Why I love sitting on my ass and waiting (or: Why I am still buying Rakon)
“All the money is in the waiting”
Y’day I had a few calls from people about RAK and a few other stocks — you know, RAK is trading at 80c and it was a dollar not that long ago, etc. It reminds me of the market truism — price drives narrative — when stocks are going up it must be the best thing since sliced bread (remember the over-the-top bearish narrative about Meta back in the doledrums of late ‘22? It traded around $99; or think of the market darlings now — Nvidia, etc — the stock must be good!).
It is a very peculiar part of human pyschology. Think of Buffett’s favourite steak metaphor. If you like steak at $20/kg you’re going to love it at $15/kg. But with stocks this often goes the opposite: if you like Meta at $400 you’re going to hate it at $99. Here is a selection of articles about Meta from the NYT written in late ‘22:
Need more? Ok —
If you correlate the dates of the above headlines with the stock chart, you get an ultra-professional chart that looks something like the below:
Price drives narrative.
Here is a headline that is more recent (see the chart above and reference the date)
Price drives narrative!
If you were to buy and sell stocks based on market fear and the associated narratives you would be very poor. Ryman Healthcare was the golden child of the NZX for a while — now it is a dog. Tesla was the golden child of the NASDAQ for a while, not that long ago, and people looked at me like I was stupid for not being invested. Now Tesla is a dumpster fire producing trucks that appear to have been designed by a child in between playing Roblox (do kids still play Roblox??)
This comes back to my favourite Mungerism — you make all your money in the waiting, in sitting on your ass. If you like that steak at $20/kg you’re gonna go crazy for it at $10/kg. There’s really no other secret. I am always bemused when people claim you need an entire team to do investing (like it is some kind of dark art, and not just saying “Stock good. Stock go up. Like stock”). You buy what you know and what you understand, you constantly doubt yourself and try and kill the idea (otherwise you can end up like poor old Bill Miller just prior to the GFC, doubling down on banks that were about to go bust) and then you wait.
I look after my mother’s portfolio. It is a modest portfolio. It is not an endowment. It has annualised +14% (sometimes it has outperformed my own!). The reason I am telling you this is because I never look at it — maybe once a year when she calls me to ask how “the stocks are doing”. It holds Visa, Mastercard, Amazon, Berkshire, Microsoft, Infratil, LVMH and a couple of others. It is the epitome of sitting on your ass. My mother knows nothing about investing and just lets it sit there. It does well. Sitting on your ass.
Because those of us who work in investing don’t have real jobs like building or being a plumber1 or something like that, we tend to focus on being active — often to our detriment. How many times has someone pointed at a chart to you or hyper-focused on a tiny detail — analysts in particular tend to be caught up in their models and wondering if they underestimated the capex for FY26 or whatever. Here’s a good quote from Kerr Neilson, the founder of Platinum Asset Management:
We’ve always argued that the biggest problem investors have is paying too much attention to the media overload. That creates huge biases in behaviour and we call the most common one 'availability bias', where there is an obsession about the current news item and it can lead to mispricing of shares. So that’s what we think is a really valuable source for looking for asymmetric opportunities; so where the reality is not quite as bad as some people will hold and that gives you the mispricing
Amen!
Why I am buying more RAK today (or: how I learned to stop worrying and just buy more)
Let’s talk about specifics, now. I’ll use Rakon as an example but also gave you a couple more ideas we are examining at the moment. RAK is trading at 73c. After it received at NBIO for $1.70 per share the stock traded upwards of +$1.20. The facts have not changed: RAK received a bid for $1.70 per share in the form of a NBIO. The NBIO continues to be in play — the board would have to report if it wasn’t to the NZX, per disclosure rules. The company has spent in excess of +$2.2mn on costs associated with the NBIO. I do not think the company would do this unless they were serious about selling it. In addition, the company has suspended their dividend in spite of having plenty of free cash flow. Companies tend to suspend capital disbursements to shareholders when they are in a sale process (they typically want to retain capital on the balance sheet, etc). All this tells me the company is continuing to discuss the NBIO. Buying the stock at 73 cents gives you a 132% return if the NBIO is accepted.
Let’s talk about why the buyer might want to purchase Rakon. It was heavily implied on the earnings call that Rakon supplies chips to AI players — Nvidia without saying Nvidia (the company could not confirm nor deny this). Rebecca at BD did a good interview with the CEO where he spoke of AI:
Altug said Rakon could not name who its AI customers were, and was prohibited from doing so. He said its customers were protecting their own competitive advantage in not revealing the use of Rakon’s products. “They keep it tight and confidential, and there is that paranoia. I think it is very valid for all of the AI ecosystem.”
Rakon makes two chips that are intended for AI data centres. If the chips are seeing demand by players such as Nvidia, you can then understand why a company might want to buy Rakon.
The way I see it, you are either buying a company that is successfully pivoting to AI and space technology (noting the recent contract win for low orbit satellites) and/or you are buying a company which has a NBIO in the works that currently has +132% upside. Returning to the steak metaphor — if you like steak at $1.20, you’re going to love it at 73 cents. I think fear is misplaced with stocks. It is much better to look at the facts and make a clear-eyed assessment. Graham’s Mr. Market is the best metaphor — sometimes he is going to offer you lots of money for your stocks and other times he is going to offer you squat. It’s good to take advantage of that bi-polar dynamic.
More stocks we are buying and looking at that are cheap
Let’s look at a couple of other unloved stocks we are buying. There is obviously the cluster of booze barons — Diageo, Pernod-Ricard, Brown-Forman. They are all trading, more or less, at or below five year lows. I’ve written about them before — what I like is a company selling a sticky product (booze) with strong brand moats (Jack Daniels, etc) and strong margins that is selling on the lower end of its earnings multiple. That’s it. That’s the thesis. Simple.
The other two we have started looking at are Lululemon and Starbucks. They have both performed abysmally this year. They have bad narratives attached to them as a consequence. Starbucks commands wonderful margins and has a highly loyal user-base. It has several billion dollars in pre-paid customer deposits for future Starbucks products combined. Lululemon is the worst performing stock in ‘Muria’ this year. Before that it received wonderful headlines — “the Becky portfolio” etc. It is — believe it or not — still selling a lot of leggings. It is also trading, on a EV/EBITDA basis, around COVID “crash” time lows.
Price drives narrative, price drives narrative, price drives narrative.
I’m joking!! Am I?