Below is the Q1 2021 quarterly letter for the ENSEMBLE FUND (ENSBX). You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!


As of March 31, 2021

1Q21 1 Year 3 Year 5 Year Since
Ensemble Fund 3.80% 66.99% 21.14% 20.28% 17.49%
S&P 500 6.17% 56.35% 16.78% 16.29% 14.73%

*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.

It has now been a full year since global markets were shaken by COVID. If someone fell into a deep sleep on February 19, 2020 and woke up on March 31, 2021, they’d see the S&P 500 was up 19.72% since they last checked their portfolio. By historical standards, a great return in just over thirteen months! “Not much must have happened,” they’d think, “Oh well, back to bed.”

For the rest of us, we know the last year was anything but sleepy. Beyond the direct impacts of COVID, which we’ve covered in previous letters, the pandemic accelerated secular trends such as video gaming, remote working, and e-commerce.

As we begin lapping those impacts, the market is wrestling with what comes next for companies that prospered or struggled during COVID. The Goldman Sachs “reopen basket,” which consists of 35 US-listed stocks that Goldman believes stand to benefit the most in a reopening scenario, was up 22.0% this quarter. In contrast, the Goldman Sachs “US Stay at Home Basket” of stocks was down 2.4%. Last year, the “reopen basket” was down 51.9% while the “stay at home basket” was up 0.4%. What a difference a year makes.

We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Netflix (8.7% weight in the Fund) and Masimo (6.2% weight in the Fund) were up 16.1% and 12.1%, respectively, in the first quarter of 2020 when the market was down 19.5% as they were beneficiaries of the “shelter-in-place” era. More people stuck at home meant more time watching Netflix content. Masimo’s leading position in medical-grade pulse oximetry led to a surge in hospital demand for its products to provide solutions for COVID treatments. This quarter, as economies began to reopen, however, Netflix and Masimo were down 5.1% and 15.7% respectively, while the S&P 500 was up 6.4%.

Another example was the market’s reaction to Costco Wholesale (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.

Analysts also complained about Costco raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.

These examples show how the market can obsess over what’s at its feet rather than thinking about what’s on the horizon (which, by the way, is where most of a company’s intrinsic value is determined). To be sure, the long-term is made up of a bunch of short terms, but no company has a smooth trajectory up and to the right. That’s why it’s critical for us to build conviction in high quality businesses that add value for their stakeholders in good times and bad times. We firmly believe that Netflix, Masimo, and Costco are all stronger companies today than they were last February.

One of our best performing holdings in the first quarter, Charles Schwab & Co, offers a good example of this dynamic. The stock had underperformed the S&P 500 in recent years, as declining interest rates and the elimination of trading commissions dented profitability. As we wrote in October 2019, though, its decision to proactively “kill commissions” only fed its “flywheel of scale” and took its major competitors by surprise. Its immense scale allows Schwab to spread out expenses much wider than its competitors and its low-cost profile attracts investor assets to its platform. Its scale also provides Schwab an opportunity to launch new products and services for its large client base and gain immediate traction, while it may take an upstart years to scratch the surface.


As the world of investing has become more quantitative, with alpha, beta and various “factor exposures” being sliced and diced and repackaged in various ways, it is easy to lose track of the fact that businesses are just collections of people working together as a tribe.

These tribes are formed in pursuit of some mission that revolves around creating value for customers, who themselves are just collections of people. And while the company tribe seeks to create value for various customer tribes, they are operating within an ecosystem of cooperating and competing tribes with the actions of every tribe within the ecosystem interacting with each other.

(Source: Harvard Business Review)

When you recognize that investing in stocks is about financing various parts of a living ecosystem, it becomes obvious that many of the mental models that investors should draw on to inform their decision making come from fields such as sociology, evolutionary biology, anthropology, and social psychology. Yet somehow, the investment field in recent decades seems to have drawn more from models found in the hard sciences. As if there was some sort of underlying “laws of investing” – a “magic formula” – that explains the ways that stock prices move as if they were physical objects subject to the sort of immutable laws that govern chemistry, math, and physics.

