Below is the Q3 2021 quarterly letter for the ENSEMBLE FUND (ENSBX). You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!

3Q21 1 Year 3 Year 5 Year Since
Ensemble Fund 3.52% 35.05% 20.91% 20.14% 17.91%
S&P 500 0.58% 30.00% 15.99% 16.90% 15.10%

*Inception Date: November 2, 2015

Performance data represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end are available on our website at

Fund Fees: No loads; 1% gross expense ratio.

On March 20, 2020, the day before the bottom tick of the COVID driven market crash, Ensemble Capital, advisor to the Fund, held a public conference call in which we discussed how it was the tying together of the global economy that had given rise to so much global prosperity and such a massive decline in global poverty. But it was this same interconnectivity that the COVID virus was now using to encircle the globe. You can find a transcript of that conference call here. Today, we want to revisit this theme to discuss why we see so much new value being created in the years ahead, value that our portfolio of companies are helping to develop.

The past few months have made it clear that one of the greatest challenges the world has seen in modern times, a once in a century global pandemic, continues to be very challenging to resolve as new Coronavirus variant waves have continued to spread. It continues to cause great tragedy in the lives lost, numbering over 4.5 million globally and over 700,000 in the US alone and continues to disrupt people’s lives and behaviors the world over.

As with many tragic experiences in life, it is also demonstrating the power of humanity’s ability to rise to great challenges with creativity, ingenuity, and cooperation, both in developing new inventions to solve problems and in our ability to coordinate large groups of people and resources to deal with them. Never before have we been able to design, test, manufacture, and distribute billions of doses of new drugs around the world, all in the span of a year.

In fact, over 6 billion doses of vaccines have been administered globally to nearly 40% of the world population, an amazing feat of modern science and logistics. However, much work remains to be done in vaccinating a substantial proportion of the remaining 60%, without which they and we all remain threatened with the ongoing pandemic that threatens us with new variants selected to try skirting our increasing collective immune defenses.

Fortunately, vaccines have worked remarkably well in preventing severe disease and deaths despite the mutating virus, providing hope for a future where COVID is no longer a widespread health threat. Among populations with the majority of individuals vaccinated, we’ve seen the economic activity of people substantially remain steady despite the new variant driven surges as people have learned to adapt their behaviors in the face of a second year of the pandemic. This is part of the resilience of people and societies we’ve come to observe.

It’s not that humanity has not faced such challenges before. In fact, the effects of deadly infection had been the historical norm prior to modern medicine’s discovery of vaccination and antibiotics as well as innovations that disinfected water and managed sewage. It’s the reason child mortality approached nearly 50% historically regardless of one’s status in life, be it emperor or servant, but has plummeted over the decades.

“Nathan Rothschild was surely the richest man in the world when he died in 1836. But the cause of his death was an infection—a condition that can now be treated with antibiotics sold for less than a couple of cents. Today, only the very poorest people in the world would die in the way that the richest man of the 19th century died.” -Max Roser, Our World in Data

But we have been so privileged to live during a time that benefitted from the invention of modern medicines and public infrastructure that have kept the most pernicious infections at bay for a large majority of the developed world population and growing segments of the developing world.

Modern day social and technological structures are also what allowed billions of people around the world to take shelter at home for weeks while also being able to work and provide for their families. They were able to utilize technological infrastructure that had been built over only the past two decades. The government and monetary responses are also a form of innovation that was able to respond and effectuate actions at a speed and scale that allowed millions of people and businesses to bridge through the Shelter in Place orders without the economic devastation they would have otherwise experienced, compounding the public health tragedy.




Investors should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus at or by calling the transfer agent at 1-800-785-8165. The prospectus should be read carefully before investing.

Important Risk Information

An investment in the Fund is subject to investment risks, including the possible loss of the principal amount invested. There can be no assurance that the Fund will be successful in meeting its objectives. The Fund invests in common stocks which subjects investors to market risk. The Fund invests in small and mid-cap companies, which involve additional risks such as limited liquidity and greater volatility. The Fund invests in undervalued securities. Undervalued securities are, by definition, out of favor with investors, and there is no way to predict when, if ever, the securities may return to favor. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. More information about these risks and other risks can be found in the Fund’s prospectus. The Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.

