Circle of Competence Issue #99

QUOTE OF THE WEEK

“Lyndon Johnson said giving a talk on economics is a lot like pissing down your leg - it feels hot to you but doesn’t influence anyone around you at all.” - Charlie Munger at The Daily Journal 2020 Shareholder Meeting

FOOD FOR THOUGHT

Texas Pacific Land Trust

Texas Pacific Land Trust is a land trust company which was formed in the late 1800's after the bankruptcy of its parent company, a former railroad firm. It currently owns roughly 900,000 acres of land in West Texas and as the practice of hydraulic fracking has increased the amount of reserves that are salvageable, the acreage owned by TPL has become increasingly more profitable based on the royalties they receive from the oil and gas that is drilled under their land.

Essentially, it serves as a tollgate for oil and gas operators to access subsurface hydrocarbons. This is one of the oldest business models known to man.

After reading through the 10K's this week, it became clear that TPL is a wonderful illustration of how a company with high returns on capital can massively compound that capital given a long enough period of time.

A few facts on TPL (see financial spreadsheet below):

- Earnings per share grew by 28% over the last 20 years.

- They bought back an average of 2.6% of the share base annually, and a whopping 40% of shares outstanding in total over the past 20 years.

- Their stock enjoyed over 23% annualized returns over the past 25 years. To put that in perspective, if you would have invested $1,000 per year ($25,000 total) into TPL, it would be worth roughly $880,000 not including dividends. Incredible. This is the power of long-term compounding.

- They performed this well with very little to no debt.

- The most amazing stat of TPL? As of 2019, they had paid a cash dividend for 62 years straight. And they've grown it by 13% annually over the past 20 years.

It's a super boring business, but it gushes cash, manages its books conservatively, is a capital light business (average ROE of 75% over the past 18 years), and is selling at roughly 18x trailing free cash flow.

This is the textbook example of a boring business that cranks returns year after year after year. Just the way I like it.

10K's:

2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019

Selected Financials (Link to GoogleSheets)

This also gives me another chance to highlight the slowly-accumulating-but-fun-side-project that is the Business Vault. I plan on beefing this digital library up over time as I get a chance to upload material. Also, as I find more companies like TPL and have the time, I'll be putting company case studies together in addition to the body of material I've already gathered on the world's greatest investors, operators, and entrepreneurs. If you have suggestions for what should be included and isn't, feel free to shoot me a note!

(Disclosure: long TPL. Disclaimer: do your own research, this is not a recommendation nor investment advice)

LINKS

Investing

Charlie Munger speaks at The Daily Journal AM (Daily Journal)

Brookfield: inside the secretive $500B investment firm (Financial Times)

Preparing for the next recession with Mark Spitznagel (Vanity Fair)

What does 'Bullet-Proof' investing mean to me? (Sanjay Bakshi)

Crisis investing: how to maximize returns during market panics (Verdad Capital)

Why we're in one of the biggest financial bubbles in history (Real Vision Finance)

The case against REIT's (Alpha Architect)

Technology

'Miracle' cancer treatments could be a blessing for investors too (Fortune)

Intangible assets are a critical part of company value (Visual Capitalist)

Geopolitics

The world according to Peter Thiel (Hoover Institute)

The economist as scapegoat (Russ Roberts)

The economic geography of a universal basic income (Interfluidity)