Whitney Tilson’s annual letter for his new fund, the Kase fund, has just been obtained by the site. Tilson was down 2% in 2012, but is up 5% in 2013 already largely due to Netflix. We detail some parts of the letter below and have the full letter from Tilson embedded in scribd:
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I hope you had wonderful holidays and wish you a happy new year!
In each annual letter (this is my 14th) I seek to frankly assess the fund’s performance, reiterate my core investment philosophy, and share my thoughts on various matters. In addition, I disclose all of the fund’s long positions and in Appendix A explain my thinking behind each one so you can better understand why I’ve purchased these stocks, how I invest, and why I am very confident in our fund’s future prospects.
Now that I’m managing money solo, I’ve adopted the name “Kase”, so our fund is now doing business as the Kase Fund. The letters of “Kase” come from the four most important people in my life: my wife, Susan, and three daughters, Alison, Emily, and Katharine. May they bring all of us as much good fortune as they’ve brought me! Also, please note our new address and phone number on this page.
Our fund was down slightly in 2012, significantly lagging the major indices, as this table shows:
|Kase Fund (net)||0.1%||-3.0%||-1.7%||
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2 Accredited Fund (dba the Kase Fund) was launched on 1/1/99.
After 11½ strong years, the fund has lagged badly over the last 2½ years. To turn things around, I’ve made many changes (discussed below), most importantly returning to my roots of managing money solo.
In June, Glenn and I decided to each run our own funds, and began doing so on July 1st. As part of this process, I took our fund to cash so that I could rebuild the portfolio from scratch. However, I wasn’t able to exit a handful of illiquid positions, most notably the Iridium warrants, which impacted performance in the second half of the year, but today I’m pleased to say that the portfolio is where I want it, conservatively positioned in my very best ideas. My mind is clear and focused on the long term, and I’m looking forward with confidence and optimism.
These feelings were bolstered recently when Netflix, which is by far the most controversial and heavily shorted stock we own, reported blowout earnings and the stock rose 71% last week (it’s more than tripled since its lows of last summer). Thanks in large part to Netflix, our fund is up nearly 4% so far this month, despite its very low gross and net exposure, so 2013 is off to a solid start (all data and prices in this letter are as of the market close on 1/25/13).
Since I took over as sole portfolio manager seven months ago, I have purchased/repurchased only eight stocks, seven of which have risen – and are currently the seven largest positions in the fund (we took a small loss on Apple, which I sold). If I can maintain an .875 batting average over time, we will do very well indeed.
I am pleased with the fund’s concentrated yet well-diversified long portfolio, which I believe will substantially outperform the market over time. Here is a list of every long position the fund holds today, ranked in descending order of size (each is discussed in Appendix A):
1. Berkshire Hathaway (BRK.A) (BRK.B)
3. Howard Hughes (NYSE:HHC)
4. Citigroup (NYSE:C)
5. Goldman Sachs (NYSE:GS)
6. Netflix (NFLX)
7. Canadian Pacific
9. Grupo Prisa
11. Spencer Holdings (private placement)
12. Japan side fund (private placement)
13. Spark Networks
Note that the illiquid legacy positions that hurt our performance in the second half of 2012 – most notably, dELiA*s, Iridium, and Grupo Prisa – were approximately 30% of capital on July 1st, but are now under 10%. With the benefit of hindsight, I of course wish that I’d sold more of them last summer, but today I think they are attractive “mispriced options” that will do well from current depressed levels.
The fund is currently 62% long, and my highest priority is to identify a small number of cheap, safe, new investments that will take the fund’s long exposure to the 80-100% range. This won’t be easy, unfortunately. In today’s markets, complacency abounds – market volatility levels haven’t been this low since before the financial crisis in early 2007 – so high-conviction long ideas are few and far between right now. I’ve been doing a lot of work on a range of companies and am finding many stocks that are trading at a 10-20% discount to intrinsic value, but that’s not a big enough margin of safety, so I continue to look.
I can’t tell you how long it will take me to build the fund’s short and long exposure up to my target levels, but I can assure you that I will be patient – and my experience over more than 14 years of managing money professionally is that my patience has eventually been rewarded.
In late June, as I prepared to once again manage the fund by myself, I thought hard about how to maximize my chances for success going forward. I ultimately decided to go back to the much simpler, more focused, lower-risk approach that had worked for me so well early in my career. To that end, I have significantly reduced the fund’s overall exposure, position sizes, use of options, and trading.
I truly believe that less is more. Going forward, the funds I manage will be concentrated in my very best, carefully researched investment ideas, with approximately 15 meaningful positions on the long side and a similar number of (much smaller) positions on the short side. My target portfolio exposure is 80-100% long and 15-30% short. In this increasingly short-term, trading-oriented environment, I aim to do as little trading as possible, and would be delighted if I am able to generate a handful of great investment ideas each year.
I also want to emphasize what I’m not doing. While I want with every bone in my body to get us out of the hole that we’re in, I’m not going to do it the wrong way. I’ve seen too many fund managers try to quickly make back losses by swinging for the fences – trading rapidly, using leverage and options, and buying speculative stocks – and they invariably blow themselves (and their investors) up. I’m taking the opposite approach, which can by summarized by the first rule of holes: “When you’re in one, stop digging!” (hat tip to Molly Ivins).
Whitney Tilson’s Case Fund 2012 letter by