.KURP&DSLWDO:LWK$QRWKHU.LOOHU<HDU8S<7'

Home

Videos

Value Investing

Books

OUR FREE NEWSLETTER

Gurus

News

Search

BREAKINGThe
NEWS
Background Of A Value Investor In New Zealand Christopher Swasbrook

4 HOURS AGO

Wedgewood Partners thoughts o

$PH[*ROG%XVLQHVV&DUG
*HW5HZDUGHG2Q3XUFKDVHV6SHQG *HWN3WV7 &V$SSO\

Khrom Capital With Another Killer Year

Up 23% YTD
By VW Staff on August 25, 2015 in Value Investing

This isone ofour favorite funds Eric Khrom just kills it again and
again while maintaining a high level of cash too early to proclaim the
next Seth Klarman? Who knows but watch this guy.

*HW7KH)XOO6HWK.ODUPDQ
6HULHVLQ3')
*HWWKHHQWLUHSDUWVHULHVRQ6HWK.ODUPDQ
LQ3')6DYHLWWR\RXUGHVNWRSUHDGLWRQ\RXU
WDEOHWRUHPDLOWR\RXUFROOHDJXHV
Email Address
GET THE PDF

Khrom Capital letter to investors for the first half ended June 30, 2015.
Dear Limited Partners:
In the first half of 2015, our Partnership returned 18.2% net of fees and
expenses. On average, we held 10% of our assets in cash throughout
this period. For the past five years, the fund has had an average cash
balance of 26%.

KWWSZZZYDOXHZDONFRPNKURPFDSLWDOUHWXUQV





.KURP&DSLWDO:LWK$QRWKHU.LOOHU<HDU8S<7'

6HQGXV\RXUWLSVDW
WLSVDWYDOXHZDONFRP

Our returns in the first half of this year were generated about equally
among six investments (with an average market capitalization greater
than one billion dollars, hopefully answering the question of whether our
strategy is scalable). Our investments consist of businesses that we
underwrote to hold forever. This does not imply that we will never sell
them. It means that our investment theses do not depend on a sale.
We assume a buyer for our shares will never come along. That way, we
are forced to evaluate the total earnings a business will produce over its
lifetime, as opposed to speculating on what others will pay us for it in a
given year.
Of course, this implies that our Partnerships reported return so far this
year does not matter much. The stock prices-what others are willing to
pay for the businesses we own-will continue to fluctuate (sometimes
wildly) so long as we own them. We must-and so should you as our
Limited Partners-ignore thoughts on where a companys share price
may go. Our focus must remain on determining the earnings we think a
business can produce over its lifespan. Then the only remaining actions
are to buy shares when the price undervalues-and sell when the price
overvalues*-the companys lifetime earnings. Sticking to this
methodology-assuming we can never sell a business once we buy it-is

&217(17)520285
3$571(56
Bethany McLean,
discusses Fannie
and Freddie, high
rents

how we hope to avoid becoming stock price addicts.

Foreigners Are

Khrom Capital - Investment approach

Corporate Bonds

We recently made a new investment based on taking this lifetime view

of a business. This company is disrupting a large industry; it has only a
0.3% share of a growing market, a clear and increasing competitive

Once Again
Accumulating US

The Highest-Paying Jobs Of The

Future Will Eat Your Life

Fast Company

advantage, an astute and well incentivized board of directors, and is run

by an extraordinarily intelligent CEO who has a clear strategic vision and
has created an outstanding corporate culture.
However, if our
investment strategy
focused on trying to
estimate what the
stock price could be in
a yearor even five
yearsfrom now, we

&)'7UDGLQJ
3ODWIRUP
)UHHSUDFWLVH
$FFRXQW:LWK/LYH&KDUWV

KWWSZZZYDOXHZDONFRPNKURPFDSLWDOUHWXUQV

Starbucks Corporation (SBUX) To

The Man Who
Shutdown All La Boulange
Cornered The Onion
Invest Correctly
Market [PODCAST]

The Darlings of
Active Managers:




yearsfrom now, we
might have passed on
this investment. There

.KURP&DSLWDO:LWK$QRWKHU.LOOHU<HDU8S<7'

$FFRXQW:LWK/LYH&KDUWV
DQGWRROV

are many reasons that

the stock price could
decline in the nearterm. Competition will
likely increase since the opportunity that this company is pursuing is

Most Crowded
Trades
Can Option Trading
Activity Offer
Insights On Future
Stock
SRZHUHGE\3XE([FKDQJH

large and lucrative. The companys current profitability is depressed,

and its CEO will likely continue to suppress it further in pursuit of
significant advantages of scale. The U.S. economy may enter another
recession, and since this business hasnt previously proven itself
through an economic contraction, there may be panicked sellers of the
stock. These and other factors may make for a messy stock price over
the next few years.
However, by encouraging ourselves (and structuring our Partnership to
allow us) to think as permanent owners of the business, we focused our
attention not on the share price this company could trade for in a few
years, but on the profits this business is likely to produce over the next
few decades. Ironically, the farther out we look, the easier it becomes
for us to approximately predict things.