Distributed by Rafferty Capital Markets, LLC Garden City, NY 11530.

During our third quarter 2021 portfolio update webinar, Ensemble Capital’s Chief Investment Officer Sean Stannard-Stockton and senior investment analysts Arif Karim and Todd Wenning discussed the current market and economic situation. They also discussed two of our holdings, Booking (BKNG) and Landstar (LSTR) at depth, and answered live Q&A at the end of the meeting.

Below is a replay of the full webinar as well as a link to Ensemble Capital’s quarterly letter.

(If you’re viewing this by email, click here to watch the video.)

While our quarterly webinar is an unscripted, more casual discussion, we also produce a quarterly letter that covers the same topics but in written form and with more detail. You can find a copy of our third quarter letter HERE.

(This is Part V of a five-part series. Part I. Part II. Part III. Part IV.)

“We should not try to design a perfect world. We should make better feedback loops.” -Tim Hartford

At Ensemble Capital we are not in the business of trying to forecast the growth of the average company. We are in the business of trying to identify special, unique companies that we believe are unusually well positioned to outperform the average company. While we may be wrong in our analysis from time to time, it would be an abdication of our duty to make reasonable forecasts when making investments if we were to identify highly unique companies and then simply assume they would grow like an average company plucked from any particular industry during time periods stretching back decades.

For many of our portfolio holdings, our integrated analysis of inside and outside view perspectives leads us to make growth forecasts that are not particularly high. Some of the businesses we invest in only grow at about the rate of GDP. Although we try to avoid investing in truly slow-growth businesses, or those that may see their growth rate decline below the rate of GDP, as we discussed in our extended series on The Risk of Low Growth Stocks.

In fact, we do not view ourselves as “growth investors.” Our investment process centers around identifying highly competitively advantaged businesses, not those that have high growth rates. While we certainly own stocks that third party evaluators deem “growth stocks,” these same evaluators only categorize about half of our current portfolio in this way.

But there is a group of companies in our portfolio where our outlook is for an extended period of super normal growth. We don’t make such forecasts lightly. But these companies share a set of circumstances which are relatively rare. Building a reference class of these companies, which we believe must be selected based on subjective, qualitative assessments, would be extremely challenging. This is particularly true on a retroactive basis where it would be impossible to make subjective, qualitative assessments of companies where you already know the outcome. But we are not arguing that these companies are immune from base rates, rather we are saying that we believe the base rate of growth of these companies is materially higher than the base rate of growth for the average company.

We think of these companies as category killers that benefit from positive feedback loops in rapidly growing markets.

Three of the main reasons that growth tends to slow over time is because:

  • Most markets have robust competitors who compete for current growth opportunities.
  • High growth markets draw in new competition, reducing future growth opportunities.
  • The available market becomes saturated, limiting growth opportunities for all competitors.

But category killers that benefit from positive feedback loops in rapidly growing markets are insulated (although not immune) from these pressures. Instead, these companies:

  • Dominant their current market and face only limited competitive pressures.
  • Operate in markets with high barriers to entry and/or scale (i.e. Industries that are hard for competitors to enter at all or feature significant barriers to generating material initial growth).
  • Participate in industries in which the longer-term addressable market is almost certainly much larger than the current market.
  • Feature a set of positive feedback loops that cause the company’s products or services to improve more rapidly than their current or future competitors are likely to be able to achieve.

This last feature, the positive feedback loop, is critical. Most activities in business (and life for that matter) exhibit negative feedback loops, at least over the long-term. These negative feedback loops are a chain of reactions that leads a particular activity to stabilize at some sort of equilibrium. The fact they are called “negative” feedback loops does not mean they are always bad. Indeed, negative feedback loops are important to creating stability.

One example of a negative feedback loop is the way in which the increased profits that a company earns when they raise prices leads to more interest in entering the market from potential competitors. Thus, the negative feedback loop kicked off by raising prices is the reason why free markets in which companies are able to charge any price they want tend to result in relatively low and stable prices for consumers.

