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T2 Accredited Fund Annual Letter-2011

T2 Accredited Fund Annual Letter-2011

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Published by VALUEWALK LLC
whitney tilson t2
whitney tilson t2

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Published by: VALUEWALK LLC on Jan 10, 2012
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02/27/2013

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The GM Building, 767 Fifth Avenue, 18
th
Floor, New York, NY 10153
Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160 Managing Partners fax: 240 368 0299www.T2PartnersLLC.com
January 4, 2012Dear Partner,We hope you had wonderful holidays and wish you a happy new year!In each of our annual letters we seek to frankly assess our performance, reiterate our core investmentphilosophy, and share our latest thinking about various matters. In addition, we discuss our 15 largestlong positions and so you can better understand how we invest, what we own and why, and why we haveso much confidence in our fund
s future prospects.
Performance
There is no way to put a positive spin on 2011: our fund had a dreadful year, its worst ever on both anabsolute and relative basis. While we made a bit of money on the short side, nearly all of our longsentering the year did very poorly and, compounding this, most of the investment decisions we madeduring the year subtracted value. It has been an extremely frustrating
 – 
and humbling
 – 
experience.
December 4
th
Quarter Full YearTotalSinceInceptionAnnualizedSinceInception
T2 Accredited Fund - net 0.1% 6.5% -24.9% 114.2% 6.0%
S&P 500 1.0% 11.8% 2.1% 29.2% 2.0%Dow 1.6% 12.8% 8.4% 79.6% 4.6%NASDAQ -0.5% 8.1% -1.0% 23.6% 1.6%
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2 Accredited Fundwas launched on 1/1/99.
This chart shows our
fund’s net
performance since inception:
 
-40-20020406080100120140160180200Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
(%)
T2 Accredited Fund S&P 500
 
 -2-
 This table shows our
fund’s net
performance by month since inception:
Note: Returns in 2001, 2003, and 2009 reflect the benefit of the high-water mark, assuming an investor at inception.
 
Performance Objectives
In every year-end letter we repeat our performance objectives, which have been the same since our fund
sinception (no changing the rules in the middle of the race): Our primary goal is to earn you a compoundannual return of at least 15%, measured over a minimum of a 3-5 year horizon.We arrived at that objective by assuming the overall stock market is likely to compound at 5-10%annually over the foreseeable future, and then adding 5-10 percentage points for the value we seek to add,which reflects our secondary objective of beating the S&P 500 by 5-10 percentage points annually overshorter time periods. While a 15% compounded annual return might not sound very exciting, it wouldquadruple your investment over the next 10 years, while 7-8% annually
 – 
about what we expect from theoverall market
 – 
would only double your money.Since inception 13 years ago, we have not met our 15% objective, thanks in part to one of the worstperiods ever for stocks. We have outperformed the S&P 500 by 4.0 percentage points per year, just belowthe low end of our 5-10 percentage point goal. We are not satisfied with our performance and aredetermined to improve it.
Performance Assessment
We struggle with how bad of a
grade to give ourselves for 2011 because in some ways it’s too early to
tell. Yes, many of our stocks took beatings during the year, but only time will tell whether we werewrong or just early. We think in most cases the latter, given that we still own meaningful positions in 8 of our 10 (and 15 of our 20) biggest losers on the long side in 2011. If even a handful of these stocksperform like we think they will in the next 1-
3 years, we won’t look as dumb as we do today – 
and thuswe might give ourselves a C for 2011
. If these stocks don’t recover, then we deserve a D.
 Why not an F? Because an F is reserved for blowing up
 – 
 
