Whitney Tilson Hedge Fund Letter November 2010

    t2 partners
    Whitney Tilson

    Whitney Tilson is the founder and Managing Partner of T2 Partners LLC and the Tilson Mutual Funds. The former (http://www.T2PartnersLLC.com) manages three value-oriented private investment partnerships, T2 Accredited Fund, Tilson Offshore Fund and T2 Qualified Fund, while the latter is comprised of two value-based mutual funds, Tilson Focus Fund and Tilson Dividend Fund (www.tilsonmutualfunds.com).

    He is the author of More Mortgage Meltdown: 6 Ways to Profit in These Bad Times which we reviewed here., and co-author of the best book on Charlie Munger, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger.

    To see my lengthy interview with Whitney Tilson click here.

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    Below is some commentary from his newsletter for his hedge fund followed by the full document in scribd. His hedge fund is up approximately 215% over the past 11 years versus 15% for the S&P 500.

    Our fund declined 1.7% net in October vs. a rise of 3.8% for the S&P 500, 3.2% for the Dow and 5.9% for the Nasdaq.  Year to date, our fund is up 12.1% net vs. 7.8% for the S&P 500, 9.0% for the Dow and 11.2% for the Nasdaq.

    On the long side, winners of note included Microsoft (8.9%; see below), Resource America (8.3%), and General Growth Properties (up 7.7%), which will emerge from bankruptcy next week.  Offsetting these were dELiA*s (-13.8%), Winn-Dixie (-6.0%), Berkshire Hathaway (-4.2%), and Iridium (-3.4% for the stock and -13.6% for the warrants).

    On the short side, decliners included the for-profit education stocks (we’re short a number of them, including Apollo, which fell 27.0%), St. Joe (-18.8%), OpenTable (-9.7%; see below), Barnes & Noble (-7.6%), and the homebuilders (ITB was down 5.6%).  Shorts that rose included MBIA (11.5%) and Netflix (7.0%), both of which we discussed at length during last week’s Q3 conference call (see links below).

    We’re still having a good year, but our outperformance has gone from massive to modest in the last two months as our fund hasn’t budged while the S&P 500 has jumped 13.1%.  The primary reason for this is our defensive positioning – in particular, our short exposure, which has offset substantial gains on the long side.  While corporate earnings have been strong, we think the main reason that our shorts have spiked upward is due to momentum-driven speculators front-running the Fed’s next round of quantitative easing (so-called “QE2”).  It is nothing short of mind-boggling that a mere 18 months after utter panic and paralysis in the market, animal spirits have returned and reckless risk-taking is occurring in many areas of both the debt and equity markets.  In light of the ongoing economic weakness and high unemployment, which will likely persist for a number of years, we think this will end badly.

    Our first priority is always capital preservation, so we are usually playing defense and practicing get-rich-slowly investing, even if this means trailing the market at times when it’s ripping upward.  Sometimes, however, in periods like late 2008 and early 2009 the market offers enough opportunities that we can go on offense and practice get-rich-quickly investing.  Today, we are most emphatically not in such a period.  Instead, we are in a time of “unusual uncertainty” (to quote Ben Bernanke), yet the market is complacent, so we think it’s prudent to be quite defensive on the long side by focusing on big-cap, blue-chip stocks with strong market positions, cash flows and balance sheets.

    It’s a different story on the short side, however.  After the recent burst of froth, foolishness and speculation, we think our short book is the most attractive it’s ever been, with the exception of early 2008 (a once-a-century opportunity that, thankfully, we didn’t miss).  We are taking advantage in a number of ways, as we discussed on our recent conference call.  In addition, we analyzed our largest short position, InterOil, in our August letter

    Below is the full document in scribd format:

    Whitney Tilson October Shareholder Letter