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Tarpon Folio
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In This Issue

bullet Cale's Notes: The Contrarian's Burden: Part One
bullet About the Tarpon Folio: More on our flagship Spoke Fund

November 2015
Part One of Four

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Cale's Notes
Dear Investors,

We've got a lot to cover.

It's been a busy few months. My time has been focused almost exclusively on the oil market and U.S. exploration and production companies ("E&Ps").

It's also been a frustrating few months. After an unremarkable 2014, we were starting to see some respectable returns earlier this year - until the bottom fell out in late June.

From the first of this year through the market close last Friday, Tarpon is down 19.7%, net of fees on an unaudited basis. The benchmark S&P 500 index is essentially flat over the same period.

I regret that I am unable to report good news to you all the time. In the end, there was much this summer that I could not control. What I can control, however, is being on top of things. The material that you'll receive from me this week is, essentially, my testimony to you that I am.

I am well aware of how much trust you all put in me. Please consider this update my attempt to reassure you that it is well-placed.

Lauretta Reeves has also been quite busy here at IIM. Retz has an update on her three international portfolios in a letter of her own, which you can find here at this link.

I'm also proud to announce that Retz was recently elected as Chair of the Burroughs Wellcome Fund Investment Committee and a member of the Burroughs Wellcome Board of Directors. Burroughs is an independent private foundation based in the Research Triangle of North Carolina dedicated to advancing biomedical science by supporting research and other activities.

Should you peruse the bios of other board members, you'll note Retz is in some serious company on that board, which includes a Nobel Laureate. I'm told her first motion will be to move their February meeting to the Keys.

Please congratulate Retz the next time you see her, or you can email her here.

Standby For An Epic

My entire update to you on Tarpon will be delivered in four separate emails over the course of the coming week. In each email will be a link to download a separate PDF file containing my thoughts on a particular aspect of Tarpon. These four PDF updates make up my single letter to you all. I was tempted to send the entire report out as one very long PDF, but in the end, a letter that is informative, but that you do not read, is of no value.

So, I'm breaking it up and sending it out in pieces instead. I hope you can find the time to read, contemplate, and ask questions about each section.

The four PDFs I will be sending you this week are as follows:

Part One: Eighty-four Days Without Fish (An Introduction)

It contains the sections...

- What Happened in Tarpon
- What I Am Doing About It
- The Short Version
- Investor Q&A

The PDF for Part One is now available to download at this link.

Part Two: Thoughts on Risk. This will come out on Wednesday.

Part Three: Evidence of Mispricing. Look for this on Friday.

Part Four: The Opportunity. I will send this out next Sunday.

The entire report is lengthy. I wanted to explain this year's performance, the market's volatility and our new focus on a single sector. And some things are impossible to generalize.

This letter went through a number of drafts. My editor deleted my best jokes. I secretly pasted them back in. My editor is my wife. That last bit may have been a mistake.

If I were to compress this entire update into a single message on Twitter, it would be this:

I refuse to let other people do our thinking for us. Also, the decline curve never sleeps.

The Short Version of The Entire Letter

The popular consensus is that the oil market is grossly oversupplied, due to Saudi Arabia's determination to retain market share at the expense of U.S. "tight oil" producers - a relatively new breed of oil companies drilling in shale, sandstone, and carbonate rock. In this consensus view, the market will remain oversupplied until significant amounts of current production are reduced - a potentially long, painful process.

My view is different. I believe there are fundamental industry trends being ignored that, unless oil prices rise fairly soon, mean the oil market is at risk of sleepwalking into a supply shortage in 2016. In the meantime, the price of oil is unsustainably low and should self-correct fairly soon.

This collapse in oil prices has created egregious mispricings in securities across the capital structures of numerous energy companies. The common stock prices of U.S. exploration and production companies in particular appear the most untethered from conservative appraisals of true value. A number of these firms represent exploitable, once-in-a-decade opportunities for patient investors to compound capital at high rates of return with significantly less risk than extreme levels of volatility might otherwise imply.

In the full update that I will send to you over the course of this week, I further explain the reasons why I differ from the consensus. The short version is this:

I believe a significant and sustained rise in oil prices is inevitable much sooner than consensus. Massive cutbacks to drilling programs plus natural decline rates across the world's oilfields may render the industry temporarily unable to increase production enough to control the pace of an increase in oil prices as demand begins to exceed supply.

Oh, and also:

Is it just me, or does the Middle East right now look like a Tom Clancy novel that ends in massive sectarian war?

Because, um, nobody has told the oil market.

The shares of the companies we now own in Tarpon have been extremely volatile. But that same volatility appears to have driven out the vast majority of institutional investors, who because of clients far less patient than you all, are doing their best to avoid the sector entirely. This has temporarily left us with a large, exploitable advantage over some of the biggest investors in the world.

I believe the odds we have on our side right now are the most favorable we have seen in any area of the stock market since late 2008. As a result, Tarpon is now entirely focused on this opportunity. I have deliberately chosen to concentrate our efforts and capital here. We are, effectively, all-in on U.S. energy companies, and this is somewhat of an unexpected and dramatic shift in our holdings.

I'm hoping the full update I send you this week will help explain why.

Please Download Part One of My Update Here.

I will send you the next installment, Part Two: Thoughts on Risk, on Wednesday.

Stay tuned for more emails this week. Please let me know if you have any questions. And thank you.

- Cale

About Tarpon

The Tarpon Folio is an innovative, investor-friendly alternative to the traditional actively managed mutual fund. It's built on a model we call a Spoke Fund.

Spoke Fund is a group of separate investor accounts linked to a portfolio containing a significant portion of the net worth of the portfolio manager. Cale Smith at IIM is the creator and owner of this trademarked and proprietary approach to better transparency and integrity in investing other people's money.

Fees for Tarpon are 1.25% of assets annually, assessed on a monthly basis. Turnover, taxes and trading are minimized in the fund, which uses a long-term value investing strategy.

For more information, visit our website.

Here is our privacy policy, our Form ADV and our Fiduciary Oath.


Historical performance data above represents performance results as reported by the portfolio identified. Performance results are for illustration purposes only. Historical results are not indicative of future performance. Positive returns are not guaranteed.

Individual results will vary depending on market conditions and timing of initial investment. Investing may cause capital loss. The S&P 500, used for comparison purposes, is significantly less volatile than the holdings of the funds listed. The performance data is net of all fees reflecting the deduction of advisory fees, brokerage commissions and any other client-paid expenses. The performance data includes the reinvestment of capital gains and dividends.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.

© Islamorada Investment Management. All rights reserved.

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