Wedgewood Partners’ letter to clients for the first quarter ended March 31, 2015, titled “Crude realities … and opportunities”

H/T Dataroma

The game of making money in the stock market is deceptively simple. It is one of the few businesses where one makes offensive decisions and is not forced into making defensive ones. You play the game only when and where you wish to. You need only swing at the fat pitches, which are over the plate and belly-button height. – Warren Buffett

Wedgewood Partners: Review and Outlook

The Great Bull Market of 2009-2015 celebrated its 6th anniversary this past March 9th. During the first quarter our Composite (net-of-fees) performance was roughly flat (+.57%). The S&P 500 Index was a bit better at +.95%. However, we significantly underperformed our benchmark, the Russell 1000 Growth Index, which gained +3.84% during the quarter.

Outside of one fat recent pitch, we haven’t been swinging at much at all over the past year or so. Plus, on the performance front, there has been little to celebrate of late here at
Wedgewood Partners. Worse still, our relative returns over the past twelve months have been among the poorest in our strategy’s +22-year history. For the trailing twelve months ending this March our Composite’s gain of just +7.78% significantly underperformed both the S&P 500 Index and the Russell 1000 Growth Index by-495 basis points and a whopping-831 basis points, respectively. While we are proud of our long-term performance record, we are quite certain that our newer clients that have entrusted us to manage their money over the past year are none-too-pleased with us – we dare say that we deserve the boos too from clients that have joined over the past two years as well.

Wedgewood Partners: Portfolio review

During the quarter our portfolio turnover was reduced to sloth-like activity. We trimmed three holdings due to richer valuation – Cognizant Technology, Stericycle and Varian Medical. We added to just two, due to more attractive valuation – Qualcomm and National Oilwell Varco. 2

Our largest detractors during the quarter were National Oilwell Varco,  Berkshire Hathaway and Qualcomm. Our best contributors during the quarter were Cognizant Technology, Coach and Verisk Analytics.

Now may be as good a time as ever to comment on and share our own performance expectations. We believe that a five-year time horizon is a long enough time frame to judge the merits of any money manager. Some may say three years is plenty of time, but we prefer at least a five-year time horizon – particularly for Focused managers. Why the special consideration for a Focused investor you ask? Simply put, we believe that the only systematic way for active managers to outperform over meaningful time horizons, and in both bull markets and bear markets is to be as different as possible from the investing crowd. The hardest ways, in our view, to try to outperform the market (and one’s peer group) is to think you possess an IQ and/or an informational advantage. If an individual (or firm) may in fact possess either, we believe such advantages are fleeting and not repeatable.

Therefore, we think the “easiest” way – if one dares – is to be a Focused investor. Market indices and benchmark portfolios typically hold +500 stocks. Most active managers hold dozens of stocks. We only invest in 20 or so. We strongly believe that our focused investment philosophy and process is not only our long-term competitive advantage, but is repeatable in most economic and market environments.

Focused investing is also the main reason why we have had periods of significant underperformance over the past two decades. Put another way, this is not the first time we have underperformed our benchmark by this wide of a gulf, and it most assuredly will not be the last. Indeed, if we are true to our differentiated focused philosophy and process, and do not chase the industry darlings of the day, then we must endure periods of underperformance.

Wedgewood Partners

See full PDF below.