Khrom Capital - Focus on long-term profitability

For example, take the risk of competition. We think that this company
has obvious and growing competitive advantages that should help
solidify it as the dominant player in its space. (Think how the number of
search engine startups dried up once Google solidified its dominant
position.) We think it is ideal that this management is willing to reduce
short-term profitability to invest in growing the companys competitive
advantage, increasing the quality of its long-term profitability. (Think
how Amazon.com has barely shown any profits for over a decade, but
the value of its business has grown significantly every year.) We think
that a recession could benefit this company, since their cash-rich
balance sheet, economies of scale and prudent management team
would enable them to grow stronger as weaker competitors die off.
(Think how Wells Fargo is earning more money today than before the
Great Recession.)
In short, since we do not need to concern ourselves with where the
stock price will be in the next few years (since you have allowed us to
follow an investment strategy that focuses on the fundamentals of a
business), we are able to look beyond all the short-term noise. That is
how we attempt to generate our excess returns. By taking the profits
that people cannot take (and hopefully avoiding the losses that they
incur) because they want to rent a stock.
***
We remain excited about the investment returns we think we can deliver
to our Partners over the long-term. Virtually all of my familys and my
entire net worth remains invested in the Partnership, as we aim to
compound our wealth alongside yours. As always, if there is anything
KWWSZZZYDOXHZDONFRPNKURPFDSLWDOUHWXUQV





.KURP&DSLWDO:LWK$QRWKHU.LOOHU<HDU8S<7'

compound our wealth alongside yours. As always, if there is anything

you wish to discuss, please feel free to call me. I look forward to writing
to you again after year-end.
Sincerely,
Eric E. Khrom
Managing Partner
Khrom Capital Management, LLC

*HW7KH)XOO:DUUHQ%XIIHWW
6HULHVLQ3')
*HWWKHHQWLUHSDUWVHULHVRQ:DUUHQ%XIIHWW
LQ3')6DYHLWWR\RXUGHVNWRSUHDGLWRQ\RXU
WDEOHWRUHPDLOWR\RXUFROOHDJXHV
Email Address
GET THE PDF

Like this article? Sign up for our free newsletter to get articles delivered
to your inbox
Tags:

Competitive Advantage

long-term profitability

Google

Khrom Capital

short-term profitability

stock prices

u.s economy

Written by VW Staff
ValueWalk.com was launched in January 2010 as a financial news
website with a focus on value investing and value investors.
ValueWalk has grown into a news site with a team of greporters
covering all breaking financial news with an emphasis on value
investing, hedge funds, large asset managers, tech news and
business news. The site also offers numerous archives of famous
investors, and a wide variety of investor resource pages. ValueWalk
is well-known in the value investing community for both its
evergreen and new content, and is gaining a reputation for breaking
stories on hedge funds and investigative reports on investments by
major funds.

"Steroid Alternative" Putting Australian Gyms Out Of Business

A Seduction Technique Women Can't Resist
58-Year-Old Outsmarts Skin Care Doctors
Probiotics Effect More Than Just Digestion
Breaking News: How To Back Up Your Computer In Seconds
Probiotic Supplement Melts Fat Like Butter

KWWSZZZYDOXHZDONFRPNKURPFDSLWDOUHWXUQV

1 Simple Way To Make $7,650 A Month Online





.KURP&DSLWDO:LWK$QRWKHU.LOOHU<HDU8S<7'

1 Simple Way To Make $7,650 A Month Online

Clever Trick Used To Remove Wrinkles Without Surgery
$GVE\$GEODGH

0RUHRIIHUVDQGDUWLFOHV

,Q$XVWUDOLDSHRSOH
IRXQGDQHDV\ZD\
WRPDNH.D
PRQWK\RXZLOOEH
VKRFNHG:$7&+
12:

6NLQQ\
3LOO7DNHV
&KHFN+RZ3HRSOH
$XVWUDOLD%\6WRUP *HW5,&+LQ
$XVWUDOLD,W
V6R
6LPSOH:DWFK7KLV
9LGHR12:

<HDU2OG:RPDQ 7KLV,V+RZ,7XUQ
)LQGV1DWXUDO
LQWR
6ROXWLRQ7R/RRN 1RZ,&DQ%X\
$Q\WKLQJ,ZDQW

&RPPHQWV
5HFRPPHQG

'LVFRYHU7KH:D\
0LOOLRQDLUHV$UH
0DGHLQ&KLQD0DNH
SHUGD\&OLFN
7R6HH+RZ

9DOXH:DON

6KDUH

SHWHUEDWVDNLV
6RUWE\1HZHVW

6WDUWWKHGLVFXVVLRQ

%HWKHILUVWWRFRPPHQW

6XEVFULEH

$GG'LVTXVWR\RXUVLWH

3ULYDF\

Copyright 2015 ValueWalk - Privacy Policy

KWWSZZZYDOXHZDONFRPNKURPFDSLWDOUHWXUQV

Developed by ValueWalk Team