NOAH
JACOBS

TABLE OF CONTENTS
2023.07.08-Letter-III
2023.01.08-Letter-II
2022.07.30-Letter-I

INVESTING

"The most critical asset I manage everyday is my time"

- Anon hedge fund manager

If you consider allocating time as investing, then I have been investing since I was very young.

More literally, I started options trading by 16 and was managing a hedge fund by 21. I did this from April 2022 to December 2023. The project was the cumulation of a number of efforts:

Age 16-17: Began swing trading a couple shares of Tesla. | Started playing around with options. | Lost money in penny stocks.

Age 18: Started an options trading club, Theta Capital, at the University of Michigan's Ross School of Business, not to be confused with the Dutch fund of funds. | Trading evolved to focus more on longing volatility with crude delta hedging.

Age 19: Decided I was to start a hedge fund; I liked selling vol at that point, so that would be core to the strategy. | With Noah Cox, my business partner in the endeavor, we started the first of two "test funds" for the impending actual hedge fund. | Independently studied for and passed the Series 65 exam, although I never registered as an investment advisor. | Joined EVO Trading Club, a trading Discord, where I shared strategies and stock analysis.

Age 20: Published what I believe to have been the "first" book on the GameStop short squeeze; if I recall correctly, it hit top 20 in "Derivative Investments" on Amazon's Kindle Store, a feat that required only something like 5 purchases. I still get $.20 from the book every 6 months. | Cox and I started an investing newsletter to share our thoughts and build interest in our fund. | Started a second test fund for the hedge fund. | Evo was disbanded.

Age 21: Started and managed hedge fund, Noahs' Arc. | Began building and managing the building of software tools for investing.

Age 22: Left hedge fund. | Continued building the software tools. See Hacking for more.

Age 23: Aggressively investing in my skill sets and whatever business endeavor I am working on.

By clicking on the left column, you can view the three semi annual letters sent to investors during my tenure at Noahs' Arc, the fund.

Last updated 2024.06.08

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Partners’ Letter II

Issued 8th of January, 2023

Concerning performance from July 2022 to December 2022

Introduction

We are pleased to share that since our Letter, our lead on the S&P 500 has grown quite considerably, from a spread of [REDACTED] to a spread of [REDACTED], in our favor. However, as always, past performance will not necessarily equal future results. While it is the goal of our fund to, in the long term, strongly outpace the growth our investors would have enjoyed by simply investing in the S&P 500 or a similar index, we make no claim that we will beat the index every month, or even every year for that matter. It is through smoothing out the downside that we seek to compound at a superior rate. 

Most of this letter will focus on one of our investments as a case study: Waste Management (NYSE: WM).  Before that, however, we’re going to rehash an idea we shared in our recent quarterly newsletter : the value of smoothing out the worst days. 

Executive Summary

Smoothing the Downside: Through selling options out of the money, we’ve been able to outperform on the downside, which is more valuable to us than outperforming on the upside.

Taking Out the Trash: One of our strongest conviction holdings, Waste Management, runs a boring yet robust business that is strengthening its ability to participate in green energy trends.

Smoothing the Downside

If Noahs’ Arc will succeed at delivering superior returns compared to the broad market over the long term, one large piece to the puzzle will be smoothing out the downside.

A study shared in our public, quarterly letter discussed the comparative advantage of missing out on the 10 worst market days over a 21 year period (1999 to 2019) versus missing out on the 10 best days. While missing the 10 best days halves an investor's returns, missing the 10 worst days doubles those returns. 

Again, we make no guarantee that we will completely avoid market downturns. As is clear by our returns, we have participated in drawdowns. In our view, though, it’s more important that we dampen the downside than partake in the entirety of the upside. We are proud that we're doing just that, even if it's with varying degrees of success over the past 9 months. 

We are still actively working to improve our various hedging protocols and have launched our subsidiary, Ultima Insights, to help with this feat. Click here to learn more about that. 

Taking Out the Trash

The garbage disposal business may not be the first thing that comes to mind when you think of utility companies; it certainly wasn’t for us when we started exploring the space back in June. Perhaps that’s why Waste Management (NYSE: WM) got our attention when we were looking through some utility indexes. Regardless, there are a million and one reasons why it is such a compelling investment for us.

Waste Management derives revenue from collecting garbage, charging for the use of its landfills and transfer stations, as well as from the sale of recyclables. A good chunk of the growth over the last ten years has been fueled by acquisitions made by WM and its subsidiaries (over 35 of which have been completed since 2010).

