Tobias Shute‘s year-end letter for 2014.
It has been quite a while since my last (/first) year-end letter! That missive was penned following a successful year of investing for my personal account in 2010, and led directly to a terrific opportunity that kept me out of the market and under a cone of silence for the next several years. With the cone now removed, I am free to write to you once more. I have also taken to tweeting @tobyshute, which has proven an unexpectedly rich source for new connections and ideas.
Corsair Capital highlighted its investment in a special purpose acquisition company in its first-quarter letter to investors. The Corsair team highlighted FG New America Acquisition Corp, emphasizing that the SPAC presents an exciting opportunity after its agreement to merge with OppFi, a leading fintech platform powered by artificial intelligence. Q1 2021 hedge fund letters, conferences Read More
Tobias Shute: Performance
I’m not able to present a tidy high-level performance review for 2014 as I did in 2010, because I wasn’t in the market for the entire year, and I was managing different family accounts for different periods of time. Things didn’t really kick off in earnest until my wife handed me the keys to her 401k rollover, which I parked at Interactive Brokers (Nasdaq: IBKR) — IB for short, and more on those guys later. That account got funded on July 8, and from that point through the end of the year my managed accounts collectively returned 7.8%. It was an unspectacular but entirely satisfactory result.1
Most important, within the IB account I succeeded in following my wife’s investment policy statement. It’s a rather dark spin on Buffett’s Rule No. 1: “Don’t lose this money, or I’ll kill you.” So far so good, honey!
I incurred my fair share of realized and unrealized losses in 2014, but most were of the paper cut variety and on balance things worked out alright. I’ll adopt the approach of my friend Eric Burnside2 and start off with the things that didn’t work. Interestingly, none of the top three detractors from performance was a stock pick gone awry.
Tobias Shute: Dollar Domination
My costliest activity in 2014 – at least in terms of impact on the P&L between 7/8 and 12/31 – was diversifying internationally. While the underlying performance of the foreign-denominated securities I purchased was positive, the FX translation on those securities plus cash held in other currencies robbed a full 2% of performance from the IB account. (My family’s other accounts don’t have such globe-trotting capabilities, and were thus inadvertently insulated.) The dollar rose against every major currency for the first time since 2000, and both emerging markets and developed international markets collectively fell for the year, albeit gently compared to their double-digit declines in 2011.
The lesson here? There’s none that I can discern. Currencies will fluctuate, and I’m not about to stop scouring foreign exchanges for mispriced securities. As long as I don’t do something remarkably stupid like taking a leveraged short position against the Swiss franc prior to it getting unpegged against the euro, I should be fine.
Tobias Shute – Hedging: A Waste of Time, Most of the Time
A second rather expensive choice was my attempt to hedge out some market exposure by owning RWM, an ETF that returns the daily inverse of the Russell 2000 small cap index. While flawed, this seemed like the best instrument for the job, given my inability to short stocks or purchase put options in our retirement accounts. As it turns out, this wasn’t a job worth doing, and the hedging activity detracted 1.4% from performance across all accounts.
I bought put options on IWM, the Russell 2000 ETF, back in ‘07-‘08 and that was a pleasantly profitable experience. It made me feel smart and prescient. Since then, all my index-based hedging activity has been a drag, and has more or less negated all of the profits generated by those earlier put purchases. I would expect this to be the general pattern over time: regular losses as the market marches onward and upward, roughly offset by the occasional burst of profitability following a panic or crash. This is probably not a great use of my time or money.
Tobias Shute: The Seductive Allure of the Cheap Stock Trade
The third-biggest drag on my 2014 performance was overtrading. This has not been an issue for me in the past, and I can chalk it up to at least three causes. One is that I had not been actively investing for the FA for several years, and one could say I was a bit trade-deprived. Pulling the trigger felt good, and I got a little trigger-happy. Second, most of the money I am managing now sits in retirement accounts and is either not taxable or tax-deferred, so I am more likely to take short-term profits. Third, commissions on the IB platform generally run $1 (unless you buy large blocks of low-priced stock or shares on foreign exchanges, both of which I did). The remarkable cheapness of and ease of execution on this platform can have a real influence on your trading activity if you allow it to.
See full PDF below.