Dear Investors,
The annual investor meeting will soon be upon us - Sunday, May 25th, at 2:00pm at the Islander Resort. If you plan on attending, please RSVP if you have not already by replying to this email. If you're unable to attend but would like a copy of the slides afterwards, please let me know that, too. At the meeting we will review the past year, take a closer look at some of our more interesting holdings, and answer any questions you might have.
If you have any questions you want to be sure are addressed at the annual meeting, please fire away. Below I've included some questions I've gotten the past few months from investors that cannot make the meeting. Let me know if they spur others.
Tarpon is off to a good start this year, up 9.8% since the beginning of its sixth year through the end of March, and up 4.4% for the first quarter by calendar year. I recently had Tarpon's complete historical performance independently verified, and you can see those results at this link. I'll talk more about our recent performance and my future expectations at the annual meeting.
Lauretta Reeves also remains hard at work. Retz recently traveled to Europe to meet with the management teams of a number of the companies she owns or is considering buying shares of for the Frigate and Treasure Harbor Folios. You can read more about her trip here, and some pictures are also posted here on something called "Pinterest." I'm not entirely sure what that is, but Mark Zuckerberg almost certainly thinks it's worth about $20 billion. You'll hear more from Retz at the annual meeting, too.
Until May 25th, then, here is a Twitter-sized summary of our first quarter:
"Tarpon is doing fine. Retz traveled throughout Europe while Cale got lost on the way to a Heat game. Much more to talk about at the meeting. #yolo #selfie"
Here are some of those recent questions from investors.
"Are we at risk of anything when it comes to this high frequency trading stuff?"
I received several variations of this question the week after Michael Lewis appeared on 60 Minutes to talk about his new book Flash Boys.
I spoke about HFT at last year's annual meeting, and again in my most recent letter. To discuss it much further risks crossing over the line from "raising awareness of a disconcerting problem" into "whining." So I'll add just a little bit more here to my previous comments:
(1) Over the past five years the market has become a highly emotional machine that thinks quite differently than value investors like you and I. That's neither good nor bad. It's just the market. The important thing to remember is that it's there to serve us.
HFT has made the market especially quick to jump to conclusions. It tends to think more in black or white these days, and is constantly on high alert for either (a) catastrophe or (b) huge pots of gold, one of which is always just around the next corner.
In his 1949 book The Intelligent Investor, Ben Graham created the famous "Mr. Market" allegory, describing the stock market as a high-strung investor driven entirely by - depending on the day - panic, euphoria or apathy. An HFT-dominated market is a bit more like Sonny Corleone from The Godfather. It's pretty much always going to be hotheaded, reactionary and quick to judge. We can continue beating the market over time by being just the opposite of Sonny - calm, rational, wise in our choice of perspectives and, above all, taking his histrionics in stride. That and we will absolutely refuse to stop at any suspicious one-car toll booths on Long Island.
(2) Some of our transactions on FOLIO are shielded from the more pernicious aspects of HFT, but others are not. Probably. It's too hard to tell, which is part of the problem.
What I do know is that FOLIO holds billions in assets. When I make a trade in Tarpon, FOLIO first attempts to match our buy/sell orders with the buys/sells of other managers making trades on the platform at the same time. If we can get better pricing on those internally matched orders compared to the pricing available out in the market, then our orders are executed internally - out of reach of the HFT algorithms. Alas, if our orders don't match up internally, or if there is better pricing out in the market, then our orders are routed to five market makers FOLIO relies on to fill external orders, at which point our orders probably are being gamed by HFT.
"How can that be?"
It's just the way it is.
"How can I go on?"
You'll find a way.
To be clear, I lose no sleep whatsoever worrying about the negative impact of HFT on our accounts in Tarpon on a daily basis. My concerns are related to broader systemic risk, general confidence in and the economic utility of the market these days. Tarpon is a small fund and we tend to hold our shares much longer than average, and a decent number of those shares are in small companies that may be too illiquid to be attractive to HFT algos, anyway. If we are getting picked off or front-run by algos, it's much less of a concern for us than it should be for multibillion dollar pension funds. And those orders that are filled external to FOLIO typically represent a sliced up string of smaller transactions I make over time, too, which should lessen the chances of our orders attracting undue attention from algorithms. For instance, I may execute a total of 15 different small buy orders over the course of a month to accumulate a full size position for us in a company with a $150M market cap. Finally, remember that we don't pay any commissions at FOLIO, and because FOLIO tracks all cost basis info for us, there really is no disincentive not to ease our way into some positions through multiple transactions. And if by splitting all those orders up I also am decreasing or eliminating the impact of high frequency trading on our accounts, well, then that's even another reason to keep doing it that way.
(3) Lewis' book is excellent, but the important part of the story is not about high frequency trading per se as much as it is a technologically-induced morality void on Wall Street. Should you read the book, if you get stumped by the mystery regarding the microwave tower mentioned at the end, please drop me a line. Your. Ears. Will. Smoke.
