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Arquitos Capital Partners – July 2017 Performance

Steven L. Kiel:

Arquitos Capital Partners returned 1.6% net of fees in July, bringing the year to date return to 26.0%. Since its April 10, 2012 launch, the fund has provided an annual net return of 30.4%.

Separate from performance results, I want to highlight a project in which you will likely have interest. My friend Tom Jacobs spearheaded a campaign to republish the works of Maurece Schiller. After a Kickstarter campaign and other financial contributions to get the project off the ground, Tom is on the verge of publishing the first of five Schiller books on special situation investing. I had not previously been aware of Schiller’s contribution to investment analysis and learned that his books, originally published more than 50 years ago, were the foundation for the style of investing that Arquitos has successfully employed.

Tom’s idea was to add modern case studies from a variety of investors in the reprints of the books. I am happily supporting Tom and am also contributing a case study for one of the books. You can find my case study on ALJ Regional Holdings below:

 

 

Stanphyl Capital Management July Letter To Investors

Friends and Fellow Investors:

For July 2017 the fund was down approximately 0.9% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 2.1% while the Russell 2000 was up approximately 0.7%. Year to date the fund is down approximately 16.7% net while the S&P 500 is up approximately 11.6% and the Russell 2000 is up approximately 5.8%. Since inception on June 1, 2011 the fund is up approximately 90.1% net while the S&P 500 is up approximately 109.4% and the Russell 2000 is up approximately 83.2%. Since inception the fund has compounded at approximately 11.0% net annually vs 12.7% for the S&P 500 and 10.3% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two; meanwhile I continue to waive the annual management fee until we regain our high-water mark.This has been an awful year for us, and yet the fund has been down roughly this much before and

This has been an awful year for us, and yet the fund has been down roughly this much before and subsequently went on to recover that downdraft and set a new all-time high NAV, and I have every intention that it will do so again. This year’s terrible performance has been almost entirely due to our short position in Tesla, whereby despite having an overwhelming number of facts on our side (detailed, as usual, below) the stock is up 51% this year. Meanwhile, as a value investor it’s currently tough to find any companies cheap enough to buy; Howard Marks from Oaktree Management did a great job this month summarizing how incredibly overvalued this market is– here’s the link and here are the highlights:

See the rest of the letter below:

Boyles Asset Management – Q2 2017 Letter Excerpt

“In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches.” –Financial historian, economist, and educator Peter L. Bernstein (2004 interview with Jason Zweig)
As he did in his 2007 book, A Demon of Our Own Design, Richard Bookstaber returns to the story of the cockroach with his 2017 book, The End of Theory.  The cockroach has survived and thrived for about 300 million years, thanks in large part to a simple survival mechanism.  As described by Bookstaber:

…the cockroach simply scurries away when little hairs on its legs vibrate from puffs of air, puffs that might signal an approaching predator, like you.  That is all it does.  It doesn’t hear, it doesn’t see, it doesn’t smell.  It ignores a wide set of information about the environment that you would think an optimal system would take into account.  The cockroach would never win the “best designed bug” award in any particular environment, but it does “good enough” and makes it to the finish line in all of them.

