Whitney Tilson was down 7.3 percent in 2015 as we previously reported. Now that is has been sent out we can post the full thing. Below is an excerpt from his latest email discussing performance issues and more.
In this, my 17th annual letter, I seek to frankly assess the fund’s performance and share my thoughts on various matters including, most importantly, why I am very confident in our fund’s future prospects. Below I disclose and discuss our fund’s 10 largest long positions as well as its largest short, Lumber Liquidators.
Pros And Cons Of Tail Risk Funds
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Our fund declined 7.3% in 2015 vs. +1.4% for the S&P 500 (with dividends reinvested), as this table shows:
Following the re-launch of our fund three years ago, we had two solid years (+16.6% in 2013 and +13.7% in 2014), so it was disappointing to give back half of 2014’s gains last year.
Four stocks killed our performance last year: Canadian Pacific (-33.7%), Platform Specialty Products (-44.7%), Avis (-45.3%) and Micron (-59.6%). I bought them all well, as each roughly doubled (they were four of our five biggest winners in 2014), but I failed to sell and thus we have now round-tripped them.
I’ve certainly learned a good lesson about the need to sell cyclical stocks when the cycle is at its peak. Today, however, especially with all four down even further this year, I believe that each is at a cyclical trough and poised to significantly outperform.
These losses more than offset the gains from JetBlue (+42.8%) and an epic year on the short side, as four of our major positions collapsed: World Acceptance (-53.3%), Exact Sciences (-66.4%), Lumber Liquidators (-73.8%) and Unilife (-85.1%).
… I believe that keeping portfolio turnover low is critical to long-term success. As such, at the end of 2015, we still held 11 of the 12 largest positions we held at the start of the year (discussed in last year’sannual letter). The stocks I did sell during the year – smaller positions in American Airlines, AIG, Hertz, magicJack, Pershing Square Holdings and AIG – all turned out to be good sales.
The fund is currently 96% long (20 positions) and 15% short (10 positions). Here are the top 10 long positions (all those 4% or larger), which account for two-thirds of the fund’s long exposure, ranked in descending order of size:
- Berkshire Hathaway
- Howard Hughes
- Canadian Pacific
- Spirit Airlines
- General Electric
- Platform Specialty Products
- Air Products & Chemicals
- Goldman Sachs
- Reading International
- Micron Technology
(Past performance is not indicative of future results. Please refer to additional disclosures at the end of the attached investor letter.)
In Q1, the fund was down 3.6% vs. +1.3% for the S&P 500.
2) Three weeks from tomorrow I will be attending my 18th consecutive Berkshire Hathaway annual meeting in Omaha. If you’re going to be there, I’d like to invite you to two events on Friday evening and Saturday afternoon, both in the St. Nicholas Room at the Omaha Hilton:
1) My friend Chuck Gillman and I are hosting our annual cocktail party from 8pm-midnight on Friday, April 29th. No agenda, no speeches, no dress code – just come, enjoy the drinks and snacks, and meet other value investors.
2) Chuck and I are also sponsoring a casual get-together immediately following the annual meeting on Saturday, April 30th – just walk across the street or take the skybridge to the Hilton. It will end around 6pm.
(I have to leave early to get back to NYC for a friend’s wedding, so I will only be at the Friday night event.)
To RSVP for either of these events, please email Jill at [email protected] and include:
- Which event(s) you plan to attend
- Your name as you wish it to appear on your nametag
- Your city as you wish it to appear on your nametag
I look forward to seeing you!
3) I did a video interview with Yahoo Finance on Monday and discussed Berkshire Hathaway. Click here to watch it (4:40).
4) I have updated my updated Berkshire slide presentation, which is always posted at www.tilsonfunds.com/BRK.pdf.
I now peg intrinsic value at $283,000/A share (equal to 1.82x book), based on $159,794 of investments per share plus 10x $12,304 the pre-tax earnings of the operating businesses.
The upside/downside ratio for the stock is now very favorable as it has 45% upside to hit my estimate of intrinsic value one year from now ($308,000), and only 12% downside to 1.2x book value ($186,601), a floor given that Buffett has a ton of dry powder and would be an eager buyer. (On the first page of his annual letter, he wrote “Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully increase per-share intrinsic value for Berkshire’s continuing shareholders.”)
