Vilas Fund mid quarter update for the third quarter ended September 30, 2016.
To Our Partners,
The last week has seen major moves in the markets. Since the Election, interest rates are up roughly 45 basis points, the dollar has strengthened, and the stock market seems to be pricing in more rapid economic growth.
The Vilas Fund, LP has risen roughly 34% from its level on September 30, 2016 and it has risen roughly 11% from its level on December 31, 2015. While we would anticipate some sort of pullback before quarter end, we are gratified that our financial holdings are beginning to be recognized by the investment community. Further, we also are optimistic that the market is beginning to question paying very large multiples of book value and earnings for glamour companies.
We look forward to further improvement in the valuation of economically sensitive areas, such as financials and autos. These sectors remain extremely depressed when compared to multiples that existed pre-crisis. While we don’t expect to see Morgan Stanley or Citigroup selling at 5 times book value, as they did around the turn of the century, they should sell at prices considerably higher than book value over time.
When discussing the phenomenal record of Walter Schloss, among other value investors, Warren Buffett in his article entitled “The Superinvestors of Graham-and-Doddsville” made the following observation:
"He [Walter] knows how to identify securities that sell at considerably less than their value to a private owner. And that's all he does. He doesn't worry about if it's January, he doesn't worry about if it's Monday, he doesn't worry about if it's an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me."
As is generally the case, the wisdom in this statement is worth more than most business classes. Sometimes, the market just doesn't like a stock or group of stocks; sometimes it likes certain areas too much. We intend to take advantage of this tendency over time.
John C. Thompson, CFA
CEO and Chief Investment Officer
Vilas Capital Management, LLC.