend put together and gave me permission to share.
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Curious to learn about the inner workings of some of the most secretive private equity, venture capital, and hedge funds?
A quick thread on one interesting method to get an inside view and a few examples:
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Legendary investor, Peter Lynch, found one of his all-time top-performing stocks completely by accident.
After a tip from a hotel manager, Lynch found a business that ended up 11x’ing his money over 10 years, delivering 27% annualized returns.
Let’s dive in!
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There is so much more to learn from Danaher!
If folks liked this thread, for my next one I’ll do a deep dive on Danaher Business Systems and the key tools that they use to improve their businesses.
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Echo Street’s top 10 stocks (
@thetikr
):
1. Microsoft ($MSFT)
2. Visa ($V)
3. Linde Plc ($LIN)
4. Sage Group ($SGE)
5. Marsh & McLennan ($MMC)
6. Paycom ($PAYC)
7. Avalonbay ($AVB)
8. Ceridian ($CDAY)
9. Appfolio ($APPF)
10. Danaher ($DHR). I wrote about Danaher in my pinned post
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GoodCos have the following characteristics:
1. Owner-operated
2. Own the customer
3. Recurring revenue
4. Intelligent use of capital
5. Mission-critical
6. Well-capitalized
7. Digital-led
8. Secular growth beneficiary
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Billionaire investor Seth Klarman once explained the key insights he learned from Warren Buffett.
“As Warren Buffett was a student of Benjamin Graham, today we are all students of Buffett”
Here are Klarman’s top 12 lessons:
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RIP Jim Simons.
I'm one of many people that was helped by his philanthropy.
I did the Simons Summer Research Program in high school. That research project helped me win $150k in scholarships which paid for my college. Will always be grateful.
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Danaher applied these lessons to the rest of their businesses, making them one of the first U.S. companies to adopt lean manufacturing.
And so, Danaher Business Systems was born!
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Evaluating management in the investment process.
In this thread, I share some thoughts on the importance of management when investing.
I also share 10+ specific ways to analyze the quality of management:
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Greg Poole founded Echo Street Capital in 2002 at the age of 28 with less than $10 million in assets under management.
Echo Street manages $13 billion as of June 2023.
It’s a fascinating story of learning and continuously improving one’s investment process.
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An inside view of a $20 billion fund that you likely have never heard of: EdgePoint
We’ll review the fund’s strategy, a few of its actual stock pitches, and the current holdings in its portfolio.
We’ll also go over some of their biggest investment mistakes.
Let’s dive in!
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In 1980, brothers Steven and Mitchell Rales founded Equity Group Holdings to acquire undervalued industrial businesses.
They used junk bonds to acquire Mohawk Rubber Company and Master Shield, manufacturers of tires and vinyl goods.
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Broadwood Capital is fascinating.
They bought ~10mm shares of $MNST in 2009 and pretty much hold all of those shares today. Incredibly impressive given Monster has had its fair share of volatility along the way.
Turned $30mm into $500mm+. Monster is 40% of their portfolio.
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The Rales brothers acquired a real estate investment trust (REIT) called DMG, Inc. in 1983 for its $130 million tax-loss carryforwards.
They then transferred Master Shield & Mohawk Rubber Company into the REIT to help shelter their profits using the tax credits.
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This company might go down in history as being a better capital allocator than Berkshire Hathaway.
The stock is up 300x since IPO, returning 35%+ annually over 19 years.
And strangely, almost nothing is known about the founder.
Let’s dive in!
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In 1984, they renamed the company after a river in Montana - Danaher was born! The Celtic root “Dana” means “swift flowing.”
By 1986, Danaher had made 12 more acquisitions using debt. It ended up on the Fortune 500 in just 6 years with $456 million in revenues. Talk about swift!
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These small tweaks have led to vastly better outcomes over time. At the heart of Danaher has been the Japanese philosophy of kaizen, or continuous improvement.
And over the last several decades, Danaher has only gotten stronger and better. It’s now doing $30+ billion in revenues
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So what has Webb’s investment strategy been?
• 35 stocks
• 5-year avg. holding period
• Long-only
• Large stakes in small companies
• Activist role if needed
• No leverage
• Well-governed
• Undervalued
• No outside money which allows him to truly invest long-term
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Shorting is harder than ever given the volatility.
Here are my top 10 lessons I have learned through (painful) experience:
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Around 1988, the Rales brothers saw early warning signs that the junk bond market was going to crash.