The company admittedly keeps a proportionately smaller cash position than we’re used to (less than 1% of total assets, vs 10% for a company like Steel Dynamics); however, its short term debt is more than covered by cash flow. 

Speaking of cash flow, the business hasn’t had a year of negative free cash flow this century. As far as deployment of that cash goes, the company has consistently used it to repurchase more capital stock than it has issued for every year except 2012 over the last two decades and has bought back over $4.2 billion in stock over the last 5 years (equivalent to about 10% of the float over that timeframe). For this reason, dilution is not a principal concern. Keep in mind that this tendency to repurchase shares is occuring in tandem with the company’s healthy rate of acquisitions. 

With all of the basic boxes checked, the business more than makes sense from a purely financial perspective. That’s just the beginning, though.

The cash flows are robust - while WM does have to contend with federal regulation, there is not a single customer that can make or break the business. In the waste management industry, businesses contract with individuals, municipalities, subdivisions, and, when you consider the landfill and transfer station businesses, other waste management companies. Many things have to go wrong to truly destabilize the business’s revenue streams.

Additionally, WM has the freedom to raise its collections fees both via fuel surcharges and simply to match the pace of inflation, which protects it from two forces (fuel prices & inflation) that could otherwise derail the business. The really exciting stuff, however, is what WM does with its trash. 

Recyclables are commoditized goods that WM is able to sell - the more it invests in increasing recyclable yield, the more income it gets from selling those recyclables. Until 2026, the company is throwing $800M total at improving the automation of its recycling sorting infrastructure… you know how we love to see technology advances in the least suspecting of places!

We cannot emphasize this enough: the company is reinvesting in its ability to get compensated for collecting goods that it can sell. In 2021, the company had $1.6B in revenue from its recyclables segment. This was a $500M + increase from 2020; this was largely derived from an increase in the price of the recycled commodities. In a way, this division represents a call options on increased recycling commodity prices. Imagine if someone was offering you $100 an hour to go and pick up flakes of gold that you were permitted to keep!

The most exciting  part of this whole operation is not plastics recycling, but the Renewable Natural Gas ( RNG ) capture technology that WM has begun implementing at its landfills. The company is turning the methane released from its landfills into fuel… it’s gone as far as to transition 50% of its collection fleet to run on natural gas. As of now, 57% of this fleet is fueled by WM’s RNG. By 2025, the company hopes to have 70% of its collection fleet composed of natural gas fueled vehicles… 100% of this fuel could come from WM’s very own landfills.

It gets better: WM turns around and sells the carbon credits that it earns for producing their RNG.

Some quick math: in 2021, WM produced about 3.2M mmbtu of RNG. An mmbtu represents a million British Thermal Units; to put that into perspective, one gallon of diesel is around 137,000 British Thermal Units. Therefore, WM’s production translates to approximately the equivalent of 23M gallons of diesel fuel. 

The Renewable Fuel Standard (RFS) is a market where companies like WM can sell credits to Oil Refineries and the like. One RIN credit, as they are called, is issued for every gallon of diesel saved. While the market is not super transparent, we estimate that a reasonable going price of an RIN credit is $1.25. So, in 2021, WM netted nearly $30M in income from these credits. Remember, this is incredibly high margin revenue. 

By 2026, the company hopes to produce 24M mmbtu. At $1.25 a credit, that’s around $218M in value. On a company that had around $2.7B EBIT in 2021, that could translate into quite a nice boost. With a conservative P/E Ratio of 20 and the rough conversion of $218M from credit sales into $200M in net income, this translates into a potential $4.3B or +6.5% increase in market cap, without considering literally any other increases in profit, increase in the value of RIN credits, or the reduction in OpEx derived from lower fuel costs. Vertically integrating fuel also reduces volatility and desrisks in relation to fuel costs.

We hope we didn’t bore you with all this talk of garbage… This is the kind of forward thinking company that puts smiles on our faces. Gold hiding in literal heaps of trash.

Closing Remarks

While the first three months of this venture felt like a lifetime, the next six seem to have gone by a bit quicker. The world keeps happening, despite our best efforts at freezing our favorite moments in time. We’d like to think that we’re starting to figure one or two more things out than we had a grasp on when we began Noahs’ Arc, but that’s hard to believe when we learn as much as we do each day.

The day we stop learning, however, will be much more scary than realizing how much we don’t know each and every day.

We thank you infinitely for joining us as partners on this journey.

Cheers,

Noah & Noah