Whitney Tilson’s email to investors discussing Zeke Ashton closing down his fund.
Speaking of smart investors, my friend Zeke Ashton of Centaur Capital in Dallas decided to close his fund recently. The investing world is poorer for having lost a great investor, writer and teacher – and a true class act. Here’s a picture of us at Guy Spier’s wedding in Mexico in 2003:
Zeke Ashton and I met in the crazy days of the internet bubble nearly two decades ago when we were among the few value guys writing for the Motley Fool. When he decided to launch a fund in 2002, I was one of his seed investors (my single greatest investment of all time on an IRR basis!) and later backed him to start and manage the Tilson Dividend Fund under our umbrella when we got into the mutual fund business.
Zeke is a conservative value investor who nevertheless, far sooner than I, was able to see value in tech stocks and other sectors usually shunned by value investors. Over nearly 17 years, he earned his investors a total return of 423.3% vs. 313.7% for the S&P500. His best year was 2008, when he was down a mere 6.9% vs. -37.0% for the S&P.
While he didn’t keep up with the long bull market since then, on a risk-adjusted basis, he did well until the very end, as you can see in this beautiful final letter that he sent to his investors yesterday. In it, he makes a very important point about the value of a fund like his, which managed volatility well, vs. a passive index like the S&P:
Despite the buy and hold returns of the S&P500 for the period, my view is that Centaur added considerable value for many investors that is not captured in the cumulative returns above. The reason for my belief is simply due to recognizing the behavioral realities of investor decision making. What I can tell you from personal experience is that very few investors, and particularly those in passive broad market index products, did not get shaken out of the market at some point in two bear markets of 2000-2002 and then again in 2008-2009, or even at any one of several other junctures over the years.
Let’s look at an actual real world “worst case” experience for Centaur Value Fund investors versus that of the S&P500 Total Return index fund. CVF investors had only to endure one peak-to-trough decline in value of greater than 25% throughout the Fund’s entire tenure, that being a mark-to-market loss of 29.9% running from July of 2008 through March of 2009. However, CVF recovered fully from these losses and reached a new high within twelve months. Additionally, CVF had generated a greater than 30% return in the twelve months immediately prior to July 2008, offering CVF investors a bit of extra “emotional buffer” to draw upon during the period of intense fear and uncertainty that was to follow. A number of CVF investors actually found the conviction to add to their investments when markets were at their scariest point in late 2008 and almost all CVF investors at least held tight and came through the period with both capital and psyche fully intact.
The S&P500 Index, by contrast, declined by more than 50% from November 2007 to February of 2009, and it then took 53 months for the index to recover those losses (and 58 months to sustainably surpass the old November 2007 high). I can assure you that many (and maybe most) “buy and hold” investors struggled to hold on during this very long and very difficult period. And not only did many investors capitulate and sell during this time, but many also likely paid taxes on accumulated gains from prior years - or at least they did if they had any gains left. Finally, of course, these same investors would be left struggling with the difficult decision of when or if to jump back into the markets again as the stock market eventually recovered.
I won’t say that Centaur Value Fund investors were unaffected by occasional market turbulence, but I can confidently say that very few were shaken out at the worst times.
I believe that Centaur’s biggest value-add was protection against the extremes of the market, particularly the defense against deep losses, that prevented CVF investors from the classic behavioral mistakes of buying high and bailing at the lows.
Zeke Ashton also wrote some wise words in his September 2017 letter (at the exact time I closed my funds), which I think capture well what I call “the lament of the value investor” in this long, complacent (until recently anyway!) bull market:
This is probably a good time to make it clear that we find ourselves slowly and carefully moving the acceptability lines at the margins of our buy and sell discipline in our efforts to keep capital productively deployed in this very expensive market. We are doing our best to be both thoughtful and prudent about how much we do so. We know that the temptation to change one’s valuation standards in and of itself is probably a late market cycle indicator. However, I do think that some accommodation and adjustment to our discipline on the sell side was probably somewhat overdue. I think we’ve historically been too quick to pull the sell trigger and accept a good outcome on certain investments when we could have held on longer and gotten a great outcome.
…First of all, let me say that I personally am not convinced that the lack of any overt signs of euphoria or wild speculative participation on the part of retail investors means that stocks cannot suffer either a material correction or a bear market given the current valuation levels.
… One of the reasons I’m writing this letter now that I believe most investors systematically underestimate how they will be affected when a correction or a bull market comes. Stocks have been going mostly up for nine years now, and it feels like they will never – and maybe even can never – come back down. When thinking about it in the abstract (if they think about it at all) most people naturally believe that in times of stress that they will behave rationally, and that they won’t be among those who panic and sell at the worst possible time. The reality, of course, is that most investors aren’t so rational when the time comes, because when stocks are going down they feel like they might never go back up.
… We also want to remind you now that the Fund’s strategy is designed to be resilient and to handle stormy weather, and it has weathered corrections and even bear markets in the past and come out the other side reasonably well intact. Also, I’d like to remind you that to some extent ours is a strategy that needs a certain amount of volatility and the occasional market correction in order to re-stock the portfolio with bargain securities in order to produce the returns we are seeking. The really great investing opportunities are almost always found in environments of fear and doubt, and it is critical to our strategy to have strong hands during such times. It’s for this reason that we won’t be lulled into complacency by the market’s recent strength or the current low volatility levels.