PS–I’m pleased to see that Buffett has finally started including the profits of Berkshire’s insurance subsidiaries in the operating earnings figure provided to investors. I’ve long believed that Buffett was being overly conservative in excluding these earnings because Berkshire’s insurance subsidiaries are so diverse and consistently profitable, so had always added about $600/A share to Berkshire’s pre-tax earnings number (about half of the long-term average).
5) A good collection of some of Buffett’s wisest words, from his just-released 2010 testimony to the Financial Crisis Inquiry Committee. Here are some excerpts from this article:
One way to make sense of what happened is piecing together stories from those involved. The government tried this six years ago when it set up the Financial Crisis Inquiry Committee, interviewing dozens of bankers, regulators, top investors and politicians to try to figure out what happened.
One person the committee questioned was Warren Buffett. The interview took place in 2010, but the transcript wasn’t public until last week.
You can read the whole thing here. It’s 103 pages and totally fascinating.
I pulled out a few of my favorite parts. The quotes are lightly edited for clarity.
…On the nature of bubbles:
“My former boss, Ben Graham, made an observation, 50 or so years ago to me that it really stuck in my mind and now I’ve seen evidence of it. He said, “You can get in a whole lot more trouble in investing with a sound premise than with a false premise.”
If you have some premise that the moon is made of green cheese or something, it’s ridiculous on its face. If you come out with a premise that stocks have historically done better than bonds [and history shows that’s the case, people put their money behind it.]
…On debt and risk:
“It gets down to leverage overall. I mean, if you don’t have leverage, you don’t get in trouble. That’s the only way a smart person can go broke, basically. I’ve always said, “If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it.””
On the psychology of bull markets:
“When your neighbor has made a lot of money by buying Internet stocks, and your wife says, “You’re smarter than he is and he’s richer than you are, so why aren’t you doing it?” …
People don’t have to be trained to want to gamble in this country, but they have this instinct — a great many people — they’re encouraged when they see some successes around. That’s why the bells and whistles go off in the casino when somebody hits a jackpot, you know.”
On companies promising results:
“Any time a large financial institution starts promising regular earnings increases, you’re going to have trouble, you know? … If people are thinking that way, they are going to do things, maybe in accounting, that I would regard as unsound.”
6) I recorded and had a transcript made of Charlie Munger at the 2016 Daily Journal annual meeting, which I’ve posted hereMungerDJ-2-16.
7) I recently pulled together a collection of my all-time favorite Munger quotes for a presentation I’m giving:
- The more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be…So the game is to keep learning.
- What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models.
- Most people are trained in one model and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.
- Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. If you took our top 15 decisions out, we’d have a pretty average record.
- As Jesse Livermore said, “The big money is not in the buying and selling…but in the waiting.”
- There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.
- All I want to know is where I’m going to die, so I’ll never go there.
- No wise pilot, no matter how great his talent and experience, fails to use his checklist.
- In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.
- We have never given a damn whether any quarter’s earnings were up or down. We prefer profits to losses, obviously, but we’re not willing to manipulate in any way just to make some quarter look a little better.
- To say accounting for derivatives in America is a sewer is an insult to sewage.
- We think there should be a huge area between what you’re willing to do and what you can do without significant risk of suffering criminal penalty or causing losses. We believe you shouldn’t go anywhere near that line.
- Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It’s not difficult, but it looks difficult because it’s unconventional.
- If you rise in life, you have to behave in a certain way. You can go to a strip club if you’re a beer-swilling sand shoveler, but if you’re the Bishop of Boston, you shouldn’t go.
- Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day, if you live long enough, most people get what they deserve.
8) I usually get attacked anytime I go public with a short idea (just ask my assistant – she no longer picks up the phone unless she recognizes the number; and here’s an email I got last month: “I’m mortified that an avid reader of Buffett and Munger like yourself is responsible for conclusory, bombastic, fear-mongering propaganda surrounding Lumber Liquidators. You may end up being right in your conclusions, but your analysis is light years removed in quality from your role models.”).
Thus, it’s nice to read an article like this, A Hedge Fund Manager Helped Save Siberian Tigers:
But the best thing about this case is that it will slow the rate of deforestation in the critical habitat of the Russian Far East. So next time you see a wild Siberian tiger in a photo or on television, spare a kind thought—unlikely as it may sound—for a hedge fund manager. Tilson has moved on to other stocks. But I’m betting that this case will keep both him and Zhou on the lookout for bad environmental practices as one more clue to stocks worth shorting.