Positive feedback loops, on the other hand, lead to exponential outcomes, rather than equilibrium. The fact they are called “positive” does not mean they are always good. For instance, climate change is triggered by positive feedback loops. As more greenhouse gases are released, the atmosphere warms. Warmer air holds more water vapor and water vapor traps heats. This causes the atmosphere to warm further, which causes air to hold more water vapor.

Here is a useful illustration of the difference between a positive and negative feedback loop.

(Source: J. de Rosnay, Principia Cybernetica Web)

One example in our portfolio of a category killer that benefits from positive feedback loops is Intuitive.

Intuitive is the leading provider of robotic surgery systems. You can see our full presentation on the company here. From our report:

“One of the most intriguing things we discovered in our research on Intuitive was the relationship it has built with surgeons in the field and their influence on how Intuitive invests in development of new da Vinci systems, capabilities and tools.

The adoption of da Vinci has been on a procedure-by-procedure basis. Intuitive works on incorporating new technologies and learnings from the field that it believes will enhance the safety, utility, and value of the system. As new capabilities are introduced, intrepid, early adopter surgeons will try them in their practices in new procedure categories. When they find a fit, they share feedback with Intuitive and push it to develop the category appropriate tools to widen the system’s use for it.”

(Source: Intuitive)

The company’s robotic systems now incorporate learnings from over 9 million cumulative procedures with nearly 2 million more and growing rapidly per year expected as we arrive on the other side of COVID. Now the company is doubling down on cultivating the positive feedback loops that characterize their business model. For example, they are rolling out My Intuitive, an app that will allow surgeons to review their own procedure data, compare their performance to the large group of fellow surgeons using the same system for the same procedures, and identify ways to improve.

Intuitive’s robotic surgery systems and the surgeons that use them are part of a positive feedback loop. More surgeons, running more procedures, leads to better outcomes, which attracts more hospitals to buy more systems, which drives more surgeons to run more procedures.

Or in the words of Intuitive CEO Gary Guthart:

“We know that surgeons are absolutely high-performance human beings. They are like elite athletes. I think the My[…]

(This is Part IV of a five-part series. Part I. Part II. Part III. Part V.)

“Not all those who wander are lost.” -J.R.R. Tolkien.

When thinking about base rates, it is important to consider why they are what they are. For instance, the average long term 5%-6% growth rates seen in the base rate data shared in Parts II and III was made up of about 2%-3% unit growth and 2%-3% inflation. So, what happens if you are forecasting a company that you believe has the potential to raise prices really significantly over time?

We faced just this issue when we invested in Netflix in 2016. As we described in this post, we believe that Netflix is selling their service for far less than their customers are actually willing to pay. Our forward growth rate forecast for Netflix implies that they will materially outgrow most relevant base rates. However, if you were to decompose our growth forecast into the number of subscribers and the price paid per subscriber, you would find that our subscriber growth rate is not so different than a base rate analysis might imply. Rather it is our forecasted price increases that drive our super normal growth outlook.

(Click on the chart to enlarge)

Netflix’s business can be simplistically thought of as being made up of a mature US business and a still rapidly growing international business. Coming into COVID, US subscriber counts, which had been growing at quite high rates in years past, had seen growth slow into the mid-single digits, consistent with what a base rate analysis might suggest about a highly scaled media company’s growth opportunity. As the COVID impact fades, we expect US subscriber growth to continue at a low single digit rate, consistent with the 2%-3% base rate unit growth we noted above. So, there is nothing heroic about this part of our growth assumption.

Internationally, Netflix was seeing explosively high subscriber growth running at 50% or above five years ago. Consistent with what a base rate analysis of intangible based businesses might suggest, subscriber growth had slowed to about 30% by the end of 2019. As the COVID impact fades and we look into the future, we believe that there remains an unusually large opportunity ahead for Netflix. Yet we’re also aware that companies of this scale, very rarely are able to maintain highly elevated growth rates for long periods of time. We expect that international subscriber growth will slow into the mid-teens and continue to fade over time. Our inside view analysis of their subscriber growth opportunity supports our belief that the level and duration of Netflix’s international subscriber growth rate will likely continue to perform at the higher end of an appropriate reference class base rate distribution. But the base rate moderates our inside view-only analysis.