While written nearly 20 years ago, one of the best investment books to draw lessons from the so called “soft sciences” is Investing: The Last Liberal Art, by Robert Hagstrom. Hagstrom is a professional investor who has written many books about the investment strategies of Warren Buffett, but in The Last Liberal Art, he explores what Buffett’s investment partner Charlie Munger has called a “latticework of mental models” drawn from a range of disparate fields including biology, psychology, philosophy, literature, sociology and more to inform the investment process.

More recently, Katherine Collins, a professional investor and a board member of the Santa Fe Institute, a world leader in multidisciplinary research on complex adaptive systems, published The Nature of Investing: Resilient Investment Strategies Through Biomimicry. In her book, Collins argues for an approach to investing based on the lessons of the biological world that “values resiliency over rigidity and elegant simplicity over synthetic complexity.”

Ecology is the branch of biology that deals with the relations of organisms to one another and their surroundings. What is equity investing other than the study of collective organisms (humans’ superpower is our ability to assemble individuals into a collective group that acts as a single super organism) and how they relate to other organisms (other companies and customer sets) and their surroundings (the economic, social, political, and cultural systems in which business is conducted)?

It was with these sorts of mental models on my mind that I recently listened to Michael Mauboussin give an interview with the Alliance for Decision Education, a nonprofit group focused on helping students learn to be better decision makers in service of living better lives and building a better society. For those of us who have spent a lot of time in the field of decision research, the formal and advisory board of the Alliance is a remarkable who’s who in the field including Michael Mauboussin, Daniel Kahneman, Garry Kasparov, Barbara Tversky, Paul Slovic, Barbara Mellers, Phil Tetlock, and Annie Duke. If you don’t know those names, just take it from me that this is like the Mount Rushmore of decision-making researchers. We referenced the work of several of them in our series about position sizing.

Michael Mauboussin is not only a leading expert in the field of decision making and the chair of the board of the Santa Fe Institute (see Katherine Collins bio above) but is first and foremost one of the most influential voices in the practice of equity investing. Our team has read most everything he has written publicly while in his roles at Legg Mason, Credit Suisse, BlueMountain Capital, and currently as the Head of Consilient Research at Counterpoint Global, a division of Morgan Stanley. The title of “Head of Consilient Research” is an uncommon one, but since consilience is “the linking together of principles from different disciplines” you can see how relevant Mauboussin’s background is to this topic.

In his interview, Mauboussin discussed the ways in which ants forage for food and in doing so clarified for us an important element of how we think about evaluating corporate management teams.

Here’s Mauboussin:

“So now I’m going to talk about social insects. This is about ant foraging. We’ll use ants as an example. You have a nest of ants and there’s a food source. Exploitation would be when the ants go out, find the food source, and then they just focus their attention on getting as much of that food into the nest as possible. The way the ants do this is they go out randomly. But they’re laying pheromone trails as their means of communication.

Once an ant finds the food, they come back. That trail gets a little stronger. The ant comes out, senses that and so that reinforces it. As they travel the same path that becomes a very strong pheromone trail, and that’s how they figure out how to do that.

If you actually watch ants in your backyard in the summertime, they’re kind of doing crazy stuff all the time. The scientists were studying them, and they would find out that some ants would just peel off of the pheromone trails that lead to the food source. Then they got much more scientific about studying that rate of peeling off and it turns out there’s a mathematical probability.

Here’s the thing that’s absolutely beautiful. This is the thing that’s so cool. It turns out that the probability of peeling off the path is in fact[…]

Last week, Ensemble Capital’s CIO Sean Stannard-Stockton appeared on Motley Fool Live for an in depth interview with host John Rotonti. In the interview, Sean discussed:

  • Ensemble’s research process and how our team of analysts works together as a team.
  • Why we view ourselves as value investors, but avoid using the term due to the loaded nature of the phrase.
  • The way we think about the role of macroeconomic analysis in managing our portfolio.
  • The mania that is sweeping some parts of the equity market.
  • A range of our holdings including Netflix, Chipotle, Illumina, and our housing related investments.

(Click here to watch the video if you are viewing this in an email)

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

Since Warren Buffett first described the concept of an “economic moat” over 30 years ago, his students, including us, have debated the best ways to analyze a company’s durable competitive advantages.

