Patient Capital - Spring 2015 Newsletter

[giofranchi]

Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria.

 

What I am not sure I understand well about these funds which hold lots of cash and justify their decision by saying their main objective is “to protect capital” is the following:

With the exception of a new Great Depression, I am quite positive all investments of mine would grow much faster in a volatile environment than in a muddle through scenario… I actually think a 30%-40% market crash would make the companies I own stronger… not weaker!

Of course, in a market crash, as the fundamentals of those business improve, their stock prices might probably go down with the overall market… and would probably go down a lot!

But, if the fundamentals of those businesses improve, how can my capital not be sufficiently protected? Even if stock prices go down?

Therefore, imo it could be either

a) They truly fear a new Great Depression

or

b) Their true aim is not “to protect capital”, but “to buy assets very cheaply, when they become available”.

 

Cheers,

 

Gio

 

[petec]

Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria.

 

What I am not sure I understand well about these funds which hold lots of cash and justify their decision by saying their main objective is “to protect capital” is the following:

With the exception of a new Great Depression, I am quite positive all investments of mine would grow much faster in a volatile environment than in a muddle through scenario… I actually think a 30%-40% market crash would make the companies I own stronger… not weaker!

Of course, in a market crash, as the fundamentals of those business improve, their stock prices might probably go down with the overall market… and would probably go down a lot!

But, if the fundamentals of those businesses improve, how can my capital not be sufficiently protected? Even if stock prices go down?

Therefore, imo it could be either

a) They truly fear a new Great Depression

or

b) Their true aim is not “to protect capital”, but “to buy assets very cheaply, when they become available”.

 

Cheers,

 

Gio

 

Or, their aim is "to protect capital in the short term".  But of course, they never say that.

 

 

[frommi]

I can understand what they are doing. They help the clients protect against themselfs when they have only small downside volatility and make this capital more sticky to their company. For the average Joe this is probably not a bad deal.

[petec]

I can understand what they are doing. They help the clients protect against themselfs when they have only small downside volatility and make this capital more sticky to their company. For the average Joe this is probably not a bad deal.

 

More sticky for some.  Those who can't bear to miss out on a bull market, maybe not.  (I'm not criticising them.  I'm at 35% cash and 20% FFH myself!)

[KinAlberta]

Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria.

 

What I am not sure I understand well about these funds which hold lots of cash and justify their decision by saying their main objective is “to protect capital” is the following:

With the exception of a new Great Depression, I am quite positive all investments of mine would grow much faster in a volatile environment than in a muddle through scenario… I actually think a 30%-40% market crash would make the companies I own stronger… not weaker!

Of course, in a market crash, as the fundamentals of those business improve, their stock prices might probably go down with the overall market… and would probably go down a lot!

But, if the fundamentals of those businesses improve, how can my capital not be sufficiently protected? Even if stock prices go down?

Therefore, imo it could be either

a) They truly fear a new Great Depression

or

b) Their true aim is not “to protect capital”, but “to buy assets very cheaply, when they become available”.

 

Cheers,

 

Gio

 

In mid 2008 I went to 80%+ cash (selling 20yr positions in Canadian banks, etc but keeping BRK) and moved some money into some cash rich companies (Appl) and companies that had a history of being opportunistic in bad markets (eg Loews).  Everything dropped in the market downturn and most companies did little to be opportunistic. APPl did nothing. Loews funded CNA. I ended up having to double up on APPL at 90 to gain from it. Added to BRK a couple days before it bottomed. (My biggest single purchase ever.) So even though BRK was clearly being opportunistic, its shares still crashed as existing shareholders panicked and dumped BRK. 

 

So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament. Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.

[Guest 50centdollars]

I honestly have an issue with a company charging fees when they are 80% in cash.  That's kinda crazy.  They should prorate the amount they charge based on how much cash they have once they get over a certain %. 

 

but if say the market dropped 30% the rest of the year, then they earned their fees.

[meiroy]

Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria.

 

What I am not sure I understand well about these funds which hold lots of cash and justify their decision by saying their main objective is “to protect capital” is the following:

With the exception of a new Great Depression, I am quite positive all investments of mine would grow much faster in a volatile environment than in a muddle through scenario… I actually think a 30%-40% market crash would make the companies I own stronger… not weaker!

