New ways to source or construct information create alpha.
When Ben Graham published Security Analysis, only 1 in 3 Americans owned a landline phone; only 1 in 2 had cars. When Buffett wrote his famous partnership letters, the color TV was barely distributed, and the personal computer hadn’t been invented yet. These published strategies were brilliant for their eras, but they weren’t crafted for today’s markets.
The information landscape has shifted. Data trails can now be measured at little cost. Communities of customers, competitors, and suppliers are accessible online. New quant and passive strategies have changed how other investors buy and sell. Yet, many traditional fundamental funds have underinvested in custom software, do little primary research, and have backtested factors without adjusting for changes in capital flows. In short, if many of these so-called fundamental investment firms were publicly traded stocks, no fundamental investor would want to invest in them. A window has opened for fundamental investors who can adapt to this new information environment.
Lembas Capital was founded upon the recognition of this opportunity.
Lembas invests in companies with charisma. Products that attract customers, leaders that attract talent, and stocks that attract investors.
First and foremost, we look for products that will win market share long-term with excellent unit economics. We begin by studying why customers buy. We try the products ourselves, run extensive interviews, and create our own metrics to track engagement. Most importantly, we strive to understand how a purchase makes a customer feel and what incentives shape the ecosystem. This soft approach is critical to finding high-retention products. Surprisingly, it’s been just as useful for analyzing corporate purchase orders (people really love Excel) as for impulse buys.
Charismatic leaders are the ultimate forward-looking indicator. Their organizations attract the top talent, achieve key milestones more quickly than their competitors, and surpass their customers' expectations. They empower the people who work there, and they match their incentives with those of long-term investors. You should note, however, that real charisma is built on a real foundation. Fads and frauds make for bad business and bad investments. Understanding which is which is where our work comes in.
Whether it’s a great product with untapped potential or a refreshed approach to shed an old label, we want to find that unrecognized charisma and invest in it.
You can think of investment products as having a charisma of their own.
Contrary to popular opinion, many famous “purely fundamental” investment strategies were not purely fundamental. Risk arbitrageurs relied on retail sellers who immediately took gains after M&A announcements. Emerging market specialists often invested in private shares to step ahead of new global depository receipts and the mutual fund flows that would follow. Special situations investors bought downgraded debt and spinoffs from rules-driven sellers and then sold the same securities back to the same investors after the upgrade or return of liquidity. So much for blindly ignoring “crazy Mr. Market.”
The moral of this story is not that other traders are overly emotional or senseless. It’s that they have different incentives. They may face accounting, liquidity, regulatory, political, or financial concerns that you do not. Upon reflection, you may find that many so-called fundamental strategies were actually arbitraging other investors’ capital constraints.
But capital flows have been transformed by passive investing and software-driven trading. New investment strategies create new trading patterns and face unique constraints of their own. We would love to read Ben Graham’s updated take on algorithmic flows, factor rebalancing, and cryptocurrency analysis. Our task today is to recognize which fundamental strategies have been left stranded and where fresh paths have opened for new approaches.
We map out capital flows and investor behaviors to find repeatable buying windows and selling opportunities in this new landscape.
For our clients, we want to earn excellent returns on a rolling 3-5 year basis and to be good partners. We want to support our investors’ goals, be they funding pioneering research, doing charitable service, or safeguarding the family for the next generation.
For Lembas, we want the opportunity to do good work and to hone our craft. Ethics and quality are core to what we do. Our aim is to advance our field, to contribute where we can, and to improve societal allocation of scarce resources.
Lembas is the bread that sustains the adventurers in Tolkien’s Lord of the Rings. The bread was made by a secret recipe that the travelers could have learned, had they only the time to stop and study the process. Reading more deeply, Tolkien wrote the trilogy as a hidden Catholic allegory, and lembas translates directly to bread of life in his invented language. These are the kind of secrets we love to figure out.
We seek pure alpha, the intellectual capital derived from exploring hidden processes and questioning implicit assumptions. Our rigorous approach to product analysis and capital flow analysis is what makes us unique. There are great fundamental analysts, and there are great capital flow traders, but the people who do both well in the modern markets are few and far between.
As you can probably tell, we love investing, and we strive to be great investors over the long run.