This brings to mind the saying that in order to finish first, one must first finish.  But the broader point being made is that it is often simple, coarse rules that lead to survival advantages.  While these rules, or heuristics, may not be the optimal traits for an organism to reach its maximum potential for thriving in an environment, given a specific set of conditions, it allows the flexibility needed to stick around to see the finish line should the conditions change.  The observation credited to Charles Darwin about a surviving species being not the strongest nor the most intelligent, but the one most responsive to change is applicable here.  Uncertainty and change are inherent in nature, as they are in business and life in general, and it is often simple heuristics and ideas that, if pursued with discipline and consistency, can allow one to survive whatever the future may have in store.
What are some of the candidates for an investing rule that rivals the survival rule of the cockroach?  It is probably a question that one could ask 10 different investors and get 10 different answers, but for those who follow a fundamental, value philosophy, the concept of margin of safety has to be one of the key contenders for a place at the top of any list.  Even the best investors over long periods of time make plenty of mistakes along the way, and so we as investors must accept that things won’t always turn out the way we expect them to, no matter how much effort we put into trying to understand something.  Building in some margin for error in our process can help us reach the long-term survival necessary for success.
Another candidate for a key rule of survival comes from a more ancient piece of advice: know thyself.  At a recent Talk at Google, investor Mohnish Pabrai told a story about a dinner he attended with Charlie Munger.  At the dinner, Munger talked about the investment firm Capital Group, and an experiment it performed with its investment team. Capital Group assigned teams to manage different portions of its capital under management.  On several occasions, the firm set up a “best ideas fund,” in which it took the highest-conviction stock picks from each of its managers.  But each time it set up one of those funds, that fund underperformed and ultimately failed. After telling this story to his dinner guests, Munger asked the group if they could guess the underlying reason why those funds did not do well.  But dinner was then served, and the riddle was left unsolved.
Years later, Pabrai remembered the story; when he was with Munger on another occasion, he asked about the Capital Group story.  It turned out that the reason the best ideas funds failed is because of the common feature among each manager’s pick: it was the idea that he or she had spent the most time studying.
In a 2007 speech at the USC Gould School of Law, Munger warned against the dangers of drifting into intense ideologies, and made the point that as “you start shouting out the orthodox ideology, what you’re doing is pounding it in, pounding it in, pounding it in.”  And there’s a similar effect when it comes to investment research.  When there’s a decent story for a company to tell about its prospects, the more time one spends with it, the more likely one is to believe in its merits.
The solution to this psychological tendency is not to spend less time on ideas.  We feel that one of the long-term advantages that we can have in the investment world is knowing more about the companies in which we are invested than almost anyone else.  Rather, the mechanism to fight this bias is to try to suspend judgment and opinion about a company’s investment merits until one can thoroughly state the cases both for and against that company’s prospects.  We need to be aware of our own psychology, and how it is affected by the ways in which we spend our time.  And if we ever catch ourselves spending too much time preaching about the ideas we’ve spent the most time on, or not spending enough time trying to understand the case against our best ideas, then—like the puffs of air hitting the hair on a cockroach’s legs—we need to recognize that there may be something amiss.

GrizzlyRock 2017 Second Quarter Investor Letter

July 21st, 2017

Fellow Partners,

GrizzlyRock Institutional Value Partners, LP and GrizzlyRock Value Partners, LP (together “GrizzlyRock” or the “Fund”) decreased 2.03% net of expenses during the second quarter of 2017 and has returned -7.06% year to date through 6/30/17. Since inception, the Fund has compounded at 9.0% net of expenses per year.(1) The culprit of poor year-to-date performance has been the short portfolio (Fund long portfolio has a positive attribution yearto-date).

Short losses year-to-date have resulted from stock price increases of businesses with reasonable and/or cyclical revenue growth, yet a considerable lack of profitability. These businesses are not simply high quality companies at stretched valuations; rather, these companies have little hope of reaching and/or sustaining profitability given weak competitive positions, lack of technological innovation, capital market dependence, continually high reinvestment rates, and below average management teams. One could synthesize this year’s short portfolio this way: while we asserted “the emperor has no clothes and clothes are unlikely to materialize for quite some time”, for a number of businesses market claims have been “when the emperor dons clothes they will be the most magnificent clothes the world has ever seen!” Substituting the concept of enduring profitability for “clothes” explains Fund performance year-to-date.

In fundamental long/short investing, two imperative concepts are (1) being “early” is the same as being “wrong” and (2) managers must be pragmatic rather than dogmatic. This year we have made the error of being early on many short positions, yet thankfully we have been pragmatic with position sizing.

For a stock to increase markedly in price without showing commensurate profit, the narrative must appear compelling. However, business valuation over time will ultimately be grounded in economic reality. With a 9 year bull market continuing and the “fear index” VIX at all-time lows, market participants continue to pay ever higher prices for the prospect of future cash flows. Speculators are reaching far out on the risk spectrum in story stocks heralded by management teams and investment bankers with a story to tell about the “emperor’s clothes”. The current environment has not been conducive for many of our short positions, and thus our positioning has been both early and wrong.

