From Whitney Tilson's just released letter: "It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history." Is that so? May one inquire, in the aftermath of the JPM CIO scandal, does T2 mark the bulk of their positions, which as Zero Hedge disclosed recently are call options, based on market, or based on magical bid/asks, to be made up on the go (as in JPM'scase)? That's right - a hedge fund which "invests" in theta. Is there any wonder why the "hedge fund" with about $200 million in actual stock-based AUM (the balance being calls and warrants [18]), may be the first one with a negative Sharpe ratio? For a visual summary of why LPs (aside from friends and family of course) in T2 are singlehandedly propping up the bottom line of Dramamine, see the chart below.
From T2:
As you can see from the chart below, our 15 largest positions at the beginning of the year had huge gains in the first quarter (blue bars). At that point, we still thought that these stocks were moderately cheap, which is why we continued to hold them, but as the margin of safety diminished, we maintained our selling discipline and trimmed a number of holdings, including Netflix, Dell, Howard Hughes, J.C. Penney, Citigroup, and Pep Boys. Obviously we wish we’d sold more, but the gains we harvested account for most of our returns this year, as our long book, collectively, is back to being roughly flat on the year, as shown by the red bars in the chart:
As a reminder, Tilson's Iridium position is WARRANTS. One wonder: does one use Black Scholes to "mark" these?
[19]
But wait, there are more brilliant insights from the permanent CNBC fast money fixture, who links to Doug Kass missives and Bill Ackman presentations. Here he is on volatility, and why Negative Sharpe ratios are actually good for you!
Over the past ten months, our fund’s monthly returns have been extremely volatile, with our two worst months but also our 3rd and 4th best months ever. Emotionally, this is hard; all other things being equal, we would prefer to make money steadily every month. But of course all other things aren’t equal. The vast majority of money in the world is invested by people who can’t stomach volatility and are willing, either consciously or unconsciously, to sacrifice profit in exchange for lower volatility. Witness the interest rate on 10-year U.S. Treasuries falling to below 1.5% on Friday – and rates are even lower in Germany, Japan and eight other countries. It is utter madness for long-term-oriented investors to accept such low interest rates, especially with monetary printing presses around the world going at full speed, making inflation a real concern over time. But institutional investors of the world are so scarred by losses on low-quality sovereign debt and stomach-churning volatility in the stock markets that they flee to islands of perceived safety – even though, to quote James Grant, these islands (especially Japan) are offering nothing but “return-free risk.”
We have the opposite point of view: not only do we ignore month-to-month volatility in our pursuit of superior long-term returns, but at times we knowingly invest in many highly volatile stocks, but only – this is key – when we’re confident that we’re getting well compensated for doing so. For example, last August and September, the last time investors fled to safety, we added to stocks like Citigroup, Goldman Sachs, Netflix, and J.C. Penney. This paid off late last year and early this year, giving us the chance to harvest some nice gains, and now – in a case of deja vu all over again – we’re getting another bite at the apple.
For those hoping for risk free alpha, just do the opposite of the below:
Updates on Certain Positions
In our previous monthly letters this year, we’ve discussed Netflix, J.C. Penney, and St. Joe (January), Berkshire Hathaway (February), Iridium, dELiA*s, and MRV Communications (March), and Barnes & Noble, Netflix, SanDisk, and Grupo Prisa (April), so in this letter we’ll focus on SanDisk, Dell, J.C. Penney, AIG, the U.S. financials, and Pep Boys.
SanDisk, Dell and J.C. Penney
SanDisk, Dell, and J.C. Penney all reported weak Q1 earnings recently and their stocks tumbled. In SanDisk’s case, revenue fell 7% and adjusted EPS fell 39%; for Dell, revenues and EPS fell 4% and 27%, respectively; and for JCP, revenues were down 20%, same store sales fell 19%, free cash flow was severely negative, and the company suspended its dividend.
In the cases of SanDisk and Dell, both stocks appear cheap on every metric, especially after their recent declines, but we weren’t able to develop the conviction that their problems are temporary and will reverse. For us, there’s too high of a chance that they turn into a value traps so we closed out our positions.
In the case of J.C. Penney, we came to the opposite conclusion: we believe that our investment thesis remains valid and that the stock’s intrinsic value is much higher than current levels, so we view the recent selloff is a gift because we’ve been able to add to our position at more attractive prices.
Short AIG:
AIG
Our largest new investment this year is AIG, which is now our 5th largest position (after Berkshire, Iridium, J.C. Penney and Howard Hughes).
The punchline:
When a company in our portfolio reports disappointing earnings, we tune out the noise and shortterm orientation of the market
And reality too.
Many, many, may more words in the full letter below, all designed to mask one simple fact: the man writing them really has no clue.