Askeladden Capital – Q1 2017 letter


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Askendale capital
Askendale Capital

Dear Partners,

YTD as of 3/31/2017, ACP was approximately flat on a net basis, compared to a ~+3% return for the benchmark S&P 1000 Total Return Index.

Dealing With Adversity | Behavioral Progress | Transcending “Grit”

(1) “I feel like we have two battles going on: One with the man across from you. The second with the man inside of you. I think once you control the one inside of you, the one across from you doesn’t really matter. I think that’s what we’re all trying to do.”  – Tony Romo

(2) “It’s not supposed to be easy.  Anyone who finds it easy is stupid.”  – Charlie Munger

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(3) “It’s always darkest just before the dawn.  So stay awake with me, let’s prove them wrong.”  - Rise Against

If I were the kind of person who took the easy road, I could point to the quarter-end results, reiterate my excitement about the current portfolio (of which I have plenty), and say “nothing happened, catch ya in three months.”  However, that couldn’t be farther from the truth: while we ended the quarter more or less flat to the beginning of the year, the road thereto was like I-35E in Dallas after a spring thunderstorm: that is to say, filled with gnarly potholes.  I’ve spent much of this quarter thinking about the appropriate way to deal with adversity, because February and March were very frustrating months.  Here are some of the challenges I was dealing with:

  1. At one point, our portfolio was down as much as ~800 bps vs. the benchmark being up ~300 bps, despite our meaningful cash position (no lower than 15%), and our concentration in high-quality, strong-balance-sheet names.  I made good decisions and fundamentals played out as expected, but until literally today, stock prices were largely uncooperative.  ~1100 bps of underperformance in 2-3 months when you feel like you’re doing your job well is nontrivial.  Moreover, this occurred with a lot of new/recent capital inflows.
  2. A market that failed to yield any new compelling opportunities (other than those already owned) despite lots of research.
  3. Self-imposed pressure from the “Alexander-wept” phenomenon – after posting the best year I will likely ever see in my investment career, how do I follow that up and avoid looking like a one-hit wonder?

Six months ago, I told Zeke that I thought I was “six months away from putting it all together” – that is to say, getting to the point where I’d fully internalized my core framework for analysis and portfolio management, where rigorous decision-making became automatic and fluid rather than something I had to stop and think about.  That prediction proved accurate, and I’m there now, but in the meanwhile I’ve discovered that there’s another important issue that I didn’t really experience much of last year given the rocket-ship performance: dealing with challenging market circumstances.  (I had plenty of challenges, but performance / ideas weren’t among them.)

The funny thing about value investing is that it’s sort of trivial in theory: buy things for less than they’re worth!  Be fearful when others are greedy!  Etc.  I mean, who could mess that up?  There’s so much cloying sameness to a lot of value investing content that the first recommendation I usually give moderately-well-read aspiring investors is: stop reading value investing stuff.  If you’ve read five books and ten blogs, the incremental payoff from one more is probably not terribly high at this point.  Go read a book about something completely different, and/or go do some actual work, then you’ll start to understand how the theory works in practice.

So it is with the behavioral elements: one of the most intriguing observations for me is the rather large discrepancy between many professional investors’ public and private personas.  Many publicly proclaim all the right things, but privately acknowledge (whether explicitly or implicitly) to living in a completely different reality than the one they outwardly present.  But, they rationalize, asset management is a business like consulting: as much as the product (performance), you’re selling confidence, so your investors can sleep well at night.  Day to day, these asset managers may be pulling their hair out, but when they call LPs, everything’s hunky-dory.  They may say (or write) that they are long-term, volatility-agnostic investors, while in reality they’re so addicted to watching stock prices that they can’t take their eyes off their mobile Bloomberg long enough to pay attention to management in group meetings.

I’m different.  I try to communicate with investors the same way I want management teams to communicate with me: forthrightly.  It’s not that I’m not confident – far from it; you can’t take the sort of (sometimes extremely) concentrated positions I do without having unshakable confidence that you’re right and the market is wrong.  However, for both ethical and practical reasons, I’m not comfortable putting a positive spin on things when one isn’t warranted.  To the latter end: if you tell a lie enough times, it becomes your personal truth; if you walk around pretending you don’t have a problem, that’s when you have a real problem.

And the truth is that I discovered this quarter that while I have complete confidence in the current portfolio and my analytical / portfolio management approach, there is more work to be done on the behavioral side, which – as I have stated and will continue to state until I think my point is made – I believe to be the far more difficult and important part of the investing endeavor (listen to Zeke’s take here in a very thoughtful podcast interview).  Simply put, I feel like I could have done a much better job of responding to the adversity during the quarter.

Here is the good news: I don’t feel like the challenging circumstances had any negative impact on the way I managed the portfolio.  The bad news: that took up all the emotional bandwidth I had, leaving me frustrated and demotivated, leading to less research than I would have liked, as well as less big-picture reading (the importance of which I have stressed previously).  In and of itself, this wouldn’t be a major problem – a few weeks of less-than-optimal productivity doesn’t mean much in the grand scheme of things.  But with a statistical / “base rates” view of the world, this was a relatively placid quarter, and if I allow frustrations to get to me in an environment like this, what will happen in an extended environment of much higher stress (which, if you could graph emotion, tends to be an exponential rather than linear function)?  Historical examples would be the late ‘90s or 2008, both times when – for opposite reasons – the world was an extremely unfriendly place for value investors for a meaningful length of time.

I strongly believe that it is important to solve these problems sooner rather than later, for the simple reason that behavioral research indicates that when we are in “cold” emotional states – that is to say, detached from the situation – we consistently underestimate how much we will be affected when we’re in “hot” emotional states, which are defined as things like

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