Yesterday (briefly), Aurora Innovation shares touched $5.24. This price represents an increase of 104% since we bought it a month and a half ago. This is obviously excellent news. But it also raises a question: what do you do with a line that doubles in size in two months?

 

The answer is more complicated than it first appears.

There's that old saying, ‘No one ever got poorer by taking profits.’ But I have in mind this anecdote from David Rosenberg, ex-Chief Economist at Merrill Lynch: in 2002 he bought Amazon shares after the tech bubble burst at around $1.00. A year later he sold them, happy with them, with a profit of +100%. A year later he sold them, pleased with himself, with a profit of +100%. In doing so, he missed out on a near x100 (Amazon is worth $188 today). So I reach into my kit for the big black permanent marker and carefully cross out this saying.

More elaborately, I found this paper (see bottom of article) by Robert Kirby from 1984, ex-chief executive of Capital Group - one of the world's largest asset managers. In the 1950s, Kirby was a young private banker. One of his clients called to tell him that her husband had just died. He had always managed his portfolio himself, but now that he was gone, she wanted Kirby to take over. He agrees, of course, and is amused to discover that when he opens the husband's portfolio, he is copying his wife's operations, but with a slight difference: he never sold anything. He put $50,000 into every idea Kirby sent him and then threw the certificate in a drawer, paying no attention to sales recommendations.

The most surprising result was that the husband's wallet was worth considerably more than the wife's. Of course, it was an odd portfolio, with a lot of lines worth next to nothing. But some were worth more than $1 million, and one of the lines came from a company that later became Xerox. When the will was opened, that line alone was worth $8 million.

 

Lesson: when you arrive with your pruning shears to make a few cuts in your portfolio, be aware that you may be parting with a young shoot that was going to become a tree.

 

Armed with all this historical wisdom, here we are last night with our Aurora case:

a/ On the negative side, there is no positive news to explain this rise. The latest significant news from the sector is the 2nd round of Waabi, an aggressive competitor financed by Nvidia and Uber.

b/ On the positive side, in terms of valuation, we are at $6bn of capitalisation: not nothing, but it could be worth a lot more - this is not the place to go into the valuation exercise, but ‘a lot more’ means what it means.

c/ in risk management, this line where we had invested 2% of the fund now represented 4.0%. With volatility at 80% and a beta of 3.0, this gives a little effect that reminds me of the Peugeot 205 GTI 1.9 we borrowed from my uncle in my youth [for those who don't know, here against a Lamborghini Huracan]***.

 

It was risk management that got us moving and we reduced our line by 25% yesterday.Now, like the man in the story, we've put the certificate back in the drawer. The share is down 10% today, but it doesn't matter. The focus is back on the essentials: the ability of Chris Urmson, Sterling Anderson and Drew Bagnell to deliver their autonomous trucks.

 

***(apologies to anyone who really thought the 205 could beat the Lambo 🙂)

R. Kirby's paper

Market and portfolio focus

Behaviour:

Last week's article came just at the right time (you can read it again by clicking here) with the reversal at the end of the week of the large caps compared with the smaller ones: in five days the Russell 2000 is up by +9% and the Mag 7 down by -7%. As a result, between 5 and 12 July, the Monocle gained 2.5%, while the CAC 40 gained 0.6% and the S&P 500 0.9%.

But who is responsible for this rebound? The first is Aurora, which I mentioned in the previous article. +60bps this week. The second is Ouster, the American lidar specialist. Silver medal with 55bps. Finally, our position on US long rates completes the podium with 35bps.

Lines:

Sometimes you have to take two pies to learn your lesson. That's what happened to us at Téléperformance. We got into the customer relationship specialist, mainly attracted by the value proposition, without worrying too much about the threats of AI. We were slammed by Klarna at the start of the year, but we stayed on board, convinced that the structure of the industry would remain favourable to Teleperf'. We saw the share price rise until today. We took the second slap in the AI sector with the arrival of Salesforce, a more than serious competitor. As a result, we've fallen by the wayside, and so has Antoine's investment thesis: we've sold our line today, as has our investment in Concentrix (the sector's #2).
The cup is salty: we lost a total of 70bps on our investments.

We also exited U-Haul this week, with a small capital gain. On further investigation, we feel that the current risk/reward does not justify a position in this stock at present.

Finally, as explained in the note, we sold a quarter of our position in Aurora Innovation. We still have 3%.

Today, our gross equity exposure is 45% (net 34%). We remain with our position in US long rates at 32% and our corporate bonds at 13%.

 

Have a great weekend,

Charles