| Dear Investors,
The 2013 IIM Annual Investor Meeting will be held at 3:00pm on Saturday, May 18, 2013, at the beautiful new Florida Keys Conference Center at the Islander Resort.
At the annual meeting I’ll explain what I’ve done with your money over the past year, and why. I’ll provide a more extensive overview of our major positions in Tarpon, share some thoughts about the upcoming year and answer whatever questions you might have. And while the meeting is intended for current investors, it’s open for everyone.
If you’d like to attend, please RSVP by email before Wednesday, May 8th. I hope to see you there.
In the meantime, here is a brief update on the first three months of this year.
Q1 of 2013
In the first calendar quarter of 2013, the Tarpon Folio increased by 7.7% compared to an increase of 10.6% in the benchmark S&P 500. Since the beginning of its fifth year, Tarpon is up 25.6% compared to an increase in the benchmark of 14.0%.
Our more recent underperformance was largely attributable to an increase in the cash balance of our portfolio that began in early March. As I write, eighteen percent of Tarpon is in cash.
I sold out of several of our positions this quarter as the stock market continued to rise and those companies’ share prices approached fair value. It has been unnecessary to rush to put that new cash to work. The most attractive companies I have been considering adding to the portfolio have been getting cheaper of late, and the companies we currently own that I would like to buy more of have been drifting lower as well. So, for the past seven weeks, watching and waiting has seemed an appropriate strategy. In the interim, I’ve been looking hard at a number of new companies, and I think that work will pay off for us eventually.
I remain very optimistic about the long-term prospects of the companies we currently own. Our largest position is in Markel (MKL), a diversified specialty insurer we bought after a short-lived sell-off in late December and which is in the process of building a long-term compounding machine using the same blueprint as Berkshire Hathaway. More recently I have been averaging down a little in Daimler (DDAIF), the 125 year-old manufacturer of Mercedes-Benz automobiles, and more aggressively in Velti (VELT), a cheap technology leader with an attractive mobile marketing business that is currently being obscured by some soon-to-be-resolved cash management issues.
We also have plenty of cash available should we see a market decline for whatever reason in the coming months. If the market were to continue its unabated upward march while our largest position is in cash, then we risk missing out to a degree. But I’d rather wait for that fat pitch over the middle of the plate then start swinging at stuff in the dirt.
To be clear, I have little idea what the stock market will do in the next few months. I believe I am in the business of doing valuations, not making predictions, and currently, the stock market as a whole appears to be fairly valued. All things being equal, then, I don’t expect any large moves up or down based solely on the under- or over-valuation of the market as a whole. I do feel, however, that a fairly valued stock market means that strategies based on careful stock selection like ours should shine in the long-term.
So please don’t misinterpret a relatively high cash balance in the portfolio as a directional call on the market. I’m actually fairly skeptical that we will see a large drop in the stock market anytime soon if for no other reason than everyone seems to be expecting one. It’s a Zen koan for capitalists: if everyone is waiting for the market to drop to buy more shares, will the market ever really drop?
And while I don’t spend too much time obsessing about stock market gyrations or economic trends, there are two macro issues that I do find myself thinking about with more frequency lately.
In terms of the broader U.S. economy, it is notable to me that residential construction - by far the most beaten-up sector of the economy for years now - continues to show extraordinary gains. This rather significant economic tailwind seems to continue to be crowded out in the financial media by things like obsessing over Bitcoin, the price of gold and the declining share price of Apple. That housing is coming back strong is a good thing on many levels - at least for the foreseeable future.
Alas, it is still too hard to confidently determine the ultimate consequences of the Federal Reserve’s continued attempts to successfully lower the country’s unemployment rate. The range of potential outcomes is wide and uncertain - and it will almost certainly not be easy to predict. Naturally, I’m hoping it leads to a gargantuan bubble in the shares of a certain twelve companies. I suspect we’re not going to be so lucky, however, and in the meantime, my antenna remain up with regards to potential asset bubbles.
I’ll have some more thoughts to share on bubbles, the bond market, Tarpon and the road ahead at the annual meeting.
Annual Administrivia
Every year IIM is required to deliver to you a summary of material changes to its Form ADV - the regulatory document that provides further background on me, my firm, fees and our style of investing. To wit - you can find our latest Form ADV at this link, and the only material change you’ll find this year is that IIM has increased its assets under management to just over $16 million. Otherwise, please consider yourselves in receipt of that document this year, and let me know if you have any questions.
A Note on Beantown
When it comes to the events of late in Boston, I’ll leave it at this:
While grabbing some clam chowder and watching The Departed might be a decent introduction to Boston, I think this past week probably told you everything you really needed to know about that city.
Well, that and this video clip from Stephen Colbert.
Be safe.
Thank you for investing with IIM, and please don’t forget to RSVP for the annual meeting if you’d like to attend.
- Cale
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Cale's Notes: 