An Investment in Scarce Assets

Not investment advice: First, read my full disclaimer here.

I love scarce assets. Abundance breeds competition. Any time there is a supply / demand disconnect - incremental investment steps up to fill the void and soak up excess profits. Hence, you are stuck with playing a timing game that can be temporarily won if lead times are long enough to provide a temporary shield against capacity increases. However, the long-term results are the same. A reversion to the mean where many participants play a zero sum game against one another in an attempt to earn their cost of capital - yet comically still think there is some way to ‘win.’

Human nature is such that people always push for more. We crave abundance. For example, a scarce asset like bitcoin isn’t enough. We need to add leverage. We need to add forks to make it an abundant asset (through dilution), instead of a scarce asset managed by the rational simplicity of a math equation. We end up consuming the empty calories before letting the herd mentality carry us to the next thing we desire over because of an inability to override base social instincts (our brains have evolved from resource-scarce environments) and a yearning for what we do not possess.

Hence, when you find genuinely scarce assets, they should trade at a premium to the market. Importantly, they can be intangible as well. These are the type Buffett would prefer because the incremental investment is far less - resulting in a much higher ROA / ROE.

Where are they present?

• Intangible: Patents, copyrights, trademarks

• Tangible: Precious metals, rare earths (mostly lacking concentration, as the non-Sino world is getting an education in), real estate, art, vintage cars, luxury goods

The company I’m outlining today is managed by an individual who specializes in compounding capital through direct investments and operating businesses that seek to use scarcity as a long-term advantage for shareholders.

What are investors receiving in this investment:

• Significant hard asset cushion: This company trades under TBV per share despite compounding this value by 17%+ over the last 5 years.

• Inexpensive Asset Lite Operating Business: Company trades sub-4x operating income (their cash cow). I do not believe the market appreciates how this asset pushes their flywheel forward.

• Free option: A minority stake in a company that has impressively improved their profitability over the past year.

If you are a long-term, patient investor - I think this is an investment you could be interested in.

Let’s dive in to see why I believe this opportunity trades at less than half their intrinsic value with a large margin of safety.