While I dislike Josh Wolfe, he has a saying which has stuck with me.
It’s something along the lines of: in investing, “you want people to agree with you…just later.”
Recently it seems, the narrative around one of our larger investments has turned from one of pessimism to one of envy. A sample from early 2021:
But here we are in mid-2023, and Bloomberg delivered this to my inbox this week:
And this:
In most cases, I see people engaging in victory laps and back slapping, among other things. It seems so obvious, doesn’t it? The company itself stated its plans, and now it’s delivering on them. Investing must be easy, right?
What I personally find more intriguing is looking back and making an effort to identify what the market was accurately discounting that I failed to appreciate due to the narrow perspective I had, driven by a desire for a positive outcome.
In that vein, a couple of thoughts:
The Credit Default Cycle: When I initially invested in the stock, my understanding of credit was weaker than it is now. I lacked the insight to recognize that a portion of the price was simply based on the anticipation of a default cycle. This wasn’t exclusive to this particular stock; it was a pattern seen across numerous similar companies, including insurers, BDCs, and other credit-related equities.
Insurance Multiples Pose Challenges, for Good Reason: Only later did it become clear to me that Apollo functions more as an insurer with an attached asset manager, rather than the other way around. Insurers have been trading poorly for some time now, largely due to underwhelming performance over the past two decades, particularly in the life insurance sector. While insurers have seen some improvement recently, and Apollo has participated in this upturn, the initial and current undervaluation is to some extent due to skepticism regarding lifecos’ ability to truly enhance shareholder equity.
Regulation Can Sneak Up on You: Although it’s abundantly evident today, I didn’t fully grasp in the past how significantly regulatory decisions could impact a business’s trajectory. Rowan’s comment about his gray hair resulting from dealing with current and potential regulations is quite telling. This statement gains significance considering the challenges already inherent in successful investing, which are at the core of the business.
Execution is Challenging: It’s easy to overlook the difficulty of implementing a business plan from within the organization. Financial experts often make statements as if achieving success in business is as straightforward as allocating capital wisely. “Just allocate to the highest and best use…” Having experienced various difficult situations, I can attest that it’s never that simple. Execution is often disregarded because it happens behind the scenes, away from public view, making it challenging for outsiders to understand, let alone quantify. Yet, it’s likely one of the most tangible risks. Assessing it externally is complicated, and it’s easy to tell oneself that Apollo succeeded due to Rowan’s exceptional abilities. However knowing the difference between a skilled salesperson versus a capable organizer, motivator, and talent scout, beforehand, is difficult.
Moving forward, one of the trickier aspects of considering this investment is determining how to manage risk. Each of our other investments currently contributes a significant yield. When we initially invested in Apollo, it contributed meaningfully to portfolio yield. However, at today’s price, its role in terms of generating income compared to principal value is the lowest in the portfolio.
I’ve often emphasized that real estate investors excel at focusing on their figurative cash-on-cash returns. After all, you can’t use net asset value gains unless you decide to sell. I’m now pondering a question in my free time: what would constitute a wise rotation of this position to strengthen yield further? Would I end up regretting the decision? The answer won’t be clear beforehand, but part of this journey involves refining a process that suits us. In this fortunate scenario, whether due to fortunate chance or a modest accumulation of skills over time, we have the opportunity to practice risk management in a favorable outcome rather than the opposite.