Here’s how Buffett described the moat framework at the 1995 Berkshire Hathaway annual meeting:

“What we’re trying to do is we’re trying to find a business with a wide and long-lasting moat around it… protecting a terrific economic castle with an honest lord in charge of the castle.”

Among quality-focused investors, the emphasis tends to be on moat part of the analysis – that is, how is this company defending itself against external competition?

Moats are important. They help great businesses sustain high returns on invested capital and growth, thus producing shareholder value.

But what moats really do is buy time. They can’t fix what happens in the castle.

With a good moat, a smart management team has time to remodel the castle, maintain its lands, and modernize its defenses. But the opposite can also happen. We’ve written, for example, that moat erosion tends to start behind the castle walls, sowed by internal discord, which provides an opportunity for competitors to attack.

It’s also true that the castle itself can crumble, nullifying the moat’s protective value. (Notably, in most pictures you’ll see of abandoned castles, the moat is still intact.)

Bodiam Castle, UK

Here’s Buffett again a few lines later at the 1995 meeting, where he underlines the importance of the castle’s vitality:

“But we are trying to figure out what is keeping — why is that castle still standing? And what’s going to keep it standing or cause it not to be standing five, 10, 20 years from now. What are the key factors? And how permanent are they?”

This is what we’re after when we talk about relevance. We ask ourselves how likely is it that the company’s products and services will be at least as relevant ten years from now as they are today.

It’s a hard question to answer with confidence. A decade is a long time. Think how much has changed for companies in just the past year.

Yet it’s a critical question to examine, debate, and monitor over time because it strikes at this question about the castle’s health.

Even a moat with an able and honest lord might not be enough if it turns out the castle is situated in the wrong place.

Consider the oil & gas industry. In the first half of the 2010s, when crude oil prices were regularly around $100 a barrel, some energy services companies with apparent moats like Core Laboratories, Schlumberger, and Halliburton looked poised to flex their competitive positions and generate strong shareholder returns.

Yet this proved not to be the case. While the energy services companies’ moats might have remained intact and had able management teams, their castles depended on oil prices (blue dash line).

10-year returns. Bloomberg, as of March 12, 2021. Normalized to zero for comparison.

While it’s possible that these companies’ fortunes will reverse over the coming decade if oil prices recover, if your view is that fossil fuels (and thus their castles) are in decline, the fact that the companies have a moat should not matter. A moat without a castle is not worth owning.

Three things we look for when measuring our companies’ long-term relevance potential are a proven ability to:

  • Adapt and embrace change: When Starbucks took America by storm in the 1990s, its strategy was to become the “third place” for consumers between work and home. Early stores were filled with comfortable couches and chairs and fireplaces for customers to sit and chat. But that experience has changed. Prior to COVID, about 80% of U.S. Starbucks orders were “to go” – a number likely to increase post-COVID – and newer store formats emphasize convenience and order efficiency. The company was also an early mover in digital ordering, mobile payments, and loyalty programs.
  • Survive crises and emerge stronger: Most restaurant chains would have folded if they were caught up in a globally publicized food safety scare. Yet Chipotle survived its self-inflicted crisis in 2015 and is now stronger than ever. We think the 2015-2016 experience also prepared the company to nimbly respond to the COVID quarantine restrictions, such as waiving delivery fees, boosting worker pay, and supporting its suppliers.
  • Delight their customers: One of Costco’s core strategies has been what investor Nick Sleep calls “scale efficiencies shared.” As Costco grew and gained bargaining power with suppliers, rather than keep the savings for itself, it returned the savings to members in the form of lower prices. As such, Costco members grew to trust that when they buy a product at Costco – whether it’s a rotisserie chicken or a diamond ring – that they are getting Costco’s best price. Despite the growth in e-commerce competition, Costco membership renewal rates remain near all-time highs.

By 2031, there will be new challenges for each of these companies to address, but based on our trust in their management teams, the various tailwinds at their backs, and our understanding of their cultures, we are confident they will remain highly relevant for years to come. Their castles – and moats – are in good shape.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

In December of 1998, a newly minted Wall Street analyst named Henry Blodget stuck his neck out and declared that Amazon’s stock price was going to $400, a nearly 70% increase from the then current market price. Amazon, at that point just an online bookstore, had gone public the prior year at a price of $9 and was already trading at $240. So with the stock up nearly 2600% over 18 months, Blodget was saying it could rally to $400 for a total return since the IPO of 4300%.

