I
NCANDESCENT
C
APITAL
222 Broadway, 19
th
Floor
• New York, NY 10038 • 64
6-912-8886
•
February 9, 2018
Dear Investor
i
: Our portfolio rose 3.51% in Q4
versus the S&P 500‘s
rise of 6.64%, bringing our full year (unaudited) gross return to 23.66%.
This compares to the S&P 500‘s total return of
21.83%. The charts below show our performance figures year-to-date and since inception:
Incandescent S&P 500
Difference
2017 Year
23.66% 21.83%
1.83%
Since Inception (60 Months)
122.01% 108.13%
13.88%
CAGR
17.28% 15.78%
1.50%
0.00%20.00%
40.00%
60.00%80.00%100.00%120.00%
140.00%
Returns Since Inception
Incandescent S&P 500 Total Return
(10.00%)(5.00%)0.00%5.00%10.00%15.00%J F M A M J J A S O N D
Last 12 Monthly Returns
Incandescent S&P 500 Total Return
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I
NCANDESCENT
C
APITAL
Although Incandescent Capital was officially founded in 2013, I have personally managed money for friends and family since 2009. Gross returns (unaudited) from my personal reference account (where I keep 95% of my net worth) since then are thusly:
Incandescent S&P
Difference
HFRX
1
Difference
2009 50.75% 26.46%
24.29%
13.40%
37.35%
2010 18.78% 15.06%
3.72%
5.19%
13.59%
2011 2.28% 2.05%
0.23%
(8.88%)
11.16%
2012 16.38% 16.00%
0.38%
3.51%
12.87%
2013 60.68% 32.31%
28.37%
6.72%
53.96%
2014 5.31% 13.69%
(8.38%)
(0.58%)
5.89%
2015 3.69% 1.38%
2.31%
(3.64%)
7.33%
2016 2.52% 11.98%
(9.46%)
2.50%
0.02%
2017 23.66% 21.83%
1.83%
5.99%
17.67%
CAGR
18.88% 15.24%
3.64%
2.51%
16.37%
And here is how $100,000 would have compounded versus those two benchmarks if it was invested at the end of 2008: All figures above are
gross
of fees (that is, before any fees are deducted). Since each investor in Incandescent Capital has the option to negotiate different fee arrangements, net returns will vary. For 2017, if you elected our standard 20% performance fee (no hurdle, no management fee) arrangement, your
net
return would be around 18.9% compared to your
gross
return of ~23%.
1
This is the
HFRX Global Hedge Fund Index
, a widely used index to praise or pan hedge funds in the press.
$474,078 $358,353 $124,965
$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000$500,0002008 2009 2010 2011 2012 2013 2014 2015 2016 2017Incandescent S&P HFRX
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I
NCANDESCENT
C
APITAL
Customary Preamble
For the benefit of new investors receiving this letter, allow me to repeat what I‘ve written in
previous memos: short-term performance numbers as precise as the ones given above should be taken with a grain of salt. Industry standards compel me to report the numbers, but philosophically, I think of our investments like a business owner, and business owners are typically not in the habit of running out and getting valuation opinions on their enterprises on a monthly basis. Indeed, the only times that price should matter is 1.) when a business is being bought, and 2.) when a business is being sold. I generally save discussions of specific securities for my annual letter (although this is not an iron clad commandment as I will occasionally bring up names as examples for a discussion topic I am musing on).
The reason behind the ―secrecy‖ is multi
-fold. 1.
We often traffic in illiquid securities whose price can easily be manipulated with a few hundred shares, 2.
This letter goes out to people who are not currently invested with us and I do not want to promote to them a long/short recommendation that I would not be accountable to if/when the facts change, and 3.
It helps me avoid the psychological bias of wanting to defend a position just because I made it public, even if circumstances change and I ought to reverse course. Item number three is probably the most important. Value investing is a constant battle against emotions and irrationality, and erecting psychological defenses against innate human biases is critical
2
. It naturally becomes more difficult to admit mistakes if ego gets involved, and believe me, mistakes will be made. So i
t‘s
far better if I simply not go there at all. Final housekeeping item to note: Your results may differ slightly from the main reference account reported above depending on the timing of your various capital contributions. It takes a bit of time to sync each account to the same exposure as I buy/sell according to the ebb and flow of the market. Your patience is asked for as I tune your individual portfolios, but rest assured: what you own, I own. I am committed to eating my own cooking
3
. ***
2
Charlie Munger has called understanding the psychology of human misjudgment a “superpower”
.
3
The main reference account Interactive Brokers statement is available upon request from any investor.