capital losses is tuition in the school of portfolio management

So CTEK is selling itself for $1.25 / share. The company is in a “go shop” period until the end of June and still publishing contract announcements, so maybe there’s a higher price on the horizon but it's unlikely to exceed our cost basis. It will result in a permanent loss of capital. 

Owning this company (for this long) has been a terrible mistake. I say "has been" and not "was" b/c large portfolio losses have long tails, often why managers restart under new names after events like this. Not me. The only clients I've heard from are adding money, which is not a bad idea at the moment. War. Inflation. These are terrible times to invest, so valuations are attractive. 

Energy is an interesting environment. What seems different this time is that producers have financial flexibility to increase capacity based on higher, not lower prices, the scourge of past cycles. It is not an area we invest in, a view whose justification has been upheld by an argument lost many years ago to someone who isn't even a client, so possibly up for revisiting (as my son says: "money is money"). I'm in no rush to change but there was easy money in oil when it turned negative during COVID. 

Back to CTEK, I’ve written a letter to the Board reviewing mistakes - theirs and mine - and a public version of it is linked to here. (The private version was quite a bit harsher I'm afraid to say). 

A characteristic of SMA's run as if it's pooled capital is that purchases are allocated towards available cash, regardless of account. I make an effort to rebalance but - and i'm stating the obvious here - it is hard to know the "best and highest use of capital", ie choosing between A and B, at any time. That is of course portfolio management in a nutshell. It isn't easy. I generally think about upgrading the "worst" position in the portfolio: Which one has the highest risk of costing me money? Get rid of it. 

I've improved my portfolio management skills over the years, the tuition partially paid for by those CTEK losses. Given two paths for solving the complexity - either owning a little of everything or as few things as possible - I choose the "fewer" route and continue to endeavor to consolidate around best ideas, not b/c i understand them best but b/c I think their opportunity relative to their risk is highest. For accounts with constraints on cash, the CTEK sale frees up capital at less unattractive prices, to reallocate to higher return ideas. 

One new idea I am buying is in the electronics space; design, assembly and distribution. Component manufacturing is not historically a great business and it is possible that what I find attractive here is simply a semiconductor CAPEX cycle masquerading as a secular trend. But the hypothesis I am testing is whether the electronics space is experiencing "a new period of electrification" 91 years after  Thomas Edison died. 

I observe shifts happening in the way electricity is generated and stored. It might only be on the margin and the overall slice of the energy pie will likely remain overwhelmingly hydrocarbon and combustion based for the forseeable future. But energy is a big pie and small changes can be meaningful, especially when it bumps up against an industry that is historically static and commodity driven. I think we are still in early iterations of companies figuring out what works best. Wind turbines are improving. Solar farms are improving. The T&D grid has to improve. OEM's are building products that implement new ways of managing and storing energy. 

I think it's possible something big is happening with profound changes in valuation on the horizon for companies so disposed. I think the company we are presently allocating towards is benefitting from one such shift. Getting a read on an industry has to include looking at its biggest players so while I most enjoy burying my head in smaller more obscure companies, ARW's and AVT's are in the hopper. Will write more about this later. 

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. THIS IS NOT FINANCIAL ADVICE. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.