Home Value Investing Booth Laird 2014 Annual Letter: Reflection On 7 Years

Booth Laird 2014 Annual Letter: Reflection On 7 Years

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Booth Laird Investment Partnership 2014 annual letter entitled, “Know Thy Investment.”

To the Partners of Booth-Laird Investment Partnership:

Booth Laird: Performance

Below is a more detailed comparison of the return on Partnership investments (separately reflecting returns for inception-to-date and calendar year 2014) to the S&P 500, the most commonly used proxy for the market as a whole. The S&P 500 figures include dividends issued by S&P 500 companies and assume those dividends were reinvested. The Partnership figures reflect returns for the Partnership as a whole. Individual partners invested at various times throughout the year and, therefore, realized different returns based upon when the partner contributions were made. Further, qualified and non-qualified partners have different fee structures, which also impacts the net returns realized by each partner. A separate document detailing your specific return for the year has been provided to you.

We are pleased to report that 2014 was another respectable year for the Partnership. Assets under management increased over 60% as a result of both returns on investments and investor contributions. More importantly, our return, net of fees, of 12.8% nearly equaled our target annual return (our primary focus after preservation of capital) of 15%.

We began the year with approximately 34% of our portfolio in cash, which dipped to 5% by the end of June before rising again to 36% at year end due to new contributions and to selling or downsizing a number of investments as discussed below. In January 2015, we put over half of our cash to use in both existing and new investments.

Booth Laird: Reflection

As we near the 7-year anniversary of the founding of Booth-Laird Investment Partnership, given the significance of the number 7 in numerous cultures, now is a good time to look back over our brief history. We started the Partnership at the ages of 24 and 25 on April 16, 2008, with $10,000 of our own money, while both were still working full time as auditors for KPMG. It took nearly a year before we had our first external investor. By the end of 2009, we had a total of 3 external investors, ~$70,000 in assets under management, and were both still running the Partnership part time. We came to the conclusion that at least one of us would need to quit his day job and run the Partnership full time if we truly wanted it to grow. In January 2010, I quit my job as the Assistant Director of State Economic Competitiveness in the Louisiana Department of Economic Development to devote 100% of my time to the Partnership.

Around this time, we found an obscure company called HQ Sustainable Maritime Industries (HQS), a company headquartered in Seattle with its primary operations in China. HQS was a vertically integrated tilapia producer and specialty healthcare product manufacturer. This time period was before the fraud prevalent in Chinese companies trading on western exchanges came to light. Unlike those frauds, however, HQS was headquartered in Seattle, had Canadian leadership, and was audited by a Canadian firm that was itself under the supervision of the SEC’s audit and accounting regulator, the Public Company Accounting Oversight Board (“PCAOB”). The PCAOB had thoroughly reviewed and approved this Canadian audit firm, giving us false comfort. We had spoken to the VP of Finance at HQS numerous times and even called the auditor to verify that they conducted appropriate audit procedures.

With the stock as cheap as it was compared to the net cash on its balance sheet and the free cash flow it was realizing, we invested up to 20% of the portfolio into HQS. The signs were there that the company’s financials might not be accurate, particularly when the company issued stock at below the current price to investment banks and private equity firms in the United States despite supposedly having a great deal of cash already and no debt. But the company provided an elaborate reason that seemed legitimate, and we swallowed it hook, line, and sinker.

The rising accounts receivable balance was another major red flag, which is what prompted us to call the auditor. Even the auditor explained away the high accounts receivable balance. We were both fooled. In April 2011, the chair of HQS’s audit committee resigned from the Board of Directors and issued a press release accusing management of fraud. It took another two months for the Canadian auditor to finally throw in the towel and admit they too were fooled. We did not wait for the auditor to quit before writing off the entire investment in HQS. The information provided by the former Audit Committee Chair was too damning for us to ignore. We wrote off the investment the next day, immediately taking a roughly 20% hit to our portfolio.

We did not hide from the HQS disaster. We sent an e-mail to our investors the very next day explaining everything. Not one investor asked for his or her money back. Our investors still believed in us. We like to think we have rewarded that belief.

See full PDF below.

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