Remember, base rates don’t tell you what will happen. They tell you what has happened on average in the past. It is then incumbent on you to also take into account information related to your specific forecast.

Going back to our example in Part II of forecasting whether it will rain tomorrow in Seattle and Las Vegas, no matter how high the frequency of rain in Seattle is compared to Las Vegas, if it has been raining for a week straight in Las Vegas with no sign of a change in the weather, it would be naïve to think the probability of rain tomorrow was best estimated using the low long-term base rate.

But subscriber growth is only part of the total growth equation for Netflix. When forecasting their revenue, you also need to consider the price they charge their subscribers. For many companies, investors should assume that prices will rise more or less in line with inflation. Typically, if a company raises prices much faster, they will lose customers to its competitors.

But that is certainly not always the case and has not been the case for Netflix in the past because they have very strong pricing power. And the pricing power they have is sustainable because it comes from the way they delight their customers in an industry that is better known historically for commanding pricing power from having trapped and exploited their customers.

With Netflix, we believe the company charges a price well below what customers would be willing to pay. We believe this based on our own analysis of their value proposition, our research on what their customers say about how the value the service, and the historical record of them rising average prices in the US by approximately 9% a year, even while new subscribers flocked to the service adding 80% to their US subscriber count in the five years prior to COVID.

Notably, Netflix did not start raising prices for US subscribers until they had already built a sizeable business and proven to a large cohort of customers just how fantastic their service is. The international business serves a range of customers in developed and emerging markets with a wide dispersion in the amount of highly relevant content in different geographies. But overall, we expect Netflix to run the same playbook, where they scoop up tons of new subscribers at a very low price, use the newly generated revenue to invest heavily in outstanding new content, prove to their subscribers just how fantastic their service is, and then raise the price of the service over time to a level that better reflects the value they provide, even while they leave a huge amount of consumer surplus on the table for their subscribers.

Once you add together our base rate driven subscriber growth with the company’s relatively unique proven ability and ongoing opportunity to raise prices at an unusually high rate, you get a total revenue growth rate that is well above what most blunt base rate references classes might suggest.

Our forecast is not simply that Netflix will grow faster than most companies could be expected to grow. Rather it is that Netflix’s growth in subscribers will be constrained by the same forces that most large, growing, intangible asset-based companies face, but that the company has a relatively unique opportunity to dramatically raise prices without losing customers and, thus, report base rate breaking revenue growth for years to come.

This process does not in any way ignore base rates or suggest that Netflix is somehow immune from the forces that conspire to slow down corporate growth over time. Rather the combination of our inside view analysis of Netflix, and our outside view analysis of corporate growth rates, has been combined in such a way that results in a forecast that is at the high end of the historical experience of similar companies.

Of course, this does not guarantee our growth forecasts are correct. It may be that we should be tying ourselves more tightly to the mast and we run the risk of being lured by the siren song of growth. But the[…]

(This is Part III of a five-part series. Part I. Part II. Part IV. Part V.)

“My interest is in the future because I am going to spend the rest of my life there.” -C.F. Kettering

In Part II, we shared an analysis of the base rate of corporate revenue growth. On its face, the analysis seems to offer investors a simple, straightforward, rules-based forecasting method. If only forecasting was so easy!

There is a major problem with using the McKinsey reference class data when making growth forecasts. It includes data on all public companies and goes back to 1963. While this wide breadth of data helps reassure us that the reference class is complete, it also means it is a very blunt tool.

For instance, a lot has changed since 1963. In this chart, you can see that technology adoption rates have persistently sped up over time.

(Source: Market Realist)

If you are examining a new technology company and thinking about its future growth rate, taking into account how long it took for television to be adopted or the speed of growth of home computers might not be so relevant at a time when a company like Zoom can go from a relatively obscure corporate video conferencing service to a service used by people all over the globe every day in less than two years.

