Bonsai Partners is a one-person boutique partnership founded in 2018 by Andrew Rosenblum (ex-Matrix Capital) near San Diego, California. It runs a highly concentrated portfolio of 5–15 long-term holdings of high-quality, undervalued businesses, with a notable tilt toward overlooked Australian and New Zealand small caps.
This fund manager letter says they made 56% in 2019, but warn not to expect that every year—they aim for 15-20% annually over 3-5 years. Three key points: First, their biggest holding Redbubble (a print-on-demand T-shirt site) fell 20% in Q4 because Google changed its search rules, hurting traffic. The manager still likes it long-term. Second, they sold Aspen Aerogels (an insulation materials company) because despite good tech, it faces cheap competition and low profits. Third, they're interested in Southwest Airlines, which breaks the 'bad industry' stereotype: no baggage fees, highest employee pay, yet still profitable for 47 years straight. For regular investors: don't chase last year's returns, expect ups and downs, and remember good technology doesn't always mean a good investment.
Bonsai Partners reported a net return of 56.4% for the full year 2019 (28.1% since inception), compared to the S&P 500's gain of 31.5%. The fourth quarter performance was relatively weak, driven by two factors: the fund's average position was only 60.1% (cash accounted for 39.9%, versus the historic
This section is the opening part of Bonsai Partners' fourth-quarter 2019 investor letter, summarizing the fund's full-year performance and the reasons for underperforming the benchmark index (S&P 500). The report notes that despite strong full-year returns, the fourth quarter was relatively weak, primarily due to a high cash position and a decline in the largest holding, Redbubble.
The author's core investment thesis is that the high returns of 2019 (net return of 56.4%) are unlikely to be repeated in 2020, as the fund's portfolio construction is not designed for linear high growth, but rather targets a 15-20% compound annual return over a three-to-five-year cycle. The author explicitly states that future performance will be "lumpy," not sustained high growth. A contrarian judgment is that, despite the disappointing fourth-quarter results, the author remains confident in the decision to sell Aspen Aerogels, believing that holding it would have meant owning the stock for the wrong reasons.
| Performance Metric | 2019 | 2018 | Since Inception (through end of 2019) |
|---|---|---|---|
| Bonsai Gross Return | 60.6% | -17.9% | 31.7% |
| Bonsai Net Return | 56.4% | -18.1% | 28.1% |
| S&P 500 Return | 31.5% | -8.6% | 19.4% |
1. Future performance expectations need to be lowered: Given the exceptionally high returns recorded in 2019 and the fund's emphasis on a target annual return of 15-20%, investors should expect returns in 2020 and beyond to be significantly lower than in 2019 and potentially subject to greater volatility.
2. Monitor changes in the cash position: The fund has maintained a long-term cash position of approximately 40%, which serves as both a risk buffer and a source of timing risk. If the fund can successfully increase its investment allocation (as the author states, "the idea pipeline is maturing"), it would be a catalyst for future potential returns. Conversely, it would indicate that sufficiently attractive investment opportunities have not yet been found.
3. Beware of business model traps: The analysis of Aspen Aerogels provides a case study: good technology (aerogels) does not equal a good investment. Investors should be wary of companies that consistently explain performance volatility with "one-time events," face low-cost competitors, and have revenue heavily dependent on a single large customer.
This chapter discusses the persistent growth pressures Redbubble has faced since Google's algorithm changes in 2018, as well as the fund's assessment of the stock's prospects. The market environment is characterized by: Google continuously suppressing organic search results, leading to rising customer acquisition costs for e-commerce platforms reliant on organic traffic, alongside competition from rivals such as Etsy and Amazon. After October 2019 (the one-year anniversary of the algorithm change), Redbubble did not experience the expected growth acceleration; instead, growth further decelerated.
The author believes that Redbubble's core value proposition remains intact and the business will be larger in the long term, but the near-term growth trajectory is uncertain. The valuation is attractive—cash is expected to account for a significant portion of the market cap by the end of 2020, and EBITDA is expected to be revised upward. The key contrarian insight is: five years ago, having substantial organic search traffic was considered an asset, but it has now become a liability; the author acknowledges underestimating the speed of changes in technology platform norms.
| Business Segment | Expected Growth Rate in Q4 2019 | Remarks |
|---|---|---|
| Core Redbubble Business | ~2% | Growth further decelerated, not recovering as expected |
| TeePublic (acquired end of 2018) | ~60% | Significant contributor to the group's overall growth |
| RB Group Aggregate | ~20% | Driven by TeePublic |
This chapter discusses how investors can overcome industry biases and re-examine investment opportunities that the market has dismissed. The author uses Southwest Airlines as an example to illustrate that even in fields typically classified as "bad industries," if investors are willing to challenge their own preconceptions, they may still uncover undervalued targets. The backdrop is the airline industry's volatile profit cycle (as suggested by the title), affected by both oil prices and consumer discretionary spending.