At the time, Blodget was working at CIBC and a more well-known Merrill Lynch internet analyst scoffed at his prediction saying instead that Amazon would drop sharply to just $50.

A month later, as 1999 began and the Dot Com bubble went into overdrive, Amazon’s stock price screamed through $400 on its way to a high of $600. The Merrill Lynch internet analyst left the firm and Blodget was hired to take his place, quickly becoming one of the most prominent cheerleaders of the Dot Com bubble. Blodget’s Amazon call was such a big deal at that time that later that same year, Blodget declared, “I expect my obituary will read, ‘Henry Blodget, he predicted Amazon would hit $400.’”

Now this is the point in the story where things are supposed to go bad. This is when I’m supposed to tell you that Blodget was foolish to think a little online bookseller would take over the world and have its stock price go to the moon. And in fact, Amazon’s share price did collapse. After hitting a high of $600 in late 1999, the stock got absolutely annihilated, falling over 90% as the Dot Com bubble collapsed.

But in retrospect, we know that over the long-term Blodget’s price target for Amazon was too conservative, not too aggressive. If you had bought Amazon in early 1999 when it first hit $400, this is what your returns would have been through the end of 2020 vs the S&P 500.

It is true that many individual internet related companies of the Dot Com era barely even had a real business model and investors in these stocks lost everything. But the flame out of Dot Com stocks obscures the fact that the internet has proven to be a far, far bigger deal than most people thought it would be 20 years ago.

If in 1999 you had predicted that 20 years in the future nearly the entire global white collar work force would pivot on a moment’s notice to working from home on the back of a robust global internet, you would have been seen as a starry-eyed optimist even by the Henry Blodgets’ of the world. Predicting the rise of 7 billion internet connected devices with people from every walk of life carrying an internet connected supercomputer in their pocket at all times would have made even the Dot Com uber bulls blush at your optimism. But this is exactly where we find ourselves today.

So, the lesson of the Dot Com era is not that people came to have irrational beliefs about the future. In fact, investors in the late 1990s underestimated just how big of a deal the internet would prove to be. Rather the massive error that investors made was to incorrectly think that pretty much any company that was operating in internet related industries was a sure thing. Despite the internet proving to be very real, most of these stocks performed terribly with many falling into bankruptcy and never capitalizing on the internet boom.

But don’t get the impression that as long as you pick the right company that everything will work out OK. You couldn’t have been more “right” in 1999 than by picking Amazon as a long-term winner. But even picking the right company was not enough to avoid the Dot Com crash.

While the 20-year chart on Amazon’s stock price above looks like what every stock picker is trying to find, from its all-time high in late 1999 to its low in late 2001, Amazon’s share price fell 94%! It took a decade until late 2009 for Amazon to return to its 1999 high. It took until 2014 before 1999 buyers of Amazon stock had generated 10% annual returns.

Today, we face a market that in total bears no resemblance to the extreme valuations of 1999. While the overall market is trading at a higher price to earnings multiple than average using either 2019 or forecasted 2021 earnings, the S&P 500 is only about 10% more expensive than it was in 2016 and 2017.

Over the last five years the S&P 500 has appreciated by 115%, while in the five years leading up to the peak of the Dot Com bubble, the S&P 500 had appreciated by 225%, meaning the current market would have to appreciate by another 50% overnight to approximate the rate of returns that were seen in the late 1990s. The market would need to see a similar increase in prices to get up to the 30x PE multiple the S&P 500 traded at in 1999.

But there are indeed pockets of what appear to be extreme valuations. Or said more bluntly, pockets of the market where stock prices have disconnected from any rational estimate of the cash flow the companies will produce over time.

For instance, Nikola a company that claims to be making electric vehicles but does not actually have any revenue, traded to a valuation of $30 billion in June, before falling 80% since. And multiple billion-dollar valuations for exciting companies that do not yet have any revenue (not no earnings, but no revenue) is not limited to Nikola.

While fast growing software-as-a-service business models are fantastic and commanded valuations of 10 times revenue prior to the pandemic – or maybe 15 to 20 times revenue for the most promising companies[…]