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T2 Accredited Fund Letter to Investors-Feb 2012

T2 Accredited Fund Letter to Investors-Feb 2012

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Published by Devon Shire

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Categories:Business/Law, Finance
Published by: Devon Shire on Mar 02, 2012
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03/02/2012

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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
March 1, 2012Dear Partner,Our fund declined 0.9% in February vs. gains of 4.3% for the S&P 500, 2.9% for the Dowand 5.5% for the Nasdaq. Year to date, our fund is up 11.5% vs. 9.0% for the S&P 500, 6.5% forthe Dow and 14.0% for the Nasdaq.On the long side, winners included Citigroup (8.5%) and SanDisk (7.8%), offset by Netflix(-7.9%), Grupo Prisa (B shares) (-7.4%), and J.C. Penney (-4.7%).On the short side, we profited from First Solar (-23.6%), which just reported dismal earnings andguidance, Interoil (-10.4%), and Boyd Gaming (-8.7%). These gains were offset bySalesforce.com (22.6%), which is growing rapidly but trades at 8.7x revenues and has a $19.6billion market cap despite being unprofitable. In addition, Green Mountain Coffee Roasters,which we think is likely to be the next Krispy Kreme (for those of you with long memories), rose21.8%.
Berkshire Hathaway
Last Saturday, Berkshire Hathaway released its latest earnings report,as well as Warren Buffett
s widely anticipated annual letter.Neither disappointed. Here
s our quick take:a)
 
Berkshire has never been stronger. Its balance sheet is awash with cash and the companyhas a diverse and robust collection of exceptional businesses that are collectivelygenerating more than $1 billion per
month
for Buffett and Munger to allocate.b)
 
The company is firing on all cylinders. As Buffett writes:
Our major businesses did welllast year. In fact, each of our five largest non-insurance companies
 – 
BNSF, Iscar,Lubrizol, Marmon Group and MidAmerican Energy
 – 
delivered record operatingearnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011.Contrast that to seven years ago, when we owned only one of the five, MidAmerican,whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping$10 billion.
 c)
 
We have increased our estimate of intrinsic value to more than $178,000/share, based on$98,366 in investments/share plus applying a 10 multiple to our estimate of normalizedpretax operating earnings of $8,000/share.
 
-2-
d)
 
Given the diversity of Berkshire
s businesses, the company
s performance is a goodindicator of the overall strength of the U.S. economy (outside of the housing sector,which Buffett says remains in a
depression
).e)
 
At many points in his letter, Buffett shows the wide gap between book value and intrinsicvalue, concluding that book value is a
considerably understated
proxy for intrinsicvalue. However, we think he is being too conservative when he writes:
Over time, thedivergence will likely become ever more substantial in absolute terms, remainingreasonably steady, however, on a percentage basis as both the numerator anddenominator of the business-value/book-value equation increase.
As Berkshire
s valuehas increasingly shifted in recent years from its investment portfolio, which is valued atmarket (i.e., book value), to operating businesses like GEICO and Burlington Northern,we think Berkshire
s intrinsic value is becoming a
greater 
percentage of book value
 – 
yetthe stock is currently trading near the
lowest 
premium to book value in the past twodecades.f)
 
Buffett makes it very clear that he believes that Berkshire
s stock is significantlyundervalued and that he
s eager to buy it back, up to a price equal to 1.1x book value, or$110,000/A share as of 12/31/11 (Buffett
s limit price is likely higher today, as book value has almost certainly risen this year). We think the share repurchase program puts afirm floor on the stock price only a few percentage points below today
s level of $118,000.g)
 
Berkshire is our largest position because of its asymmetric return profile: only a fewpercentage points of downside vs. 50% upside, with intrinsic value growing at roughly10% annually.h)
 
On the first page of the letter, Buffett did his best to put the succession issue to rest,writing:
Your Board is equally enthusiastic about my successor as CEO, an individual towhom they have had a great deal of exposure and whose managerial and human qualitiesthey admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire
s prospects will remainbright.
We don
t have a strong view on who the successor is, but don
t care because wethink it
s highly likely that Buffett will be running Berkshire for at least five more years,maybe even 10. In addition, our estimate of intrinsic value doesn
t include any Buffettpremium.Since Berkshire reported earnings, the stock is actually down a bit so we took advantage and,though it was already our largest position, we added to it.Whitney was on CNBC on Monday, commenting on Buffett
s letter and how cheap we think Berkshire
s stock is (plus a few comments on Dell at the end). To watch the video, click  here,  and a transcript is attached in Appendix A. We have also updated our Berkshire Hathaway slidedeck, which his posted here and also attached in Appendix B.
 
-3-
K-1s
As always, we will strive to have the K-1 tax forms to you by late March. If you would like us tosend a copy of your K-1 to anyone other than yourself (such as your accountant), please emailKelli at KAlires@T2PartnersLLC.com. 
Privacy Policy
Attached in Appendix C is our privacy policy, which we are required to send you once a year.
Conclusion
 Thank you for your continued confidence in us and the fund. As always, we welcome yourcomments or questions, so please don
t hesitate to call us at (212) 386-7160.Sincerely yours,Whitney Tilson and Glenn TongueThe unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvesteddividends) is:February Year to Date Since InceptionT2 Accredited Fund
 – 
net -0.9% 11.5% 138.9%S&P 500 4.3% 9.0% 40.8%Dow 2.9% 6.5% 91.3%NASDAQ 5.5% 14.0% 40.9%
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2Accredited Fund was launched on 7/1/04.
T2 Accredited Fund Performance (Net) 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

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