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Islamorada Investment Management - Contact us at: http://www.islainvest.com

In This Issue
bullet Cale's Notes: A Glorious Lack of Window Dressing.
bullet About the Tarpon Folio: More about our Spoke FundŽ.

Letter to Investors

October 2011

www.islainvest.com csmith@islainvest.com (305) 522-1333


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Cale's Notes

Cale Smith

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


About The Tarpon Folio

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 FundŽ.

It is more transparent, takes more concentrated positions and is significantly less expensive than the vast majority of mutual funds. The portfolio is managed for long-term growth using value investing principles.

Fees are 1.25% of assets annually, assessed on a quarterly basis. Turnover, taxes and trading are minimized in the fund, and investors can customize their accounts in several key ways, including tax preference. Each Tarpon Folio account is also protected by three types of insurance for a maximum of up to $9.0 million

For more information, visit our website.

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

Disclaimer

See our performance disclaimer for more. Any historical performance data contained above represent performance results as reported by the portfolio listed. The 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 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.

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

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