Of course, in a market crash, as the fundamentals of those business improve, their stock prices might probably go down with the overall market… and would probably go down a lot!

But, if the fundamentals of those businesses improve, how can my capital not be sufficiently protected? Even if stock prices go down?

Therefore, imo it could be either

a) They truly fear a new Great Depression

or

b) Their true aim is not “to protect capital”, but “to buy assets very cheaply, when they become available”.

 

Cheers,

 

Gio

 

In mid 2008 I went to 80%+ cash (selling 20yr positions in Canadian banks, etc but keeping BRK) and moved some money into some cash rich companies (Appl) and companies that had a history of being opportunistic in bad markets (eg Loews).  Everything dropped in the market downturn and most companies did little to be opportunistic. APPl did nothing. Loews funded CNA. I ended up having to double up on APPL at 90 to gain from it. Added to BRK a couple days before it bottomed. (My biggest single purchase ever.) So even though BRK was clearly being opportunistic, its shares still crashed as existing shareholders panicked and dumped BRK. 

 

So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament. Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.

 

To put it simply, liquidity is what moves markets as a whole and once the liquidity decreases (as in a recession) the market as a whole will shrink taking most with it.

 

[giofranchi]

In mid 2008 I went to 80%+ cash (selling 20yr positions in Canadian banks, etc but keeping BRK) and moved some money into some cash rich companies (Appl) and companies that had a history of being opportunistic in bad markets (eg Loews).  Everything dropped in the market downturn and most companies did little to be opportunistic. APPl did nothing. Loews funded CNA. I ended up having to double up on APPL at 90 to gain from it. Added to BRK a couple days before it bottomed. (My biggest single purchase ever.) So even though BRK was clearly being opportunistic, its shares still crashed as existing shareholders panicked and dumped BRK. 

 

So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament. Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.

 

Of course I have said stock prices may go down by a lot! In fact hypothesis b) could not be possible otherwise!

 

For what I know in 2008-2009 Buffett, Watsa, Malone, Biglari, and others behaved very opportunistically. Though I agree I could be tempted to consider selling and not buying in a market crash, I hope those people might instead behave differently. Like they have already done in the past. Because, if they don’t, the problem won’t be a market crash, the problem will be I have chosen the wrong entrepreneurs and the wrong businesses. Therefore, I agree we all are on our own: choose the businesses you own wisely! ;)

 

Cheers,

 

Gio

 

[bearprowler6]

Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria.

 

What I am not sure I understand well about these funds which hold lots of cash and justify their decision by saying their main objective is “to protect capital” is the following:

With the exception of a new Great Depression, I am quite positive all investments of mine would grow much faster in a volatile environment than in a muddle through scenario… I actually think a 30%-40% market crash would make the companies I own stronger… not weaker!

Of course, in a market crash, as the fundamentals of those business improve, their stock prices might probably go down with the overall market… and would probably go down a lot!

But, if the fundamentals of those businesses improve, how can my capital not be sufficiently protected? Even if stock prices go down?

Therefore, imo it could be either

a) They truly fear a new Great Depression

or

b) Their true aim is not “to protect capital”, but “to buy assets very cheaply, when they become available”.

 

Cheers,

 

Gio

 

In mid 2008 I went to 80%+ cash (selling 20yr positions in Canadian banks, etc but keeping BRK) and moved some money into some cash rich companies (Appl) and companies that had a history of being opportunistic in bad markets (eg Loews).  Everything dropped in the market downturn and most companies did little to be opportunistic. APPl did nothing. Loews funded CNA. I ended up having to double up on APPL at 90 to gain from it. Added to BRK a couple days before it bottomed. (My biggest single purchase ever.) So even though BRK was clearly being opportunistic, its shares still crashed as existing shareholders panicked and dumped BRK. 

 

So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament. Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.

 

Well said KinAlberta!

 

In addition, despite what an individual investor may state now about themselves and their risk tolerance---there is no way of knowing how that individual with react during a protracted bear market. Will they be able to hold onto their existing positions that have dropped 30, 40 or even 50% or more? Will they be able to deploy additional capital at or near a market bottom? Perhaps more importantly --- will their circumstances allow them to hold on? Deploy additional capital? By circumstances I mean their employment/personal situation may change drastically from what they expected or they may need to use their liquid funds for some unforeseen expenditures rather than investing in value bargains.

