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 III

Issued 8th of July, 2023

Concerning performance from January 2023 to June 2023

Introduction

Noah and I are not particularly pleased with our performance in the first half of 2023. We can do better. While our reluctance to invest in big tech and our ownership of banks ( RJF, SF, JEF – not SVB ) were not helpful, the theme of this letter is construction, both in the abstract and physical sense. Physical construction is fun to watch because you can actually see the progress – the growth is visual. Even if it’s not always linear, it’s there. The construction of something like a business, or two people, is rarely so obvious. It takes place over time. 

Executive Summary

Growth Through Iteration – You didn’t invest in who we are today, you invested in who we’ll be tomorrow; we highlight some points of growth over the last year or so.

Capturing the Sun – We discuss Primoris Service Corporation, a traditional Texan construction company getting paid to cover the country in solar panels. 

Growth Through Iteration

Noah & I believe that to fuel growth, all you need is repeated trial and error. 

That may seem like a strange statement coming from two people managing your money, but there is a lot of truth to it when you’re operating in a complex system that shifts as quickly as the stock market does. Even if Noah & I had a perfect strategy yesterday, we would have to keep iterating on it to stay up to speed today. The market is dynamic, and we have to be, too.  

In our view, trial and error is an acceptable engine of growth under two conditions: 

  1. You learn from each trial
  2. No one trial can knock you out of the game

In regards to point one, the important part is that each trial builds off of the last one. Each time we iterate on our strategy, it’s informed by the last instance. Over time, this enables us to sharpen existing solutions and get infinitely further than if we were starting from scratch..

One example: the entire time you’ve been invested with us, we’ve engaged in a tail hedging strategy. In the beginning, this was costing us about half a percentage of the fund a month. Now, we’ve significantly reduced the complexity AND cost of this portion of the strategy: we’re spending under 1.5% a year for what we believe is superior coverage. This should roll down to the bottom line and help improve returns. 

We’re not doing trial and error from square one. We’re doing trial and error in a way that improves upon our existing hypothesis. That’s how science, and investing, should work. There are no definitive solutions, only compounding improvements. 

The second important clarifying point is that to grow, we need to stay in the game: we are hyper vigilant against making fatal errors, the kind that destroy a portfolio. While we hate to lose money as much as the next guys, if, in exchange for a few percentage points here and there, we can learn a lesson that will earn us 10% down the line, we’re willing to take that trade, every single time. 

We have a strong cash position, we never use margin, and invest in businesses that we believe are robust, with real assets. We think these are traits that maintain a long run durable strategy. Further, we are currently deploying more of our capital in a way that has a more favorable risk to reward pay off than we were doing in the past – one of our iterations has been to reduce some of our covered call selling to better harvest the upside from stock price appreciation.

All of this is without mentioning Ultima Insights, the company we co-founded with a pair of quantitative traders who have nearly a dozen patents & pending patents in ML & AI between them. Noah and I believe that for us to grow, we need to focus on process. Coming up with profitable investments is great, but repeatedly coming up with profitable investments is a business. There’s the old adage “never bring a knife to a gunfight.” With Ultima, we’re hoping to build something better than a gun. Ultima has raised an angel round, meaning it has its own pool of capital to operate and grow. Every technical development in Ultima directly benefits you, our Partners, in Noahs’ Arc. 

In short, Noah and I haven’t “solved” financial markets. We have what we believe is a long term profitable strategy, and we are working to improve and iterate on this strategy, each and every day. 

A note on accounting: when we started this venture, we made a number of unconventional decisions, one of which was using monthly accounting. For ease of bookkeeping, we only deploy capital at the start of each accounting period; so, monthly reporting allowed us to deploy new investments every month. 

Most private funds provide investors with a statement every quarter; now, we will be following suit, employing quarterly accounting vs. monthly. This change will be implemented at the beginning of the 4th quarter this year. As we’ve discussed, we’re evolving, and this is a symptom of that. If you’re curious about position value more frequently than every 3 months, we can occasionally provide you with unaudited estimates.

Capturing the Sun

Unless otherwise cited, all information comes from earnings calls, quarterly reports, and conversations with investors relations. 

