1 May 1, 2014 2014 Q1 Partnership Letter
Our net performance for Q1 was -0.2% vs. indices of: 1.5% Barclay Hedge Fund Index, 1.1% Russell 2000 and 1.8% S&P 500. Aron and I have been ramping up our new partnership together this quarter and it has been something of a transition quarter to get our processes all in place. We recruited a fantastic new board member at InfuSystem in Gregg Lehman and I announced I would be stepping back from my Executive duties and changing my role to non-Executive Chairman. The company has transitioned well past the activist chapter and is now solidly both feet into growth mode under Eric
Steen’s capable leadership.
We also welcomed a number of new investors to the fund including several of the smartest fund managers I know. We intend to tap them as resources as we build our investment process and business.
A Unique Environment
Today’s market poses
a challenging environment, one that we are uniquely equipped to handle given our idea sourcing and research software platform that we built over the last year. Overall valuations
during the 2000 “Great Bubble” were higher than today but they were concentrated
in large-cap stocks. Today, there are no large asset classes unaffected by the supply/demand balance favoring cheap capital and low returns: all asset classes are expensive. An interesting recent quantitative study showed that the median stock (which is less affected by say the
largest 100 out of 10,000 stocks being wildly overvalued as in 2000) is at an all-time high valuation
. To make stock picking even more difficult, dispersion is at an all-time low
meaning the range of EV/EBITDA multiples is narrower than ever. These two combined means that there is virtually nothing that is
cheap in the market. We have been aware of this trend for some time and started solving it starting in 2010. First using an entrepreneurial approach to activism and building value within underperforming companies. Then, after this experience gave the necessary depth, we began to systematize (
checklist + automation
) these insights and built a software platform to source ideas and optimize allocation of our most scarce resource: time.
I actually don’t believe the current environment is cyclical
but rather is the result of structural changes.
has become hugely popular and simple stock data is widely accessible. This is the reason why
cheap stocks are bid up and dispersion is at all-time lows. If the reason for an investor buying a stock is solely based on its valuation multiple, newly popular
“smart beta” funds will
express this thesis in a much more refined and accurate way across many similar stocks with less risk
those investors are librarians in an age of Google.