They made 3 important changes that set the stage for Danaher as we know it today:
1. Shifted focus to improving operations (DBS)
2. Reduced debt
3. Moved to Chairman role
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Danaher’s subsidiary Jacobs Vehicle Systems had been facing quality challenges. To learn from the best in lean manufacturing, their manager went to Japan to shadow Toyota Motor Corporation.
When the manager came back and applied his learnings, the results were outstanding!
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What are examples of GoodCo’s that Echo Street tracks and invests in?
• Data Sciences
• Dominant Vertical Software
• Software Systems of Record
• Life Sciences
• Alternative Real Estate
• Highly Engineered Manufacturing
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Sherman changed Danaher’s acquisition strategy in 2 important ways:
1. Transition to less cyclical, higher organic growth industries
2. Platform M&A strategy: “Making fewer but larger acquisitions… firms with respectable market shares that were underperforming financially”
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The new M&A strategy was to focus on:
1. Large, fragmented markets growing without cyclicality or volatility
2. Niche firms they could acquire for products without their overhead
3. Improvement opportunity via DBS
Simply, “we look for markets of size where we can win”
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So what is GoodCo?
Echo Street describes GoodCos as “structurally superior to other companies. They occupy a privileged seat at the economic table and from that seat, enjoy higher organic growth & unusual reinvestment opportunities. These are the companies we partner with."
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TIKR is hiring! We're looking for someone to lead our content efforts for our growing community of 300,000+ investors.
I'll work closely with you and we'll nerd out on all things investing / finance!
More about the opportunity below.
(Appreciate any likes/RT for visibility)
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Danaher has meaningfully improved its business quality from a debt-heavy, cyclical industrial company to a more predictable science and technology company.
80%+ of revenues are now recurring thanks to a largely razor/razor-blade business model.
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Three helpful metrics to focus on when evaluating quality of a business: Gross margins, ROIC, and market share gains
A quick thread with some takeaways from one of my favorite investing books below:
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David Webb’s holdings include:
• Analogue Holdings
• Eagle Nice
• Lion Rock
• International Housewares Retail
• Lung Kee Bermuda
• Ming Fai International Holdings
• Time Watch Investments
• Winox Holdings
• Hong Kong Economic Times
• Kingmaker Footwear
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The amazing thing is that the Danaher of today looks very different from its start in the industrial sector.
Danaher today is focused solely on Biotech, Life Sciences, and Diagnostics. (They are spinning off their Environmental & Applied Solutions / EAS businesses)
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Around this time, the Rales brothers also moved to a chairman role, bringing in George Sherman from Black & Decker as CEO.
Sherman was an engineer who also had an MBA. He was credited with turning around the B&D Power Tools business and helping it grow at 2x the market rate.
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To David’s credit, he has actively tried to help the investing public also avoid these lemons in the Hong Kong market.
He publicly shares his knowledge and even his holdings for free, even though it takes up half of his time. Funnily, his site is called “webb-site”
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Echo Street invests in a universe of companies chosen for the consistency and durability of the earnings streams and their ability to compound value at higher-than-average rates.
Out of 60,000+ companies, only a few hundred are GoodCos.
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Greg Poole graduated first in his class from the University of Western Ontario.
He began his career at Goldman Sachs in 1996. By 2001, Greg had become the sole portfolio manager of the Goldman Sachs Waterside Opportunity Fund, a real estate focused long/short equity fund.
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Danaher improved its M&A strategy under Sherman. The strategy was to start with a large platform acquisition when entering a new market.
This could then serve as a center of gravity as they made smaller, bolt-on acquisitions to leverage their economies of scale in distribution.
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Organic execution + M&A = compounding returns
Danaher has outperformed the S&P 500 by 4,100% over the past 25 years!
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He is still trying to make a difference and continues to write and invest.
For me, the biggest lesson from Webb is that there's so much more to life than just making money.
It's remarkable how he has used his skillset to try and do good. I found that incredibly inspiring.
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6/ SEG focuses on a small subset of great companies which they call “SEG Pedigree” businesses.
They have a very useful framework for thinking about great businesses which they call the 5 Ps
1. Pie
2. Piece of the Pie
3. Pricing Power
4. Predictability
5. People
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5/ So how do they find these special companies? They focus on 5 main traits:
1. Exceptional management
2. Large addressable markets
3. Incredible customer experience
4. Attractive unit economics
5. Durable competitive advantages
Let’s dive into each of these…
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Along the way, Danaher has refined its M&A strategy. They focus on markets with secular growth + companies with strong market positions + attractive valuations.