Okay, I'm done on HFT. Next question.
"What happens if you die/get hit by a bus/meet some kind of ghastly end?"
This question has come up frequently enough of late that I've upped my life insurance. I'm feeling fine, mind you, but quit it, already.
The short answer to this question is, "Stay tuned." IIM does have a business continuity plan, but I will update you on the plan more formally after some pending tweaks later this year.
In the interim, though, you should know that if I pass away or otherwise become incapacitated, you will retain full access to FOLIO and your FOLIO account throughout your mandatory ten years of mourning. You would receive word of my demise - possibly through Congressional proclamation, otherwise through skywriting - and then an authorized individual would step in and offer to either (a) continue to manage your account here, or (b) help you unwind your accounts and transfer your assets elsewhere. FOLIO also has a "retail" side of their business, so if I got hit by a bus, you could personally call FOLIO and have them move your account(s) from the institutional side of FOLIO (where you are now, under my firm) over to the retail side - and you wouldn't have to sell a share or make any other changes to your portfolio. FOLIO would change how you got billed as part of that move, but the point is you would have time to find another manager on your own if desired, and there would otherwise be no changes to your account in the interim - unless you wanted to make them.
It's prospective investors that have been asking this question, usually while meeting in person. While at first I thought it must be because of, you know, a certain aura of irreplaceability...it turns out the folks in the office next door have just been microwaving a lot of fish.
The deepest question I've gotten lately was this one:
"What is the core nature of your investment philosophy?"
That question came from an investor up north who has been in Tarpon for a few years and just got into grad school at Harvard.
Please note the clear causality there. Invest in Tarpon, get into Harvard. See that, kids? You don't need a tiger mom if you've got the Tarpon Folio.
That question somewhat surprised me. I suppose I thought my investing philosophy was self-evident, but that question had come from someone who had not only been investing here for several years, but who had also referred family to invest in Tarpon - the true mark of genius, if you ask me.
However, a quick review of the letters I've sent out over the same time period does in fact show them to be heavy on performance, company commentary, and hilarious, hilarious witticisms...but light on investing philosophy. So, a dose of the philosophic, then.
First, though - I don't consciously distinguish between the philosophy I bring to the office and the philosophy I bring to the supermarket. Or when watching the Final Four. Or when raising a family, for that matter. Like most of us, I have a core philosophy by which I try to live my life, and the way I invest our money is a natural extension of that. And while a full accounting of that broader philosophy is probably outside the scope of an email, the part applicable to investing could probably be summarized like this:
I am a value investor in the Warren Buffett tradition - though I have tailored some of his ideas and process to better fit my own background and observations.
That approach entails a lot of reading, the occasional deep thought, and in short a healthy obsession with trying to find the holy grail - a competitively advantaged company that either nobody else seems to have identified yet, or that was mistakenly abandoned and left for dead. This, as you might guess, is difficult, so I am otherwise always on the alert for the best inexpensive company I can find - all in the context of trying to build the perfect portfolio. And that topic is probably worthy of a book all by itself.
In general, though, I attempt to beat the market over the long-term by making prudent, disciplined investments in a focused group of companies. I do that by following a core set of principles related to identifying economically superior companies, thinking independently, managing the risk of permanently losing money, and focusing on process instead of results.
I think I also came to value investing somewhat congenitally. Looking back on it, what impressed me the most the first time I read about Warren Buffett was that he possessed a unique kind of pragmatic wisdom. This otherwise unremarkable man from Nebraska seemed to have single-handedly created the most successful template for wealth generation in the history of man. Along the way he also proved that investing, if done in a particular kind of way, might be one of the last bastions of truly independent thinking.
To be clear, I think it's important to distinguish between Warren Buffett the investor and Buffett the man. I have other role models when it comes to being a father, husband, and member of a community. Besides, when you think about it - would a net worth of $45 billion really make you happy?
Don't answer that.
But do think about it like this:
In 1965, the man who would one day become the richest person on the planet began to write one letter a year explaining in great detail how he was amassing his fortune. What he described was not a system as much as it was a pragmatic, disciplined philosophy grounded in permanent values and accessible to anyone who cared enough to dig. Frankly, I don't know why every investor doesn't read those letters...but then again, let's not encourage them.
Congrats again on Harvard, S.J.
And in the spirit of full disclosure, I am now obligated to point out that another Tarpon investor here in Key Largo recently ran his boat aground, in broad daylight, right next to a channel clearly marked by no less than fifty shiny white toilet seats.
They're not all going to school in Cambridge, knowwhatImean?
Ah, I kid.
I'll answer any additional questions at the annual meeting. Please remember to RSVP.
And a final bit of admin - once a year I'm required to provide you all with IIM's updated disclosure brochure. You can find that here. The most material changes compared to last year's version are that IIM now manages $20 million in assets and we also have Retz onboard managing her two new international portfolios. Please let me know of any other questions. And thank you for the support, as usual.
I hope to see you on May 25th.
- Cale
|
Cale's Notes: 
