Great Investor Questions

I’ve been receiving a considerable amount of interest in the Tarpon Folio since my interview last week about Neutral Tandem on the Seeking Alpha site. The stock has performed quite well since the interview went out, which is great, but – and this really should go without saying – my interview had nothing to do with that rise in share price. Nonetheless, it seemed to increase the interest level in Tarpon among a new group of folks – in particular, traders and short-term players. And, well, that last bit kind of gives me the willies.

Here, on the other hand, was a set of questions I received this week from a long-term investor who saw that interview and had been looking for a portfolio manager that shared a philosophy with Warren Buffett. Great questions, and exactly the kind of investor who is a good fit for Tarpon. Here’s the back and forth we had:

Q. Do you have any track record returns on your fund other than the one mentioned on your site?

A. The website contains all the public track record info about the Tarpon Folio. You can see a month by month breakdown of returns in my letters to investors, listed in the News & Articles section.

Q. Who do you consult with regarding your picks (who is your Charlie Munger?)

A. I have yet to find my Charlie Munger. (They all seem to want to be Buffett, too.) I read voraciously, though, and will talk to the analysts of the various research reports I subscribe to as needed. I am careful to stay within my circle of competence and try hard to buy things that don’t need a second opinion.

Q. If you publish all your holdings regularly, what is to stop someone from simply replicating the fund?

A. The short answer is that nothing is to stop anyone from owning the same securities I do, but the kind of people who would replicate my fund aren’t the investors I’m looking for, anyways. My investors can see what we own anytime day or night, but they want me to handle everything, full stop. Prospects and potential replicators (too sci-fi?) may see a list of holdings one-time, but they won’t know the portfolio weightings and won’t know of any full sales or new positions until my next letter to investors.

Q. Really enjoyed the SeekingAlpha article on Tandem, and have liked a lot about your fund set up and investing approach. Seems like you have really bent over backwards to let people know you are trying to do it right. Read some of the articles you wrote cited on the website, and liked them.

A. Thank you for noticing. I try to be as transparent as possible, and believe that helps explain our success the first year.

Q. I read your bio and website, but could you give me some more info on what got you into value investing?

A. I don’t think I really “got into value investing” in the literal sense as much as I found something that was a great fit, and that happened to be value investing. My grandfather worked on the Street, and we’d chart the Dow together on that graph paper with the little green squares, but investing still didn’t really take with me until many years later. In the interim, I became a world class cheapskate, grew skeptical of most institutions, and I suppose I grew a naturally analytical noggin. A dozen years ago I read an article about Warren Buffett one night after slogging thru the efficient market theory at business school, and that was the original spark. Knew what he was doing not only made the most intuitive sense to me, but that I would really enjoy working hard at it to get better. So, I did.

Q. How do you go about assessing management? Do you actually visit many companies, or mainly just go by the numbers?

A. Never got much out of talking to management. I think it can compromise your judgment as an investor…particularly if you don’t recognize the soft sell and/or view it as a shortcut to doing the work. So, I mainly go by the numbers, but that does include reviewing management’s salary and stake. Bios are mostly meaningless, and talking to management usually ranks far below listening to what they tell others. Sometimes company or store visits can be useful in better understanding the business, but in general, I don’t want to invest in too many businesses with a wide gap between what the numbers say and what management does in any case.

Q. Why do you think you’ll be better than so many other value investors out there?

A. There are at least four reasons I like my horse in this race. The first is that I include certain technologies and telecom in my circle of competence, while most value investors do not. Over the next three decades, I believe those skills will on balance be more valuable for my investors than if I possessed similar expertise in, say, banks, healthcare and insurance companies. Tech will simply grow faster as a percentage of GDP, and there are hardly any value guys chasing the best opportunities in what will be the fastest-growing sector. Neutral Tandem is a recent example.

The second is that I am literally alone on an island, which is how I believe value investing should be done. I am a better investor living here in the Keys than I would be anywhere else.

The third is that I’ve successfully managed and run businesses before. I believe former operators and small businessmen tend to make the best investors.

And the fourth is that, well, I think I can outwork almost every other investor out there. Will leave it at that for now, but could go on all night…

So, if you’re interested in Tarpon, and you think about picking a fund manager the same way as the gentleman above, please contact me anytime.

Look away, short-timers!

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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