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Danaher has also significantly improved its growth prospects, as these science & technology end-markets benefit from secular growth.
For example, these industries are set to benefit from the shift toward biologics, cell and gene therapies, and molecular diagnostics.
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"Think of me as an expert mechanic, walking around a second-hand car lot in which there are no warranties & all are discounted for the risk of being lemons.
By avoiding most of the lemons & getting a substantial discount on good companies, I have been able to outperform" - Webb
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With each reinvention, Echo Street Capital extended its success.
Echo Street tripled the returns of the average hedge fund over 20 years.
Even more impressively, they beat the S&P 500 net of fees while running with 20% net equity exposure and single digit volatility.
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The 2 most critical criteria for GoodCos are:
Durable economic moats: entrenched within customers’ workflows and difficult to displace.
Structural Growth: enjoy competitive advantages and secular tailwinds that allow them to compound value faster than the broader market.
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Have received a number of questions on how to access Return Ratios and other metrics on TIKR.
Go to Financials > Ratios to view these metrics. Hover over the orange bubble to see the definition. Can easily chart by clicking on the row(s)!
1/
Get a cup of coffee.
This is a joint thread; Sahil Khetpal (
@skhetpal
) and I wrote it together.
In this thread, we'll walk you through various "Return Ratios" -- ROA, ROE, ROIC, ROCE, etc.
This will help you judge business quality better, and hence invest better.
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He has shared his "stocks not to own" lists, which have lost $16 billion of value since he advised against owning them.
He has also sent 1,000+ letters to the Hong Kong Exchanges and the Securities & Futures Commission to reform trading rules and improve company disclosures.
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They have also evolved the Danaher Business System. DBS now includes not only cost-focused/lean manufacturing tools but also growth and leadership tools.
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He launched Echo Street Capital in 2002. The firm was also initially a long/short hedge fund with a focus on real estate strategies.
However, what’s remarkable is that Greg has reinvented the fund several times over the last 20 years.
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Implementing these reforms would end Webb’s advantage but it’s worth it to him.
"I don't want to reach the end of my life and say, 'I was a really good investor, that was fun, but I didn't advance the human condition. There is more to life than just making money”
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Overall, Danaher is set up well to continue to deliver top-quartile performance through a combination of:
1 Operating in attractive industries
2. Strategic M&A
3. Danaher Business Systems
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The next big evolution came in 2013 when Greg hired a young quant, Andrew Yang.
The two created the System which was a quantamental approach that automated idea generation of GoodCos and allowed the fund to run equity market neutral.
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The Rales brothers have built a remarkable business with Danaher and own a combined ~$20 billion stake in the company.
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For example, during the 2008 crisis, Greg was willing to shift focus to credit opportunities.
The biggest reimagination of the fund came in 2010 when Greg introduced the term GoodCo to his investors. GoodCo has been the foundation of their strategy ever since.
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Echo Street shorted stocks with the following characteristics:
1. Business unfavorably positioned relative to ongoing secular changes
2. Management team that is unlikely adequate to respond to those changes
3. Over-leveraged balance sheets
4. extreme valuation
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Danaher benefits from attractive industry growth. It uses DBS to lower costs and reinvests savings into R&D + S&M to grow.
Cash flow is deployed to acquire undervalued businesses that can be improved with DBS. Rinse & repeat!
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David Webb graduated in mathematics from Exeter College, Oxford University in 1986. He was a self-proclaimed “computer geek” who authored a couple books on programming and built a few games in the early 1980s.
He started his career as an investment banker in London.
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DBS has turned into a powerful, competitive advantage that allows Danaher to meaningfully improve the operations of the businesses it acquires.
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Most recently he shut down the L/S hedge fund in late 2020 to focus on the long-only strategy.
“The workflow involved in finding investment ideas is joyful… the workflow involved in smoothing the ride is increasingly a soul-sapping one”
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Welcome to my new followers! I tweet about investing, hedge funds, stocks, & entrepreneurship.
Here is a mega thread of my threads so far. I'll continue updating this as I put out new threads and plan to get more active in 2022!
If you enjoy, please do follow, like & RT :)
👇
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After 5 years of working in London, Barclays sent Webb to Hong Kong in 1991.
