Sequoia Fund Investor Day Transcript

[NoCalledStrikes]

"We also trimmed our investments in Berkshire Hathaway, Mastercard, O’Reilly, Waters and TJX. Almost all of these sales were driven by opportunities we saw to redeploy capital into either companies with better growth prospects and similar valuations or companies with similar growth prospects and more attractive valuations. The exceptions to this rule were Berkshire and Mastercard, where we felt compelled to reduce large position sizes to better reflect our assessment of future potential"

 

Not exactly the greatest timing... Let's say they sold BRK.A in mid Q4 at $280K/share, heck it still wasn't over $298K at year end.  Today its at $325.  Perhaps they should have assessed the assessment of BRK's future value of cashflows with a reduced tax rate, no?

 

Writing this caused me to lookup Mastercard, O’Reilly, Waters and TJX as well.  All are up significantly. Given the low cost basis' on what they sold, there is no way they picked better than they sold. They've locked in another year of under-performance with those sells.

 

In fairness, I don't think owning mature 500B market cap is the way to beat the S&P over the next 20 years, so I don't disagree with trimming, just the act of doing so in the face of a tax cut that most benefits mature 500B market cap companies.

 

[John Hjorth]

... Not exactly the greatest timing... Let's say they sold BRK.A in mid Q4 at $280K/share, heck it still wasn't over $298K at year end.  Today its at $325.  Perhaps they should have assessed the assessment of BRK's future value of cashflows with a reduced tax rate, no?

 

Writing this caused me to lookup Mastercard, O’Reilly, Waters and TJX as well.  All are up significantly. Given the low cost basis' on what they sold, there is no way they picked better than they sold. They've locked in another year of under-performance with those sells. ...

 

NoCalledStrikes,

 

As always, it's easy to see in the polished & clear rear mirror. [ : -) ]

 

There is much randomness, luck & unluck related to rolling between positions in the short term. My only addition here is, that rolling out of Berkshire and into something else most likely adds risk to the total portfolio, so the judgement of potential return on what one is rolling into matters much while doing that. [because Berkshire has lot of built-in diversification.]

 

- - - o 0 o - - -

 

Anecdotal:

 

In the beginning of November 2017 my oldest brother decided to join "the gang" here. He's been a DIY stock investor since 2011. We have talked on/off about stocks since then. He has done well for himself stand alone. After talking with him in detail in April 2017 and seeing his actually portfolio etc. at that time, however I had three comments to him:

 

1. His total cash position is much too large, based on his life expectancy of about 20 years. [Time deposits, with negative real return after tax].

2. His NVO position is too large. That he won't reduce because of taxes, ... OK.

3. In general, his otherwise reasonable diversified portfolio is a bit too GARPy. Mostly some Danish Blue Chips with relatively high P/Es.

 

I suggested to do something about all three points by buying Berkshire - a ton - to him. I suggested some sort of average in, to get it roughly right. His reaction: "No, just buy it. You say the entry point right now is not totally silly, and it's long term, right?"

 

So he established a trading power of attorney to me, and moved a material part of his cash into his brokerage account, and filled up unused limit for the year in a tax deferred account.

 

I got some BRK.B for him at 182.80 on November 27 in his tax deferred account, and the rest - a lot - the day after - actually the exact day that Berkshire started to take off - at 186.00 in his taxable account.

 

Think about lead times in the Danish mail on the processing of physical power of attorney, circumstances around our communication, my brothers decision making patterns etc.

 

It was just a lucky punch, based on several elements of randomness, that got him out of the start block in a good way with Berkshire.

 

- - - o 0 o - - -

 

I personally considered the probability of an adopted US tax reform before Christmas uncertain with a bias to unlikely at that particular time.

[Guest longinvestor]

... Not exactly the greatest timing... Let's say they sold BRK.A in mid Q4 at $280K/share, heck it still wasn't over $298K at year end.  Today its at $325.  Perhaps they should have assessed the assessment of BRK's future value of cashflows with a reduced tax rate, no?

 

Writing this caused me to lookup Mastercard, O’Reilly, Waters and TJX as well.  All are up significantly. Given the low cost basis' on what they sold, there is no way they picked better than they sold. They've locked in another year of under-performance with those sells. ...

