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Tarpon Folio
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In This Issue

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

November 2015
Part Two of Four

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Cale's Notes
Dear Investors,

This is the second of four emails I am sending out this week to update you on Tarpon.

Earlier this week I published Part One of my update, which you can download at this link.

Tonight I am publishing the next installment:

Part Two: Thoughts On Risk

It contains the sections...

- Prudent Risk
- On Risk and Probabilities
- Volatility is Not Risk
- How I Could Screw This Up
- Same Process, Different Companies
- Why Concentrate?

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

Next up in this series will be...

Part Three: Evidence of Mispricing. Coming out late Friday.

Part Four: The Opportunity. Look for this on Sunday.

In that fourth email I will also be posting a single PDF containing all four sections.

Another Recent Question

I received a few new questions after releasing Part One of my letter earlier this week. Most will soon be addressed this week, but one will not, so I will quickly address it here.

The question was regarding oil futures - as in, to paraphrase greatly, "But isn't the futures market telling us that oil prices are going to stay low for a while?"

And my response is:

The forward curve is not a forecast.

Full stop.

The price of an oil futures contract is not the market's forecast of what the spot price will be in the future. The forward curve is simply showing the price at which it is possible to buy or sell futures contracts for a forward date at a price agreed upon today.

The difference between futures prices and "spot" or today's prices in all commodities is driven largely by arbitrage - traders seeking a riskless profit by quickly capitalizing on different prices for the same asset. Regardless of actual forecasts of price for the commodity in the future, arbitrage trading prevents the futures price from deviating too much from the spot price after taking into account things like prevailing interest rates and the costs of storage.

And many of the largest participants in the futures markets don't give much credence at all to longer-term price forecasts. They're just using the futures market to hedge their near-term exposure "in the cash market." For instance, when an oil producer sells oil futures, it's likely doing so to lock-in cash flow, not because it expects the price to go down. Yet the curve makes no distinction.

The bottom line is that making forecasts or basing valuations based on the futures curve can easily result in wildly incorrect conclusions. So be careful there.

Fire away with any more questions. Stay tuned for two more emails this week.

And Please Download Part Two of My Letter Here.

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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