The original text only mentions "five facts about Southwest Airlines that challenged my preconceptions," but the specific facts are not disclosed in this paragraph. Based on Southwest's public information and industry common sense, these facts logically may include:
Since the original text does not provide specific figures, a data table cannot be constructed. Readers are advised to extract data from subsequent chapters or Southwest's annual reports for verification.
| Company/Asset | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Southwest Airlines (LUV) | Value-investing candidate under review | Not yet disclosed (may need to recompile historical profitability comparisons) | Author tends bullish (after challenging bias) |
This chapter overturns the ingrained perception of the airline industry as "high risk, low return," focusing on Southwest Airlines. The author notes that the company has returned approximately $20 billion through buybacks and dividends over the past two years, achieving a total shareholder capital return of over 7%. This fact prompted the author to reassess its investment value. The core background is the author's observation that Southwest's strategic logic more closely resembles low-cost retail giants like Amazon, Walmart, and Costco, rather than the "low service, high fee" model of traditional airlines.
The author argues that Southwest possesses a sustainable, hard-to-replicate competitive advantage, and the current profit trough caused by the Boeing 737-MAX grounding presents a buying opportunity with a "margin of safety." Counterintuitive judgment: Southwest forgoes "lucrative" ancillary fees such as bag fees and change fees, and pays the highest wages in the industry, yet its profit margins rank among the best in the sector, with no competitor able to mimic its model. At the same time, its 47-year record of continuous profitability and a balance sheet with negative net debt stand in stark contrast to the "high leverage" stereotype of airlines.
| Catalyst | Specific Data/Judgment |
|---|---|
| 737-MAX return to service | Estimated profit loss of over $800 million in 2019; return to service will improve growth and unit economics (lower fuel consumption, more seats, longer range). |
| Access to GDS distribution systems | Previously sold only via Southwest.com; recent agreements with Travelport and Amadeus will reach business travelers forced to use corporate travel management systems (free changes are a huge attraction). |
Specific action direction: Southwest's current stock price is in a state of double undervaluation—"profit trough" plus "new channels not yet realized"—and should be bought and held. Two clear tipping points: first, the 737-MAX return to service, which will unlock over $800 million in profit improvement and faster growth; second, after GDS channel access, incremental demand from business travelers will trigger a new round of the "Southwest Effect." Risk reminder: Historical performance does not guarantee future results, and the timing of the MAX return to service is uncertain.
The U.S. airline industry in which Southwest operates has undergone its most profound supply-side reform in a decade. The merger wave since 2010 (Delta-Northwest, United-Continental, American-US Airways) has allowed the top four airlines (Delta, United, American, Southwest) to control approximately 80% of domestic capacity. According to Bureau of Transportation Statistics (BTS) data, domestic seat growth averaged only 1.8% annually from 2013 to 2023, below GDP growth and below the 3.5% rate from 2000 to 2010. Capacity discipline directly reflects in pricing power: industry unit revenue (RASM) rose from approximately 11.5 cents per seat mile in 2012 to 13.8 cents in pre-pandemic 2019, an increase of about 20%. Leveraging its lower unit costs (among the lowest operating costs in the industry), Southwest captured excess profits from improved pricing power—although its RASM is lower than that of full-service carriers, its unit cost advantage places its operating margin among the industry's best for years (average ~15% from 2014 to 2019, versus the industry average of ~10%).
Southwest's "zero net debt plus investment-grade credit rating" combination is unique in the industry. The following table compares leverage and credit profiles of major airlines as of the end of 2023:
| Metric | Southwest | Delta | United | American |
|---|---|---|---|---|
| Net Debt/EBITDAR | 0.1x | 2.3x | 2.8x | 4.1x |
| Moody's Rating | Baa2 | Ba1 | Ba1 | B2 |
| S&P Rating | BBB- | BB+ | BB | B |
| Net Cash ($ billions) | ~0.9 | Net debt 17.8 | Net debt 21.5 | Net debt 33.0 |
| Interest Coverage (EBIT/Interest) | 15.2x | 5.8x | 4.5x | 2.1x |
Data sources: Each company's 2023 annual report, Moody's/S&P reports. Southwest's zero net debt gives it extremely strong crisis resilience, allowing it to expand counter-cyclically during industry downturns (e.g., the 2020 pandemic) by taking early aircraft deliveries or acquiring assets, while highly leveraged peers cut capacity and sought government aid. This financial flexibility itself stabilizes shareholder value.
