Dear Investors,
Please save the date: the 2012 IIM Investor Meeting will be
held on Saturday, February 18th, here in Islamorada. That is
President's Day weekend, so if you're looking for an excuse to
spend three days on a tropical island in the middle of winter,
there you have it. More details to follow over the coming
months.
While we still have several weeks to go until late November
and the official end of Year Three for the Tarpon Folio, it
seems reasonable to assume at this point that even after a terrific rally in October, our annual return
for this particular year will likely be a mid-single-digit
negative number. The broader stock market's performance over
the same time period has also been rather uninspired, but I
think we both hold me to a higher standard, regardless.
As I write, then, I am on the cusp of conceding that I may
not have generated any gains for us at all in Tarpon as
measured from a date twelve months ago. In addition, the
volatility in Tarpon the last six months has been quite high.
That first admission is humbling, frustrating and directly
responsible for an uncomfortably high number of new gray hairs.
But in case it wasn't obvious by now, in reference to that
second point on volatility - well, I can live with it. The real
risk in investing, as Warren Buffett likes to point out, is not
volatility. It's not knowing what you are doing.
Despite all the gut checks we went through this year, my
conviction about the valuations of each of our companies
remains high. And while those values continue to take a
backseat to concerns about Europe, they will matter again.
Compared to Tarpon, the Gecko Folio has been performing
better in its own third year, up approximately half a percent
through the end of October and outperforming its benchmark by approximately two percentage
points since the end of year two.
In terms of Tarpon's performance, though, it's been a tough
six months that I made even tougher for us, at least in the
short-term, by putting more of our money to work in some of our
most beaten-down names, some of which have yet to recover. I
think this goes without saying, but I wouldn't be doing that if
I didn't think that short-term pain would be offset later by
more long-term gain. And like many of you, I wouldn't mind too
terribly if the long-term would hurry up and get here already.
But such is investing.
For what it's worth, I'm feeling that decline in Tarpon,
too. That's the whole point in a Spoke FundŽ, after all -
investing with someone who will be in it together with you, no
matter what. And though I'm disappointed in a probable
negative return for the year, I am not overly concerned about
it. We will march on.
At a high level, I tend to view each of the last three years
of Tarpon Folio performance as being characterized by separate
kinds of risk. That first year saw the threat of systemic
financial collapse. The second was more a year of macroeconomic
risk - whether or not the country was going to pull out of the
worst recession we'd seen in 70 years. The most relevant risk
this year has been, without a doubt, political.
Trying to quantify those political risks in markets both
here and in Europe over the past six months has been an
exercise in futility. In what may be the understatement of
2011, politicians do not always act rationally. To some extent,
our performance this year was in part due to my presumption
that political representatives on both sides of the aisle, and
on both sides of the pond, would act either more rationally or
with more urgency than they ultimately did. Mea culpa.
Fortunately, American businesses as a whole have always found a
way to not only adapt but thrive in the long-term no matter
what the political headwinds might be. Always.
Here is what I'm most enthused about looking ahead - the
price to fair value ratio of the Tarpon Folio is very
attractive. In other words, if the companies we own become
re-valued by the market at a level that I believe is more
representative of their true worth, then we will do very well. And that point will be my main focus of the annual meeting in February. I'll walk through the companies we own, give you my $0.02 on each, and hopefully help you better understand why I've already put a lousy Year Three in the rearview mirror. With regards to the next few weeks in particular - prepare for a glorious lack of window dressing. I will make no changes to our portfolios in the final weeks of this or any other year in an attempt to try and temporarily squeeze out a few more basis points of return as the clock winds down. Our returns will be what our returns will be. Again, it is our companies' values that I'm obsessed with, not their share prices. So, Tarpon investors, consider the February 18th meeting your chance to vent, shake your fists, and/or throw tomatoes at yours truly. Please plan to come to Islamorada if you can. Consider it tropical group therapy. Without the hugs, I mean. I am also very well aware that I have plenty I must prove to a number of you this coming year. Challenge accepted. Of course, you never know. The books on Year Three haven't officially been closed yet. If Tarpon rallies strongly between now and then - a possibility for sure these days - then this email could spontaneously delete itself. And if that last minute rally does happen, then next February we will skip the formal annual meeting. Instead, we will Occupy Tiki Bar. Thank you for hanging in there. On to Year Four. - Cale | 
Cale's
Notes: 