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  • Chris Mayer

Never Seen Anything Like It

"Fortune tests the spirit's mettle."

- Seneca, Letter 13

For me, this has been a tough market.

I entered the pandemic with a portfolio laden with exposure to aviation, travel and other businesses you wouldn’t pick to own through a pandemic. While I cut some of that exposure early, I retained a hearty chunk of it. The market, so far, is not rewarding my decision.

But long-term thinking drives the decision-making around here. So, while I think my exposure to these areas will hurt (and have hurt) my returns this year… I also can’t help but think that the biggest returns in 2021 will be exactly in these areas. I’m looking for a big rebound next year.

Easy to say, but much harder to live through… Who wants to buy a hotel stock? Or an aircraft lessor? Or a pub operator that may not even open until July? It seems obvious to everyone that it is going to take a long time before these things get back to normal, if ever. Even I find these ideas hard to buy – and I own small positions in each!

And yet, that thought persists – here will be my biggest gainers next year. I’ve seen it happen before. Hated assets get hit hard, washing out the weaker hands and setting the price at a low, low bar… so that just going from awful to less awful can bring a huge move.

Still, there are no guarantees and it is hard to wait…

Everyone in money management has a competitive spirit. No one wants to lag in the race while others zip ahead. But it is a very long race. Reminds me of this exchange from Ford vs. Ferrari:

Lee Iacocca: Suppose Henry Ford II wanted to build the greatest race car the world's ever seen, to win the 24 Hours of Le Mans. What's it take?

Carroll Shelby: Well, it takes somethin' money can't buy.

Lee Iacocca: Well, it can buy speed.

Carroll Shelby: It isn't about speed.

Likewise, investing isn’t about speed – it’s a long race.

I own Intercontinental Hotel Group (IHG), as I write. (See disclaimers). Reading through their latest release was… well, it was something I never experienced before. The results were so... bad. In March, US RevPAR fell 49% -- which, comically, outperformed the overall industry. In April, they estimated RevPAR would be down 80%. I’ve never seen anything like it.

I know they won’t stay this bad. The stock actually rallied on the release. It’s not like the bad news was a surprise. And IHG is in good shape financially. Survival is not an issue here. (IHG estimates it could go 18 months with zero occupancy). It is asset-light, with most revenues tied to hotel revenues, not profits. And it has been a good business with high returns on capital, strong free cash flow, etc. But I’m just saying the numbers are like nothing we’ve ever seen before.

As far as RevPAR goes, this is way worse than 9/11, which was the template I used in initially thinking about my hotel exposure. In September 2001, RevPAR in US saw a monthly drop of 20-25% year over year, with the biggest declines in New York and Washington (30-40%). After 9/11, hotels didn’t see an uptick in RevPAR until January. It will surely take longer this time, but how much longer?

The worst may already be behind us. On the earnings call, CEO Keith Barr said that occupancy rates in China were in “the mid-20% range compared to the trough of around 5% in February with demand being led by domestic corporate and transient travel.” And Marriott's CEO Arne Sorenson said “negative trends appear to have bottomed in most regions around the world.”


Imagine the comparisons next year. What will the increase in RevPAR be when they report Q1 2021? What will the stock price be at the end of 2021? Higher or lower than today? I think it will be a lot higher.

So I hold… but it’s not easy psychologically – especially when I have other businesses that are holding up much better. The temptation to buy more of these defensive names is strong. I doubt however, the returns will be as good going forward as the stuff that’s been squashed.

By the way, reading through hotel earnings transcripts gives you a real boots-on-the-ground view on what companies are doing to deal with the lockdowns.

For example, Candlewood Suites is one of IHG’s brands. Check this out, from Barr:

“For a hotel like a Candlewood, you can run on a skeleton staff of 2. And actually, if you look at a Candlewood, they've maintained quite a high level of occupancy. They're well used. Holiday Inn Expresses, again, you can run with a low staff level. So it does work to keep them open, and most of them are open.”

