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Dear Investors, I have two updates for you in this letter: 1 - Our annual investor meeting will be held in Islamorada on the afternoon of February 19, 2011, which is the Saturday of President's Day weekend. Consider this the official all-clear to buy airline tickets if needed. More details will follow over the coming weeks. RSVP by email or phone if you plan to attend. And please contact me if you have questions about lodging or anything else, for that matter. 2 - Since I last wrote, the Tarpon Folio notched its official Year Two results. Drum roll, please. I hereby note that after recording a 91% return in its first full year, Tarpon in its second year returned…wait for it… 1%. That's right. An additional, after-fee, pre-tax return of 0.92% since the end of year one. Yeah, I know. Restrain yourselves, please. I probably don't need to tell any of you it's been a bit of a nutty year. Tarpon has been up by as much as 16% during the year and down by as much as 15%. We've been 4.5% ahead of the S&P 500 in year two, and ended up lagging the benchmark by 9.0 percentage points on the final day of the year. In short, we were all over the map. As measured since inception through the end of its second year, Tarpon is up 92% and is outperforming the benchmark S&P 500 by 44 percentage points. And you may be pleased to know that in the first 14 trading days of year three, Tarpon is up 7.5% compared to the S&P 500's rise of 3.4%. So we're closing that gap in year two underperformance already. This year's historic market volatility leads me to view that year two number as being more like a snapshot taken in a wind tunnel then the culmination of a year's worth of effort. But there's no denying that as measured by the calendar, our returns were anemic. I also put on 15 pounds and drank a small rainforest's worth of coffee this year, but I suppose that's why you hire me - to get pale and pasty while reading SEC filings so that you don't have to. In any case, after a long string of faux crises in year two, we are humbled but still in the fight. And I'll buy a Guinness for anyone who convinces the Irish to schedule any future debt crisis for the week after Tarpon's year-end next time. If there is one immediate lesson to be learned from this year's performance, it's that activity and investing don't mix. The main reason for our underperformance this year seems clear. We trailed the market for the last six months of year two because that was when I began to make a relatively high number of changes to the portfolio. It was particularly challenging to time our new share purchases right at the bottom of their trajectories, which meant I was buying shares earlier this summer as they were going down…using proceeds from the sales of other companies' shares that were going down with the broader market, too. But by staying in that batter's box and averaging down a heckuva lot this summer, we were able to get as low a cost-basis as possible on the shares we now own. And as another fund manager once said, when investing, the lowest cost-basis wins. As I've mentioned in earlier letters, some portfolio managers keep a large percentage of cash on hand no matter what, specifically to take advantage of dips. I am not adamantly opposed to holding cash in a portfolio, but this summer we held very little cash as I wanted to be absolutely sure we were fully invested whenever the market realized it was pricing our companies way too cheaply. My point here is that our underperformance this year was driven by my own actions - specifically, changes I made to give us the best opportunity to outperform by more in the future. It was a trade-off in a very literal sense. None of our companies blew up, nor do I believe I have misjudged anything material. And if not for the market chaos early this summer, we would not have a portfolio with anywhere near the latent potential we now do. Over time, then, I expect the changes I made to unequivocally result in better performance relative to the broader market than if I had done nothing this summer. So while I hate to disappoint anybody, I am okay playing the fool now and reporting a 1% return this year to you. I'm kind of used to that role, actually. I live with three women. Also, although I think this goes without saying, I'll point it out just in case: building a portfolio that does great for twelve months and then limps along for twelve years is not a worthy goal. It's not worth my time, nor your money. And while there are certainly quite a few different ways to manage money, there is only one way I know of that can make both investors and manager proud. While I'm not as excited about this year's results, value investing rarely works in the short-term, and this latest version of the Tarpon Folio was put together only a short time ago. It's like the Miami Heat, with fewer tattoos. Both will get better with time. And I don't intend to change a thing. So, I will continue to work hard to grow our portfolio as much as possible, as safely as possible over the coming months and years. Hope to see you in February. And don't forget to RSVP! - Cale
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Cale's Notes: 