He spent the next 7 years working in HK before quitting at the age of 33 to manage his own money.
Webb’s annualized returns since 1995 have been 20%/year vs. 8.4%/year for the Hang Seng Index in HK.
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Sadly, David was diagnosed with cancer in 2020.
"I will fight this with full vigour, and hope to beat it for several years as new treatments emerge, staying at least one step ahead... The knowledge that my work has been so widely appreciated will fortify my fight"
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One thing that has massively improved my performance:
Focus on simpler theses where there are only 2-3 variables that drive LT value.
Look for situations where earnings power is predictable in 5+ years. Makes it much easier to arb price & value
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From 2002 - 2020, the L/S hedge fund returned an annualized 9.4%. It beat the S&P 500 with half the volatility.
But the firm’s long-only fund returned ~21% annualized since 2015.
Mitigating short-term volatility is expensive, which is likely why they shut down the L/S fund.
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But there’s an important source of his outperformance that Webb finds troubling and has tried to end: weak corporate governance and lax regulatory oversight.
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What also makes Echo Street’s strategy unique is its quantamental approach.
For example, they classify & score economic moats and secular growth trends.
Fundamental research is augmented with charting & cyclical analysis + quant tools.
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One thing I love about investing is that it’s meritocratic. The stock market doesn’t care about your credentials.
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TLDR/ The best summary of Greenoaks investment approach is the 2 quotes on their website:
"We believe a small handful of companies define each generation.
Our sole mission is to partner with these intensely focused teams for decades."
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Echo Street believes they have the ability to continue to outperform.
Only time will tell if they can continue to adapt to changing market conditions!
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12/ Here are SEG's latest reported holdings. You can easily track the holdings of 1000s of funds on
@theTIKR
. We go beyond just 13Fs and also track shareholder reports, UK registrars, Japanese filings, etc. to give you a much more holistic, global view of an investor’s holdings
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7/ SEG is unique for their research process, which isn’t surprising given how they got their start by selling research to other asset management firms. Some unique aspects:
1. Don’t read sell-side research
2. Don’t talk to other funds
3. Internal team of investigative journalists
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2/ Greenoaks was started with the view that the Internet, instead of being an industry in and of itself, is more of an “enabler of product/process/business-model innovations that allow companies to offer new and better value propositions to customers in a variety of sectors”
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I quit my job at a hedge fund and left Wall Street to help level the playing field for individual investors.
If you’d like to learn how to invest, check out Superinvesting.
And if you enjoyed the thread, it would mean a lot if you could like and repost it. Thanks for reading!
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4/ Here is $KKR Credit’s Investment Checklist (deck starts on p. 187)
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2/ For example, some info on The Children’s Investment Fund (TCI). TCI had compounded at an annualized return of 18.2% since inception vs. 7.0% for the MSCI World Index as of the date of the memo. A nice summary of their investment strategy below too
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5/ So what has SEG's investment strategy been? There are 3 parts to their investment philosophy:
1. Great Businesses
2. Rigorous Research
3. Disciplined Investing
Let's dive into each of these...
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I'm glad you all enjoyed this thread! Thanks for the support.
There's so much more to learn from Danaher. I'm working on the Danaher Business System tools deep dive.
To make sure you don’t miss it:
1. Follow me
2. Click on the bell for notifications
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9/ And as promised, a few of their stock pitches! The first is Compass Group $CPG
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Beyond the specific strategy that Echo Street has executed on, what’s most impressive has been Greg’s willingness to keep an open mind and reinvent the fund.
He’s been able to help Echo Street navigate multiple market transitions and regime changes.
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La Quinta had a differentiated strategy, a low-cost advantage, and was growing rapidly. The stock was extremely cheap with a P/E of 10.
Stocks like La Quinta exist today and it's easier than ever to find them with TIKR's screener.
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5. Volatility is not Risk
Risk is permanent capital impairment, which usually arises from overpaying or overestimating a company’s prospects.
Prices fluctuate more than intrinsic value, so price volatility can actually create investment opportunities.
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This company started with a single can of paint and snowballed into the world's largest paint company.
Here's the untold story of how Sherwin-Williams revolutionized the paint industry and is now worth $88 billion.
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6/ Exceptional management: they define this as management having high energy, intellectual honesty, and extraordinary capabilities.
This is similar to Warren Buffett’s framework for management: “integrity, intelligence, and energy”
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