From January 1, 2016, through the market close yesterday, the Tarpon Folio is up approximately 20.4%, net of fees on an unaudited basis.
I will spare you another 80-page report in this letter. I'll review things in more detail at our upcoming annual investor meeting, the timing of which you can find below.
For now I'll leave it at, "We're still working off an oil-induced hangover from a lousy end to 2015, but we're getting there - and most importantly, our thesis about oil prices is very much intact."
Specifically, the market is grossly underestimating the damage being done to non-OPEC production outside the U.S. being caused by unsustainably low prices, supply disruptions, capital expenditure cuts, and the long-ignored decline curve. As a result, the world is at elevated risk of sleepwalking into a supply shock in the not-too-distant future. And between now and what is likely an inevitable price spike, oil prices will rise significantly.
So the energy companies we own in Tarpon and Gecko represent a rare opportunity. We either win big, or we win yuuuuge.
But let's not get carried away. In the short-term, there are several reasons why oil prices might retreat a little over the next few weeks. And a bit further out, I would also ask you to keep in mind the following...
Watching me buy shares in oil companies this past February in particular was emotionally challenging for many of you. Things were awfully tense, and more than a few of you were, um, temporarily displeased.
Shoot, I was scanning the sky for drones every time I stepped out of my truck.
But now that we've come this far, I need to ask you to steel yourself for something that might even be more difficult:
Buying oil companies when WTI was trading under $30 a barrel may soon prove to have been relatively easy. Continuing to hold shares after they double may feel a bit naive. And I am almost certain that watching the same shares double again - yet not reacting in the least - is going to make some of you think The Joker in The Dark Knight was rather well-adjusted compared to your portfolio manager.
Yet that is exactly what I intend to do. I am not managing Tarpon for emotional comfort. I am managing it for returns. So we're going to hold on to these companies until we milk every last possible penny of compounding out of them - in other words, until oil reaches a price far higher than where it trades today.
The reason we have been buying shares in spite of all the panic and gloom of late is the very same reason we will continue to hold them for the foreseeable future. And that reason is, well, math.
The math of compounding, specifically.
My biggest regret in the past eight years of managing Tarpon is, unequivocally, selling the stocks we owned on day one. We had such good prices on such good companies back in late 2008. That's some self-flagellation for another day, however. My point here is a quantitative one:
The lower your cost basis in a stock relative to the current share price, the more significant your future outperformance will be for a subsequent share price increase - and the more rapidly your outperformance will accelerate over time, too, all things being equal.
Bankers call that compound interest. Math geeks call it an exponential growth function. Either way, the benefits that can accrue to a patient accumulator of deeply undervalued shares - assuming the buyer has the fortitude to let those shares compound maximally during periods of truly significant revenue increases - can be so mind-boggling that to the greatest investor who ever lived, Warren Buffett, the only rational course of action for the owner of such a rare security is, simply, to never sell it.
I believe we own a number of those securities in both Tarpon and Gecko today. If I am right, but I prematurely sell one of them, then we will have forgone the potential lollapalooza effects of compounding. I will also be resetting the bar in terms of what will be required of us to subsequently beat the market afterwards. And we haven't gone through all the angst of sub-$30 oil prices to start taking it easy now.
So, please mentally prepare yourselves to soon shift from seeing a lot of trading the last few months...to doing nothing at all. On purpose.
To be clear, it is not my intention to never sell the shares we currently own. The oil business is cyclical, capital-intensive, debt-laden, controversial, and - when it comes to Wall Street - has been completely over-run by algorithms and short-term speculators. My plan is to exit these oil companies near the peak of the next cycle, and then return to investing in less cyclical companies, depending on what opportunities are available for us then. Probably. I might start an iguana farm instead. Depends on the margins.
But for now, we've got very good odds of realizing remarkable returns over the next two to three years. So we're staying put in the oil patch for the time being, even in the face of significant appreciation and whatever volatility may come. And - heads-up, people - we will probably unintentionally overstay our welcome a little too long at the top of the cycle, just because my bias will be to make sure we have maximized this current opportunity.
So consider yourselves warned that I am not going to time our eventual exit perfectly.
But we are fools if we leave too soon.
Right now, however, I need about three more weeks to evaluate some forthcoming updates from our companies - after which we should be in the clear for the rest of the cycle. I will then attempt to finally satisfy my perfectionist tendencies when it comes to our position sizes in both Tarpon and Gecko.
And after that, Retz and I will report to you at length on all our portfolios. We are pleased to announce...
IIM's First Online Annual Investor Meeting
***Please Save The Date***
2:00pm EST on Thursday, May 26, 2016
I'll update you more on Tarpon then, and Lauretta will also report on her international portfolios.
In fact, Retz recently returned from a trip to Europe to meet with the management teams of a number of companies in her portfolios. You can read a
summary of her trip here and some
preliminary thoughts on her portfolios in 2015 here as well.
This year's annual meeting will be online. It will be exclusively for IIM investors. It will last about an hour. A replay for IIM investors will be made available afterwards, too. More details soon.
We hope you can join us online on the 26th. In the meantime, please send us any questions and comments you'd like to hear more about at the annual meeting.
Thank you for the patience. I look forward to updating you more soon.