and we didn’t. In fact, when things got ugly inAugust and September, we didn’t panic and dump everything and go to cash or a market neutral position.
T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&PAF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500January 7.8
4.1
-6.3
-5.0
4.4
3.6
-1.8
-1.5
-5.5
-2.6
4.7
1.8
1.1
-2.4
1.9
2.7
2.4
1.7
1.9
-5.9
-3.6
-8.4
-1.6
-3.6
-2.8
2.4
February -2.9
-3.1
6.2
-1.9
-0.6
-9.2
-1.1
-2.0
2.9
-1.6
7.0
1.5
2.1
2.0
-3.1
0.2
-3.3
-2.1
-6.9
-3.3
-8.9
-10.8
7.3
3.1
4.1
3.4
March 4.1
4.0
10.3
9.8
-2.6
-6.4
3.0
3.7
1.4
0.9
3.9
-1.5
3.9
-1.7
3.9
1.3
-0.8
1.1
-2.3
-0.5
2.9
9.0
4.6
6.0
-4.1
0.0
April 2.1
3.7
-5.1
-3.0
5.1
7.8
-0.2
-6.0
10.5
8.2
2.4
-1.5
0.6
-1.9
2.2
1.4
4.4
4.6
-0.9
4.9
20.1
9.6
-2.1
1.6
1.9
3.0
May -5.7
-2.5
-2.8
-2.0
1.8
0.6
0.0
-0.8
6.6
5.3
-1.4
1.4
-2.6
3.2
1.8
-2.9
2.5
3.3
7.9
1.2
8.1
5.5
-2.6
-8.0
-1.9
-1.1
June 2.2
5.8
4.1
2.4
4.6
-2.4
-7.3
-7.1
2.9
1.3
0.1
1.9
-3.1
0.1
-0.2
0.2
-3.0
-1.5
-1.2
-8.4
-5.0
0.2
4.5
-5.2
-2.4
-1.7
July -0.7
-3.2
-3.6
-1.6
-1.1
-1.0
-5.0
-7.9
2.3
1.7
4.6
-3.4
0.5
3.7
-0.9
0.7
-5.4
-3.0
-2.5
-0.9
6.8
7.6
3.5
7.0
-4.6
-2.0
August 4.1
-0.4
5.4
6.1
2.5
-6.3
-4.3
0.5
0.4
1.9
-0.9
0.4
-3.2
-1.0
2.9
2.3
1.7
1.5
-3.3
1.3
6.3
3.6
-1.5
-4.5
-13.9
-5.4
September -3.3
-2.7
-7.2
-5.3
-6.1
-8.1
-5.4
-10.9
1.7
-1.0
-1.6
1.1
-1.5
0.8
5.0
2.6
-1.1
3.6
15.9
-9.1
5.9
3.7
1.7
8.9
-9.3
-7.0
October 8.1
6.4
-4.5
-0.3
-0.8
1.9
2.8
8.8
6.2
5.6
-0.4
1.5
3.5
-1.6
6.3
3.5
8.2
1.7
-12.5
-16.8
-1.9
-1.8
-1.7
3.8
7.0
10.9
November 2.8
2.0
-1.5
-7.9
2.3
7.6
4.1
5.8
2.2
0.8
0.8
4.0
3.1
3.7
1.9
1.7
-3.6
-4.2
-8.9
-7.1
-1.2
6.0
-1.9
0.0
-0.6
-0.2
December 9.8
5.9
2.3
0.5
6.5
0.9
-7.4
-5.8
-0.4
5.3
-0.2
3.4
-1.3
0.0
1.4
1.4
-4.3
-0.7
-4.0
1.1
5.5
1.9
0.5
6.7
0.1
1.0
YTDTOTAL31.0 21.0 -4.5 -9.1 16.5 -11.9 -22.2 -22.1 35.1 28.6 20.6 10.9 2.6 4.9 25.2 15.8 -3.2 5.5 -18.1 -37.0 37.1 26.5 10.5 15.1 -24.9 2.11999 2000 2001 2002 2003 2004 20112005 2006 2007 2008 2009 2010
 
 -3-
 Instead, we stayed calm, added to our favorite positions, and recouped some of our losses in the fourthquarter.
We’re in the Same Boat
 
We believe in eating our own cooking
 – 
we have a higher percentage of our net worths in our funds thananyone, by far
 – 
so it goes without saying that no-one has lost more money or feels worse about our
fund’s recent performance than we do.
 
We’re not only in the same boat financially, but also in
terms of the decisions we have to make whenfaced with poor performance. To the extent that you choose to invest in funds, you have thousands of choices, just as we have thousands of stocks to choose from. As we discuss below in the section entitled
“Guaranteed Underperformance,”
it is a certainty that every fund you invest in will underperform attimes, just as every stock we invest in will do so as well.The critical question all of us face is: what should we do when a fund or a stock we own performs poorly?There are only three choices: sell, hold, or buy more. This decision, more than any other, is the key tolong-term investment success
 – 
far more important than timing the entry point exactly right.Unfortunately, there is no easy answer
 – 
every fund and every stock is different
 – 
but here are a fewthoughts: First, to quote Ben Graham, you must let the market be your servant, not your guide. Just
 because other investors are selling in a panic doesn’t mean you should. In some cases, the herd is right, but the real money is made betting against the herd when it’s wrong. It may be the right thing to sell and
move on
 – 
 
you don’t hav
e to make it back the same way you lost it
 – 
but the decision whether to do so
mustn’t be guided by other investors’ behavior.
 Our approach is to tune out the short-term noise and carefully evaluate the company and its management,focusing on the long-term track record rather than the short-term poor performance. The key question toask is: has anything changed that leads us to believe that the recent performance is likely to be permanent,or is this just one of those inevitable periods of bad luck and/or fixable mistakes, such that the company islikely to revert to its long-term outperformance?In the case of most of our poorly performing stocks of 2011, we believe the latter is the case, so we heldor bought more. We think the same will prove to be true for our fund, as neither our investment approach,which is rooted in the timeless principles of value investing, nor our ability to execute on it has changed.
Deviating from the Crowd and Guaranteed Underperformance
Stocks are volatile and since we invest in a concentrated fashion, often in unpopular sectors, are willing to
“catch falling knives” if they’re cheap enough, and never engage in closet indexing, we’ve always known
from the day we started this business 13 years ago that our portfolio would occasionally suffer lossesand/or trail the market, perhaps to a significant degree. In other words, we guarantee underperformance attimes.Our
investment strategy is rooted in deviating from the crowd with contrarian bets. We think it’s the only
way to outperform the market over the long term, but it also carries with it the risk 
 – 
indeed, the certainty
 – 
that there will be periods during which one underperforms the market, which is why most money
managers don’t do it. Buffett once said, “As a group, lemmings have a rotten image, but no individuallemming has ever received bad press.”
Jean-Marie Eveillard
 put it even more succinctly: “It’s war 
mer
inside the herd.”
 

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