When I read comments like this, I get a little more optimistic. People can be incredibly resilient and resourceful. It could very well be that IHG (and other hotels) come out of this much leaner and stronger. And the changes they make now could lead to better than expected profits as things recover.

We will see…

Re-Reading Charles Handy

I’ve been reading (and re-reading) quite a few books during this lockdown. Below I share some thoughts on a recent re-read…

You may have your favorite guru from business school. Perhaps it is Peter Drucker or Michael Porter, or maybe Clayton Christensen. My favorite was always Charles Handy. His books are the only ones I still have and he’s the only one I continue to read.

Handy wrote eloquently and philosophically about work life. You’re as likely to find him leaning on insights from Schopenhauer or Aristotle as any contemporary research.

Born in 1932 in Ireland, Handy – who is still kicking today – also includes quite a bit of himself in his books. Since he’s had an interesting life, he has much material to draw from him: growing up in “a poor, priest-ridden land” as the son of a vicar… oil executive at Shell working in “Singapore, Malaya and Borneo”… warden at St. George’s House at Windsor Castle… and other adventures before going off on his own as a writer and speaker. This latter life is the chief concern of The Elephant and The Flea.

Recently, I re-read this book, which may be my favorite of his books. It came out in 2001. And its thesis then struck me as fairly radical at the time. Re-reading it, not so much.

The basic idea is that more people will be working independently (“fleas”) instead of for big corporations (“elephants”) in the future. Good chunks of the book cover his life working as a flea and dispensing advice and wisdom he gained therefrom.

He also writes about the “new economy” and all that entails -- more people working from home, more interaction by email, more commerce online, etc. It was all still fresh and buzzy in 2001.

Handy was early in seeing the disruption that would ripple through the economy. “Every business will have to reexamine its underlying business idea to see if it is still relevant, if they can still make money the way that they used to.”

At the time, this was fairly radical stuff. Now, 20 years latter, it seems obvious. As Schopenhauer’s oft-quoted truism has it: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

Handy was early in seeing many other developments that are now commonplace. For example, he saw the transition from just selling a product to one where the ideal would be to sell a service with it. We wouldn’t buy an air conditioner, he wrote, we’d buy an air conditioning service – the thing would come with a service contract and provide an annuity for the company. We see this everywhere now with all kinds of products.

He knew, too, that technology is a mixed blessing. More communicating remotely meant fewer “knees under tables” – eating, drinking and talking. And he saw how technology would bring temptations that we’d have to learn to manage and resist:

“Because something exists, we are tempted to use it. Because it is now possible to fly from Kuala Lumpur to London for a meeting, people do. Because we can copy a message to half the organization at the click of two keys, we do. Because it is possible to do business around the globe around the clock, we do.”

And I’d add, because we can buy and sell stocks with ease and at virtually no cost, we do. How exhausting all this seems. And is it better?

But some things would not change so much. “Spring will still smell as nice,” and “Shakespeare’s plays will still have resonance.” The human condition itself will not change. We are still the same emotional bundles as we ever were.

Not everything he predicted has come to pass. But they may yet. For example, he predicted that the idea that shareholders own a public company would be abandoned. Instead, they would seem more like landlords, entitled to a rent but with no say on how companies were run. (Some of my more cynical friends would say this is already happening!)

Anyway, if you want an easy, yet thoughtful, read check out The Elephant and The Flea: Reflections of a Reluctant Capitalist. As I’ve said above, many of its insights don’t age well simply because they are now widely accepted. But Handy is a likable guide, and a good writer, with some interesting stories and reflections that are timeless. And if you like this book, he’s written a bunch more. See this picture, from my personal library, of the Handy books I've accumulated over time. And I don’t even have them all!

Thanks for reading.

Sincerely,

Chris Mayer


P.S. I've also been reading Seneca's Letters on Ethics, which is very quotable and a timely read during troubled times. Seneca is all about dealing with the whims of fortune. I recommend this edition here.

Published May 12, 2020

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