 

There is a segment of the population that simply cannot tolerate even temporary declines in the value of their portfolios. For them---avoiding any "loss" of capital (even one temporary in nature) is a much bigger motivator than achieving outsized returns. I suspect that a manager such as Patient Capital would very much appeal to this type of investor.

 

One of the fears I have about the market correction in 2008-09 is that once it reached bottom it basically went straight up from that point due to central bank intervention. So even the most nervous investors made out okay provided they were able to hold on through the bottom. I am not at all certain that those same investors would be able to hold through several years of a flat lined market after a severe downturn.

 

 

 

 

 

 

[giofranchi]

Well said KinAlberta!

 

In addition, despite what an individual investor may state now about themselves and their risk tolerance---there is no way of knowing how that individual with react during a protracted bear market. Will they be able to hold onto their existing positions that have dropped 30, 40 or even 50% or more? Will they be able to deploy additional capital at or near a market bottom? Perhaps more importantly --- will their circumstances allow them to hold on? Deploy additional capital? By circumstances I mean their employment/personal situation may change drastically from what they expected or they may need to use their liquid funds for some unforeseen expenditures rather than investing in value bargains.

 

There is a segment of the population that simply cannot tolerate even temporary declines in the value of their portfolios. For them---avoiding any "loss" of capital (even one temporary in nature) is a much bigger motivator than achieving outsized returns. I suspect that a manager such as Patient Capital would very much appeal to this type of investor.

 

You should always draw a line between investable funds and funds hold for living. Those who don’t lack the basics of investing, and I seriously doubt they get to know a manager like Patient Capital well enough… But who knows? You might be right!

 

A person who has diligently set aside enough cash to live (cash I never even think of investing! And therefore I would never entrust even to a manager like Patient Capital!), and enjoys the ability to generate substantially more free cash to invest (like I luckily do!), might lack the temperament to invest after a 50% correction. There is no doubt this is true. Like there is no doubt what Packer said is also true: to outperform, you must have such a temperament! ;)

 

One of the fears I have about the market correction in 2008-09 is that once it reached bottom it basically went straight up from that point due to central bank intervention. So even the most nervous investors made out okay provided they were able to hold on through the bottom. I am not at all certain that those same investors would be able to hold through several years of a flat lined market after a severe downturn.

 

Well, that would be hypothesis a), wouldn't it?

 

Cheers,

 

Gio

 

[Munger_Disciple]

Another problem with going from close to 100% invested to 80% cash and back to 100% invested is  taxes that are incurred in the process by the investors. I would like to see the after tax returns  of this fund vs. an appropriate index.

[Tim Eriksen]

Another problem with going from close to 100% invested to 80% cash and back to 100% invested is  taxes that are incurred in the process by the investors. I would like to see the after tax returns  of this fund vs. an appropriate index.

 

In addition to the tax implications of going from invested back to 80% cash, is that for the first 8 years they invested mostly in T-bills so most of their returns in those years would be ordinary income (based on US tax rules). 

 

It is hard for me to understand why someone who is primarily focused on preservation of capital would choose Patient Capital over BRK.  While BRK has had greater volatility, it has meaningfully outperformed PC,  and after taxes would have materially outperformed. Obviously it must be the unwillingness to stomach volatility. 

[bearprowler6]

Another problem with going from close to 100% invested to 80% cash and back to 100% invested is  taxes that are incurred in the process by the investors. I would like to see the after tax returns  of this fund vs. an appropriate index.

 

In addition to the tax implications of going from invested back to 80% cash, is that for the first 8 years they invested mostly in T-bills so most of their returns in those years would be ordinary income (based on US tax rules). 

 

It is hard for me to understand why someone who is primarily focused on preservation of capital would choose Patient Capital over BRK.  While BRK has had greater volatility, it has meaningfully outperformed PC,  and after taxes would have materially outperformed. Obviously it must be the unwillingness to stomach volatility.

 

Some very good points---tax efficiency of any fund  certainly needs to be considered however perhaps this is less of an issue if the fund is held within a tax deferred account of some sort.

