Burr Capital LLC First Quarter 2017 Letter
Welcome to your Q1 2017 quarterly letter from Burr Capital LLC. We’re humbled by the trust you have placed in us with your hard-earned savings and referrals. Rest assured that we take our fiduciary responsibility very seriously and look forward to serving your ongoing investment needs.
In Q1 2017 (ending March), Burr Capital LLC aggregate accounts posted a 12.1% gain versus a 6.1% gain for the S&P 500 market index. Please remember that past performance may not be indicative of future results and individual accounts may vary significantly (please see the Disclosures section at the end of this letter for more information).
Burr Capital llc – Portfolio review
Noteworthy contributors to performance in the first quarter were our domestic cable investments and Allergan preferred shares.
- Domestic cable investments: Liberty Ventures (LVNTA) and Liberty Broadband (LBRDK) rose 21% and 17% respectively in the first quarter. We remain very constructive on the US cable industry which benefits from strong secular tailwinds – e-Commerce, Internet-of-Things, and Over-The-Top Video – and an increasingly supportive regulatory backdrop under the new FCC chairman.
- Allergan preferred shares (AGN-A): Allergan is a leading pharmaceutical company with a dynamic management team. In spite of a strong performance year-to-date, the preferred shares remain attractive sporting a 6.5% dividend yield with material capital appreciation potential.
Detractors to performance were our income-oriented investments and a new oil investment.
- Income-oriented investments: A handful of these were a drag on returns as market participants priced in expectations for rising interest rates. These investments, which sport an average dividend yield of 7.3%, play an important role in your portfolio acting as a ballast during periods of heightened volatility.
- Oil investment: Commodity businesses are bad businesses because they rarely earn their cost of capital and oil is the worst of them. Yet, they continue to seduce investors with sweet promises of outsized gains with modest tweaks to supply/demand projections. So why did we make a seemingly ill-timed and ill-conceived oil investment in the first quarter? Given the volatility in oil, we believe we can create a 15-20% annualized income yield before capital appreciation with this investment. The income yield protects our downside because even if our investment falls by 15% we hope to break even in a year and if there’s any recovery in oil prices (the cure for low oil prices is low prices), we could make out like bandits. To be clear, if by year-end it seems that our thesis is flawed, we will be quick to sell this investment and harvest any tax loss.
The stock market’s remarkable long-term record
For many investors, the scars from the 2008-2009 financial crisis and the 1999-2000 technology bubble may not have completely healed. So it may be hard to fully appreciate the remarkable long term track record of the stock market. In the 50-year period 1967-2017, the average (geometric) mean return for the S&P 500 has been around 10% which is very respectable (Source: I have sourced this from some terrific work done by Prof. Damodaran at NYU). A 10% annual rate is roughly a double every 7.3 years. So it’s not hard to see why the stock market remains an attractive long-term vehicle for wealth creation.
Let’s review compound math (one more time)
A $100,000 investment compounding at 10% per annum translates into $672,750 in 20 years (see the Exhibit below). Perhaps less obvious, is the same investment amount compounding at 15%, only five points higher, translates into $1.6 million in 20 years. Small increments in the annual return rate translate into big increases in long-term returns.
I hope you found this review helpful in giving you a better understanding of my investment philosophy and your portfolio. Thank you for your support and please do reach out if you have any questions.
Principal and Portfolio Manager
Burr Capital LLC
725 River Rd, Ste 32-123
Edgewater, NJ 07020
Phone: (551) 257-5126
Please remember that past performance may not be indicative of future results. The Burr Capital LLC aggregate account is based on the aggregate performance of all client accounts (existing and new accounts opened during the year at various times) except those client accounts that place any restrictions on investing in stocks (common and preferred), bonds, or options. Two personal IRA accounts with restrictions on trading in options were excluded from the aggregate. Burr Capital LLC accepted one outside client in November 2015; returns are therefore computed from 2016 onwards. Performance of individual accounts may differ significantly from Burr Capital LLC aggregate account, depending on timing of investments, the effects of additions, and the impact of withdrawals from the account. Not all accounts have identical securities and weightings. Portfolio holdings and weightings may vary depending on the size of the account, especially accounts below $200,000. For example, due to liquidity constraints, it may not be possible to own fixed income securities or to implement certain option strategies in smaller accounts.
Figures are unaudited and may not include impact of accrued but unpaid fees for the latest quarter S&P 500 returns include dividends but do not reflect any fees. Returns are computed on a before-tax time-weighted return (TWR) basis and are net of all paid management fees and brokerage costs.Returns are computed using Interactive Broker’s PortfolioAnalyst tool.
All information provided is for information purposes only and should not be considered as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representations or warranty is made concerning the accuracy of any data presented. This communication may not be reproduced without prior written permission from us.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Burr Capital LLC), or any non-investment related content, made reference to directly or indirectly in this research will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this research servesas the receipt of, or as a substitute for, personalized investment advice from Burr Capital LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Burr Capital LLC is neither a law firm nor a certified public accounting firm and no portion of the research content should be construed as legal or accounting advice. A copy of Burr Capital LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.