Sam Hafermann Holiday 2024 Update
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It’s been a little while since my last email. The gap wasn’t exactly intentional – yes, I got slammed workwise, but more importantly… I know how annoying it is to have a bunch of Chat-GPT written AI slop masquerading as insight sent to your inbox every week. Out of an abundance of caution, I’ll keep trying to avoid sharing anything that doesn’t reach a certain quality bar.
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Even though I haven’t published a ton recently, I still write a lot. Not just for work but by hand for myself. I’ll write in journals and notebooks, at home, at airports, you name it. It’s my way of processing and translating my experiences. I like to write about things that either people wouldn’t talk about publicly or stuff I’m in a unique position to be able to have some sort of differentiated point of view on. Candidly, I don't have that much interesting stuff to say in any given week or month. But from time to time, when I do come up with some non-trite idea or piece of work, I'll send an email. So here we are.
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Side note – I'll be in Miami for the holidays. If you'll be in the area, shoot me a text or email and we can grab some beers, a marg, or a coffee on me.
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Topics this Time Around:
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Investing at inflection points in historically shitty industries, the story of United Rentals
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Links from around the web (articles, papers, and podcasts)
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If you no longer want to be on the list, please use the footer of this email to unsubscribe.
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Lastly, feel free to write me back with feedback. And if this email was forwarded to you, do consider subscribing directly here.
With warm regards,
Sam Hafermann
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Backflow prevention, an investment thesis
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When you turn on your kitchen faucet or shower, you probably don’t think about the intricate systems that make sure your water is clean. But behind these everyday conveniences sits an essential, highly regulated industry – backflow prevention. This niche segment of the plumbing industry doesn’t make headlines, but it quietly ensures the safety of municipal water systems across the country.
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Backflow services represent a rare combination of regulatory-driven recurring demand (devices must be tested annually in 43 states) and high profitability (typically >20% EBITDA margins), making it a recession-resistant sector that also happens to be relatively fragmented and still largely untouched by private equity.
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In this post, I go through the backflow services investment thesis. Aging infrastructure, stricter water safety regulations, and increasing awareness of public health risks are driving steady growth in demand for testing, repairs, and replacements of backflow preventer devices.
It’s fertile ground for a roll-up. Backflow providers are listed on each individual municipality’s website, which allows for efficient, location-specific target outreach. By consolidating a couple local providers, introducing some software like Service Titan and a CRM into largely paper-based operations, and then fixing some low hanging fruit in sales and marketing, there’s an opportunity to unlock a lot of value in this overlooked market.
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Investing at inflection points in shitty industries, the story of United Rentals
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To be overly simplistic, companies and industries are typically segmented into contrasting buckets in the eyes of investors.
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Good vs. bad. Value vs. growth. Cyclical vs. non-cyclical. You get the idea. The construction equipment rental industry is the perfect example of an industry where even expert observers assumed there was not much chance of success. Rental yards are generally found in the sketchy parts of town. They’re filled with heavy, expensive, dirty machinery that look old after just a few uses. In a typical rental yard, you might find an excavator, a portable heater, a backup generator, or a bunch of Porta-Potties. It was known as a shitty industry. Until it wasn’t.
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As any day trader or musician can attest, good timing is often the difference between decent results and legendary ones. For longer-term investors, the importance of timing often comes down to recognizing when a business or industry is on the verge of an inflection point—those rare moments where structural forces align. The revenue mix, competitive dynamics, or regulation have changed in such a way that historically lackluster returns are set to inflect much higher, and exponential growth takes hold. These are tough to spot, and even harder to act on. But for those who can navigate the uncertainty, the rewards can be transformative.
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In this post, I explore the story of United Rentals, a company that epitomizes the power of investing at inflection points. Once dismissed as a capital intensive, low-margin race to the bottom industry, United Rentals redefined itself through a combination of (a) cheap debt, (b) a shit ton of acquisitions, and (c) a relentless focus on operational efficiency. Its transformation offers some great lessons for anyone looking to identify and capitalize on changes in historically sleepy sectors.
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My hope was to highlight the signals that precede these inflection points and provide a model for thinking about risk and reward in moments of transition. Whether you’re an investor, entrepreneur, or just like nerdy stories of business reinvention, United Rentals has something to teach us all.
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Links from around the web (articles, papers, and podcasts)
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In part, I like to use these email updates to encourage and receive insights from others. As I regularly say in my office “I like to read.” I get sent a lot of interesting material through my work and from perusing niche rabbit holes of the internet in my spare time. When the sender is okay for me to share, and it meets my quality standards, I’d like to do that.
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It helps the writer. It also helps me. It’s a virtuous cycle.
Podcast
Founders Podcast on Red Bull's Billionaire Maniac Founder Dietrich Mateschitz
Really enjoyed this podcast on the founding story of Red Bull, which is essentially a marketing conglomerate that happens to sell energy drinks. When an author tried to interview Dietrich’s elderly mother for an unauthorized biography, he threatened to have the author’s kneecaps broken. He said it would cost a mere $500 to hire a capable Russian to do the job.
He also refused to sell Red Bull or take it public and worked on it until he died, yet also prioritized fitness deep into his 70s. He like driving fast cars, piloting his own planes, and competing in off-road motorcycle races. Seems like a pretty wild dude.​
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Article
Samo Burja (Bismarck Analysis) on How Ideas Are Communicated
Which ideas shape society? Why have ideas and systems like Christianity, natural selection, Marxism, or general relativity been so influential? Great ideas can change the world, but only if they’re effectively communicated. This article explores the nuances of how ideas spread, endure, or fade over time.
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Article
Bryan Lufkin (BBC) on Why So Many of the World's Oldest Companies are Located in Japan
This great article explains the unique cultural, family, and business practices that have allowed so many Japanese companies to thrive across multiple generations. It’s a fascinating look at how tradition and long-term thinking can create lasting resilience in a world that is constantly in flux.
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Well, that's all I've got for you this time around. I hope you were able to find something that resonated with you.
Happy holidays and Go Timberwolves,
Sam Hafermann
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