 

As for simply going with BRK over the PC fund--- this is a possibilty however being a Canadian resident the added issue of the FX exposure (which I briefly touched upon earlier in this thread) adds a level of complexity that needs to be taken into consideration when considering BRK. Perhaps for a US based resident the "go with BRK" decision is much clearer.

 

As for the ability to stomach volatilty---a very valid concern---I currently self manage my family's portfolio (my wife and me) and I can safely say it is VERY concentrated in a few select names. Volatility is truly something I do not concern myself with. Nonetheless---I raised the possibilty of potentially having my wife use Patient Capital as her investment manager should something unexpected happen to me because of that firm's focus on capital preservation and the low volatlity of its results.

[Patmo]

Another problem with going from close to 100% invested to 80% cash and back to 100% invested is  taxes that are incurred in the process by the investors. I would like to see the after tax returns  of this fund vs. an appropriate index.

 

In addition to the tax implications of going from invested back to 80% cash, is that for the first 8 years they invested mostly in T-bills so most of their returns in those years would be ordinary income (based on US tax rules). 

 

It is hard for me to understand why someone who is primarily focused on preservation of capital would choose Patient Capital over BRK.  While BRK has had greater volatility, it has meaningfully outperformed PC,  and after taxes would have materially outperformed. Obviously it must be the unwillingness to stomach volatility.

 

Some very good points---tax efficiency of any fund  certainly needs to be considered however perhaps this is less of an issue if the fund is held within a tax deferred account of some sort.

 

As for simply going with BRK over the PC fund--- this is a possibilty however being a Canadian resident the added issue of the FX exposure (which I briefly touched upon earlier in this thread) adds a level of complexity that needs to be taken into consideration when considering BRK. Perhaps for a US based resident the "go with BRK" decision is much clearer.

 

As for the ability to stomach volatilty---a very valid concern---I currently self manage my family's portfolio (my wife and me) and I can safely say it is VERY concentrated in a few select names. Volatility is truly something I do not concern myself with. Nonetheless---I raised the possibilty of potentially having my wife use Patient Capital as her investment manager should something unexpected happen to me because of that firm's focus on capital preservation and the low volatlity of its results.

 

I help out a couple family members and a friend and I essentially have them on the same book as mine, only they are thinner. I really don't want to build up 20%+ positions on anything at all for them. I wouldn't even do that on a name like BRK. I know I can stomach the ups and downs and I know that they trust me and can handle tough roads themselves, but I would feel irresponsible to do it. The risk of my being wrong on a big position and taking a dump on their future is not worth the potential gain. It's just a different thing to handle someone else's money vs. your own, at least that's my opinion.

 

Not that I condone hoarding 80% cash for a decade straight though....

[giofranchi]

Two, even the best companies will drop in a recession and you'll see it in your own portfolios plummeting value, and you'll consider selling and not buying.

 

I think there is something else to be said about this: I concentrate my investments in only a few companies because I want to have great conviction in any business that I own. And the reason I want to have great conviction is precisely because I want to be able to average down as stock prices decrease. In other words, I seek to replace, in part at least, the temperament needed to buy when others are selling with a strong conviction about what I am buying. Until now I have been successful in doing so… This of course is not to say I will be successful in the future too… I hope so, but we will see! ;)

 

Cheers,

 

Gio

 

[giofranchi]

So the lessons are, one, you are on your own, doesn't expect your holdings to grow stronger in a recession, their mgmt may freeze due to their temperament.

 

Another fact: anyone who is invested in FIH (Fairfax India Holdings) knows very well our capital is still parked in bonds and cash. Evidently, Watsa & Co. are encountering some difficulties in deploying it through the Indian stock market, because prices have recently gone up so much… By the end of the year we should see the first investment, or at least that’s what Watsa has said, but FIH is looking for at least 6-7 businesses in which to invest. At the rate of one idea per year, it will take 6-7 years before we are fully invested…

Except, of course, a market correction comes sooner! ;)

 

In other words, how you can be invested in FIH, without hoping for a market correction and without relying on Watsa’s ability to take advantage of that correction, is beyond me.

 

Cheers,

 

Gio