Here we go again… another old school business benefiting from a green trend, not as a gimmick, but as a boon to their existing activities.

Primoris Services Corporation (NYSE: PRIM) is a small cap, Texas based construction company. They’re largely servicing utilities and energy companies through the construction and maintenance of telecom infrastructure, power distribution, solar generation, a little natural gas, and other adjacent projects. PRIM is run by a disciplined management team that is optimizing its robust business to profit from a rising tide.

Pardon our French, but management is no bullshit. It’s not terribly common to listen to an earnings call and hear the CEO answer a question in under five words – Mr. McCormick, who has been running the company for just under half a decade, does not beat around the bush. He either answers the question, or he doesn’t…. You won’t hear any corporate smoke bombs or half answers. McCormick is focused, gearing the company up to help customers harvest the sun, enabling PRIM to, in turn, harvest part of the value created. 

This year, the team has revealed a couple of high level changes. First, PRIM consolidated its pipeline business under energy services to save overhead and managerial complexity; second, the company removed the regional divisions in its utility business. Now, management is organized across functions and deliverables, rather than by arbitrary geographical distinctions. These changes seem small, but will help cut bloat and fatten the bottom line.

Moreover, in the utilities segment, PRIM is working on increasing a type of work called MSA, or Master Service Agreements. With these projects, revenue is more reliable and margins are higher, smoothing out the general project based lumpiness of income.

Now, the exciting stuff: on the energy side, PRIM has been focused on solar projects, and they’ve been doing it better than anyone else. As of now, the solar line of business is around $1B, or about 20% of revenue. Not only do these projects tap into the strong green trend, they also are a great chance to cross sell with PRIM’s utilities business. They can put up the panels and get the electricity to its destination. In line with many of our other investments, this is how the company has a 20th century line of business that it is utilizing to ride 21st century trends. 

Management’s discipline shines through in the way that PRIM is selecting from the ample supply of solar jobs; Investor Relations told us that they don’t even consider bidding for jobs above a certain price point. If they took a $1B solar job, they understand that even 20% in overages would wipe them out. They’re disciplined, selecting smaller jobs that a company their size usually wouldn’t go for. This diversifies the client base and diversifies the risk. PRIM is wiping the floor, scoring no bid work and building up a strong book of relationships.

They’re even starting to take on small, 50mw solar jobs. While that number may not mean a lot to you, it’s a pretty significant threshold in the solar space: jobs of that size include gigs like building solar panels for shopping malls. Most importantly, jobs of this size often circumvent the need to receive permitting to complete the work. As in all fields, permitting adds another layer of complexity that can waste time and resources. 

PRIM has jobs booked out to 2025 and some work for as far 2027 being discussed. Despite this robust pipeline, the company is not over extending. As an example, investor relations told us that they have 10 teams in solar; they would be able to find work for a total of 20 teams right now, but instead of rushing, are scaling up at a responsible rate. As of now, they’re growing to 12 teams, with 16 as a further out target. Quality over quantity: it takes 2 years to train a good project manager. PRIM is willing to wait for that. 

None of this is even mentioning the future dollars that will go to solar once the Inflation Reduction Act’s guidance is fully implemented, reducing costs of solar installation through tax credits by about 30% . Additionally, there’s another $35B from the IRA earmarked for TX infrastructure, including many projects that PRIM is capable of taking on.

Of course, the company has its drawbacks, including a higher debt load than we’d like to see. Last quarter, PRIM struggled on the cash conversion side, but it’s a problem they’re aware of and working to fix. 

Another potential issue involves some legislation in TX that may affect the permitting requirements for solar jobs; however, PRIM is already hedging this threat out by diversifying its work to include the no permit jobs mentioned above.

All in, these reasons make PRIM an attractive pick, despite the economic backdrop. Primoris Services Corporation is not only constructing solar panels & infrastructure, they’re constructing a robust company that will harvest the tide of renewable energy without being carried away by it.

Closing Remarks

Primoris builds solar panels farms. We’re building a fund. Neither thing happens overnight. 

We can’t thank you enough for your patience and support as we learn, grow, and work towards returning value to all of us.

Cheers,

Noah & Noah