August Update for Investors

I sent out an abbreviated Letter to Investors late last night. Here it is in its entirety:

Dear Investors,

Consider this just a quick update on our August performance. I’ll have a more traditional letter to you after the end of September.

In August, the Tarpon Folio declined by 4.7%, compared to a decline of 5.7% in the S&P 500 Index. In its third year, Tarpon is up 4.9% through the end of August, compared to a negative 1.6% return for the benchmark index.

The Gecko Folio declined 2.6% in August, and in its third year is down 0.8% compared to a 4.8% decline in its benchmark over the same period.

The monthly numbers for Tarpon in particular fail to convey the kind of month we really just went through, however. In mid-month, for instance, Tarpon was at one point briefly down 16.6% for the month. The strong rally we saw in Tarpon after that, however, was due to several things, not the least of which was this:

A few days prior to the nadir in the fund’s performance, I’d made Clearwire the largest position in Tarpon, with a share price for us of $1.64. By month end, due to a string of developments, Clearwire shares closed at $3.21. In other words, we clawed our way back by notching a 96% return in our largest holding over a few weeks time.

There were probably many lessons learned by investors in August, but if Clearwire is any indication, the one that seems most appropriate is once again Warren Buffett’s advice, “Be greedy when others are fearful.”

And speaking of Buffett, our performance in Gecko was also aided this month by our purchase of high-yielding preferred shares in Bank of America just days before the Oracle of Omaha struck his own deal with BofA. I believe the investing lesson in that case was,” Sometimes it’s better to be lucky than good.” But I’ll take it.

So August, in retrospect, was a gut-check kind of month. Had we been surfing, I’d have said that some days we rode the wave, and some days the wave rode us. But we’re still paddling.

We’re not out of the woods yet in terms of the economy. Today’s unemployment report was miserable but not unexpected, and the situation in Europe warrants continued close watching. The Euro countries seem to be taking slow, covert steps towards fiscal union, which though politically controversial seems pragmatically inevitable. So in the meantime, it’s probably best we not let that Clearwire thing go to our heads.

Our companies are still cheap. Valuations will one day matter again. So, as always, we will continue to fight the good fight.

More in a month. Enjoy the long weekend.

– Cale

Here are the answers to the most common questions I’ve been getting about the letter so far:

I made Clearwire a 10% position in Tarpon in the middle of the month. I would have made it bigger, but it started to get away from me.

No, I haven’t sold a share yet. There are not too many times you come across an opportunity like that. It could make for a bumpier short-term to hang on, but it will ultimately prove wise, I believe.

You can sign up to receive my letters directly here. The archive is here.

Disclaimer: This post in no way constitutes investment advice. Same for my Letters to Investors. My investors and I own shares in Clearwire. Commentary on this blog or my emails should never be relied on in making an investment decision.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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