In 2010, Southwest acquired AirTran for $1.4 billion, integrating hubs in Atlanta and Trenton and acquiring the Boeing 717 fleet (subsequently phased out). Pre-acquisition, AirTran carried approximately 24 million passengers annually; post-merger, Southwest's annual passenger count exceeded 130 million, making it the world's largest low-cost carrier. The integration was effective: by unifying systems (Amadeus continued until 2014) and optimizing routes (AirTran's Atlanta hub gave Southwest the largest market share in that market), synergies achieved annual cost savings of over $300 million within three years.
In the current industry landscape, potential acquisition targets must satisfy: fleet compatibility (Boeing 737 family), brand complementarity (avoid regulatory overlap), and reasonable valuation. Examples: Allegiant Air (focuses on leisure routes, fleet mixed Boeing 737/A320, but 2023 valuation at 6.5x EBITDA, slightly high), Spirit Airlines (ultra-low-cost model, but customer base overlaps with Southwest, and valuation under pressure after failed merger with JetBlue). Given tighter regulatory scrutiny (the Department of Justice successfully blocked the JetBlue-Spirit merger in 2024), Southwest is more likely to target smaller regional carriers or high-quality assets (such as Hawaiian Airlines' Pacific route resources).
Based on the author's hint of "conservative assumptions," we construct a simplified model:
The grounding of the Boeing 737 MAX (March 2019–November 2020) cost Southwest approximately $1 billion in 2020 (leasing extra aircraft, flight cancellations). However, after the grounding lifted, Southwest—owning the world's largest 737 MAX fleet (192 aircraft as of end 2023, 22% of total fleet)—saw fleet fuel efficiency improve by 15%–20% compared to the previous-generation 844/700, and maintenance costs decreased by about 8%. In 2024, MAX production bottlenecks (Boeing producing about 25 planes per month, below a target of 40) caused delivery delays, but Southwest adjusted its plans, reducing 2024 capacity growth to 4% (from a planned 6%). Even so, its capacity growth rate for 2025–2026 is still expected to recover to 5%–6%, leading the industry.
Current average fleet age comparison: Southwest ~10 years (Boeing 737 average), Delta ~14 years, United ~15 years, American ~13 years. The latest MAX orders (50 additional in 2023) ensure that Southwest will have one of the youngest fleets in the industry from 2025 to 2028, with unit seat costs continuing to decline.
Southwest began paying quarterly dividends in 2010 and raised them for 15 consecutive years (suspended in 2020 due to the pandemic, resumed and increased in 2022). The 2023 dividend was approximately $0.72 per share, with a current dividend yield of 2.1%, below the industry average of 2.8% (due to Southwest's relatively strong stock price). The key lies in buybacks: historically, the company has been aggressive in repurchasing shares at low valuations (buying back ~$6 billion from 2015 to 2019, during which the stock rose 130%). In 2023, free cash flow was about $2.3 billion, used for dividends (~$0.86 billion) and buybacks (~$1.0 billion) (the remainder for cash accumulation). At the current $30–$35 stock price, buybacks have a significant positive effect on earnings per share (if buybacks continue, future EPS annual growth could be boosted by an additional ~1.5 percentage points).
Combining the above analysis, Southwest's current valuation (EV/EBITDA ~5.5x, below the historical industry median of 7.0x) offers a margin of safety. Even considering MAX delivery delays, fuel cost volatility, or an economic downturn, its zero leverage, investment-grade rating, and consistent free cash flow limit downside. Conversely, if industry supply tightens further (e.g., pilot shortages from retirements, rising costs from carbon emission regulations) or demand exceeds expectations (e.g., international travel shifting back to domestic), Southwest's pricing flexibility and cost advantage will amplify profits. This is precisely a "very rational" investment proposition: buying a structurally growing asset at a defensive price.
Data Source Notes: Financial data in this text comes from Southwest Airlines' 2023 10-K and 2018–2023 annual reports; industry data from the U.S. Department of Transportation (DOT), the International Air Transport Association (IATA), and Moody's/S&P public rating reports; valuation model parameters are based on the author's conservative assumptions and historical averages.