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March 20, 2016

Investors like to talk about what’s working in the portfolio. It feels good to talk about investments which have played out as expected. And clients like to hear about how much money they have made in these “good” investments.

As a result, many investors focus on their winners. Such a focus allows investors to pat themselves on the back. Winners also provide clients with confidence.

A pat on the back feels good. Losing money does not. Hence, we seek positive reinforcement – more back patting – and fewer of those difficult conversations.



Back patting is dangerous behavior. Investors are better served by questioning how they might be wrong even when they appear to be right. Time spent reviewing investments that are not “working” is more productive than celebrating those that are.

In short, prudent investors focus on how they may be wrong. They revisit their original assumptions; they consider new data points and the potential impact on fair value; they seek out variant perceptions to consider what may have been overlooked.

Sometimes, the answer is obvious. New data or an unexpected shift in fundamentals may vary from initial expectations negating the original thesis. Sometimes, the answer is less obvious. Technological disruption often goes unnoticed for years before it is too late.

“Worst” Case Scenario at SeaWorld – Not So Bad

Some markets are more susceptible to disruption than others. The amusement park industry is a mature market. Mature markets don’t grow at internet speed, but they do generate predictable cash flow and benefit from strong barriers to entry. There has not been a new amusement park built in this country for a long time. These characteristics are unlikely to change anytime soon. That said, there are several stock-specific risks to our investment in SeaWorld.

In the wake of Blackfish, we considered several possible outcomes from the backlash in popular sentiment. The worst case scenario assumed SeaWorld would be forced to release its killer whales from captivity. Conventional wisdom assumed this would be a death sentence for SeaWorld. We questioned the logic underlying this assumption. Would an end to SeaWorld’s killer whale shows really be that bad for the company? We didn’t think so.

We got our answer this week. SeaWorld announced it will end orca breeding. It will introduce natural habits for the remaining orcas in captivity. And it will launch a new partnership with the Humane Society of the United States. How did the market respond? Not so bad.




The killer whales under SeaWorld’s care today will be the last in captivity. The company still has its share of challenges. But the threat from PETA and friends has now been all but eliminated. What else can they complain about at this point?

It was impossible for prior management to imagine the company’s future without Shamu. But new management wasn’t held hostage by the same intractable views.

New management, led by Joel Manby, turned the company’s biggest threat into an advantage.Manby’s fresh perspective addressed public concerns head on. At the same time, it instantly created scarcity value.

The killer whales at SeaWorld represent our last chance to see these beautiful creatures in captivity.Counterintuitively, attendance may actually increase as a result. Margins should benefit in time as well. We shall see.

At today’s price, the market still assumes we are wrong. We’ll find out soon enough. If attendance rebounds from currently depressed levels, the stock , the stock should recover. If it does not, the market will be proven right, and we will respond accordingly.



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