The nature of the US economy has changed over the last 60 years as well. In the chart below you can see that during this period, the source of growth of the US economy has pivoted sharply. Rather than a majority of corporate growth investments being made in tangible assets, such as machinery, equipment, and factories, most growth investments today are made in intangible assets such as research and development, branding, and training of a company’s human capital.

(Source: The Economist)

It is easy to understand why a software company can grow more quickly, for longer, than a car company. If demand for a piece of software increases, more copies of the software can be downloaded or accessed in a Software as a Service model with little to no effort by the company. But if demand for cars increases, a car company needs to build more factories and buy more equipment. This takes time, is difficult, and requires the reinvestment of massive amounts of capital.

This shift in the economy is so large and so important that it triggered Warren Buffett to declare in 2017 that he had embraced a new phase of his ever-evolving investment philosophy.

From our post at the time:

“Buffett has pointed to something new. Something so important that even though it was reported on in real time, he thinks people didn’t appreciate enough the importance of his comments.

“I believe that probably the five largest American companies by market cap…they have a market value of over two-and-a-half trillion dollars…and if you take those five companies, essentially you could run them with no equity capital at all. None.” -Warren Buffett, 2017 Annual Meeting.

Buffett went on to call these “ideal businesses,” the same phrase he used in the past to refer to companies that reinvested massive amounts of capital at high returns.

Then, the next day in a CNBC interview with Becky Quick, Buffett referenced these comments again saying “I did mention one thing at the meeting, which I don’t think people appreciated at all… So, you have close to 10% of the market value perhaps of the United States in five extremely good businesses that essentially take no capital. Now that was not the case in the past.”

The “five extremely good businesses” that Buffett was talking about are Apple, Microsoft, Amazon, Google, and Facebook (Buffett is quick to remind the interviewer to include Facebook in the list when she leaves it out initially). Then, when Quick asks him “Would you like Berkshire’s businesses to be more reflective of that sort of new paradigm?” Buffett says “I’d love it.”

Apple, Microsoft, Amazon, Google and Facebook. That’s Warren Buffett’s idea of what he’d like to see Berkshire Hathaway’s portfolio look like going forward. These are the new “ideal” businesses in his view.”

Buffett’s comments, and his redefinition of his phrase “ideal businesses” from those who have an opportunity to reinvest large amounts of capital in tangible assets, to those that can grow with little to no investment in tangible assets, were a recognition of just how much the US economy has changed.

In a recent paper, Michael Mauboussin, whose previous paper The Base Rate Book is one of the most valuable sources of data on this subject for investors, sought to break out the base rates of growth for tangible vs intangible based businesses. Drawing on the work of another research paper which sought to sort public companies by their tangible vs intangible asset intensity, Mauboussin wrote:

“In a recent paper, three finance professors built a model to infer the value of intangible assets… They found that the order of ranking from highest to lowest by industry was healthcare, technology, consumer, and manufacturing. They also placed about one-third of the companies into an “other” category because they didn’t fit neatly into one of the industries.

We calculated the median sales growth rate for companies in each of those categories using the constituents of the Russell 3000 from 1984-2020. We also examined the standard deviation, a measure of the dispersion, of the distributions. Exhibit 1 shows the results for the full sample.

The sales growth rates, measured either as the median or average, consistently go from highest for companies that are most intangible-asset intensive to lowest for those that are least intensive. While the short-term numbers are noisy, the relationship holds true over 1-, 3-, 5-, and 10-year periods.”

(Source: Counterpoint Global)

As you can see in the chart, intangible asset-based businesses have grown materially faster than tangible asset-based businesses. It may be a heroic assumption to think that a manufacturing business needing to build and buy factories and equipment can grow at nearly 10% continuously for a decade. But this same outlook would be just an average outlook for a health care company built on intellectual property with little need for acquiring large amounts of tangible assets to fuel their growth.

At first review, it may seem that the reference class in this base rate data is more precise and modern and, thus, more useful than the blunt base rate data from McKinsey. The McKinsey data goes back to 1963[…]