See the rest of the letter below:

Arquitos Capital Partners – Q2 2017 Investor Letter

The coziest spot is under the warm blanket of ideology. It offers easy answers to difficult problems. But, man, is it dangerous, especially in an adapting world. Great stuff happens at the intersection of “Confident enough to take a stand” and “Humble enough to admit when something I don’t want to be true is true.” Morgan Housel

Dear Partner:

Arquitos Capital Partners returned 5.5% net of fees and expenses in the second quarter of 2017, bringing the year to date return to 24.1%. Our annualized net return since the April 10, 2012 launch is 30.6%. Please see page five for more detailed performance information.

The quote above is from a great blog post, “What I Believe Most,” by Morgan Housel. The entire post is great. The most successful investors have a unique ability to combine confidence and humility. They have to have the confidence to make the decision to buy and sell a stock when their opinion differs from the collective wisdom of the crowd (i.e., the current share price), and they have to have the humility to realize that most of the time the crowd is right.

Getting that proper balance is very difficult, especially in times of market stress. It is even harder to consistently maintain the proper mental equilibrium for effective decision-making. This is why being self-aware and intellectually honest are the two most important traits to reduce risk. If your initial reaction to stress is to deflect rather than internalize, it is going to be tough to be objective with yourself.

I’d like to address the subject of risk in this letter. This is a topic that is a lot easier to talk about when you’ve racked up a few good quarters in a row! This also is probably the most important time to do so. Lessons tend to take hold better when you are receiving negative feedback from your poor decisions. Real risks grow when all seems well.

Let’s get this foundational question out of the way: What is risk? The answer is that risk is the probability of permanent capital loss.

The chance of the price of a stock going down and the chance of the performance of the portfolio going down is not risk. Rather, risk in this context is not being able to psychologically handle a short term decline. By short term I mean less than a few years. Ignore your monthly, quarterly, and even annual returns. Look at them over a three to five year period. Your life will improve.

See the rest of the letter below:

Arquitos Capital Partners – Q2 2017 Investor Letter

The coziest spot is under the warm blanket of ideology. It offers easy answers to difficult problems. But, man, is it dangerous, especially in an adapting world. Great stuff happens at the intersection of “Confident enough to take a stand” and “Humble enough to admit when something I don’t want to be true is true.” Morgan Housel

Dear Partner:

Arquitos Capital Partners returned 5.5% net of fees and expenses in the second quarter of 2017, bringing the year to date return to 24.1%. Our annualized net return since the April 10, 2012 launch is 30.6%. Please see page five for more detailed performance information.

The quote above is from a great blog post, “What I Believe Most,” by Morgan Housel. The entire post is great. The most successful investors have a unique ability to combine confidence and humility. They have to have the confidence to make the decision to buy and sell a stock when their opinion differs from the collective wisdom of the crowd (i.e., the current share price), and they have to have the humility to realize that most of the time the crowd is right.

Getting that proper balance is very difficult, especially in times of market stress. It is even harder to consistently maintain the proper mental equilibrium for effective decision-making. This is why being self-aware and intellectually honest are the two most important traits to reduce risk. If your initial reaction to stress is to deflect rather than internalize, it is going to be tough to be objective with yourself.

I’d like to address the subject of risk in this letter. This is a topic that is a lot easier to talk about when you’ve racked up a few good quarters in a row! This also is probably the most important time to do so. Lessons tend to take hold better when you are receiving negative feedback from your poor decisions. Real risks grow when all seems well.

Let’s get this foundational question out of the way: What is risk? The answer is that risk is the probability of permanent capital loss.

The chance of the price of a stock going down and the chance of the performance of the portfolio going down is not risk. Rather, risk in this context is not being able to psychologically handle a short term decline. By short term I mean less than a few years. Ignore your monthly, quarterly, and even annual returns. Look at them over a three to five year period. Your life will improve.

See the rest of the letter below:

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