 

NoCalledStrikes,

 

As always, it's easy to see in the polished & clear rear mirror. [ : -) ]

 

My only addition here is, that rolling out of Berkshire and into something else most likely adds risk to the total portfolio, so the judgement of potential return on what one is rolling into matters much while doing that. [because Berkshire has lot of built-in diversification.]

 

 

I suggested to do something about all three points by buying Berkshire - a ton - to him. I suggested some sort of average in, to get it roughly right. His reaction: "No, just buy it. You say the entry point right now is not totally silly, and it's long term, right?"

 

I got some BRK.B for him at 182.80 on November 27 in his tax deferred account, and the rest - a lot - the day after - actually the exact day that Berkshire started to take off - at 186.00 in his taxable account.

 

It was just a lucky punch, based on several elements of randomness, that got him out of the start block in a good way with Berkshire.

 

 

Kudos to you for "timing" Berkshire for your brother. Surely he's happy but hopefully he is "long term". There is a different kind of happiness that the long term shareholder feels but something words cannot express. And my long term started 15 years ago. I met a couple at the Berkshire meeting whose long term started in 1978.

 

Now, let me address the urban myth going around right now; that the tax reform and the resulting benefit to Berkshire is the reason for the recent swelling of the market price. Sure. After all, the market is a voting machine and the math on that is easy. 20% more profits inuring to the shareholders and $37B of one time estimated BV gains ain't shabby at all.

 

Let's get to the weighing machine. I've been calling out (for more than a year) that the IV was well north of what the stock is selling for, now. That 1.2x BV threshold has messed with rationality of lot of folks. I've consistently been in the school that at 1.2x, it was a 70 or 60 or 50 or...xxxty cent dollar. How much of a bargain is a matter of time. Buffett uses "instantly and materially" when he talks about the buyback benefiting remaining shareholders. The 1.2x is a vaguely correct estimate of a ridiculous discount to IV. The market for sure made that precisely wrong. Market value will eventually catch up with IV.

[educatedidiot]

Sequoia's Q4 13-F is out.  You can see some of the details of their transformation with increases in a number of internet-based businesses (AMZN, GOOGL, W, JD) and decreases in a number of their longer-held positions:

http://www.rocketfinancial.com/Holdings.aspx?id=370&fC=1

[VersaillesinNY]

2017 Sequoia Annual Report

 

https://www.sequoiafund.com/Download.aspx?ID=2a7cc777-1e39-46fc-b5b5-068aee839d70&Name=December_31st,_2017_-_Annual_Report

[Jurgis]

I thought Sequoia reopened the fund after Valeant disaster. Fido says the fund is closed. So did they never reopen or did they reopen and then close again really fast? I tried searching the news but my Bing/Google-fu was not up to chops.  ::)

 

Edit: Morningstar page says SEQUX is open. Should I try to kick Fido about wrong info or is there more to the story? Anyone knows?

Edit2: Maybe it is only open if you go directly to SEQUX and not if you go through brokerage?

Edit3: Sequoia page has a link "open an account". I clicked up to the point where it asked for SSN. So I guess it is open for new investors directly? I still did not find any info if they restrict purchases through brokers.

[lschmidt]

The Sequoia Fund is open, but not through Fidelity. You can invest with them directly or through other brokerage platforms.

[Guest]

SEQUX is available on other mutual fund supermarkets (TD Ameritrade and Vanguard). I assume they won't pay Fidelity's bookkeeping fee (or whatever you'd like to call it). Just a fun fact about these "supermarkets." The No Transaction Fee funds usually pay around .40% to the platform. I think the Transaction Fee (TF) funds pay around .15%-.25%. If you look at Fidelity, most TF funds have a $49.95 fee for buys. There a couple firms - Vanguard and Dodge and Cox  that cost $75. I'm assuming these guys pay even less if anything (supposedly Vanguard doesn't pay anything and I think Dodge and Cox pays .10%). I'm not sure what SEQUX doesn't follow that path. I'd imagine they want to pay 0% (or close) like Vanguard but Fidelity makes an exception because well, they don't want to turn away Vanguard funds.

[Jurgis]

Thanks guys.

 

Fido should not mislead investors by saying that fund is closed. Should just say that it's not available. I guess since it's not available nobody bothered to change the message or something. I could complain but probably won't bother (but then that's why the message will never get fixed ;)).

[Carvel46]

Jurgis,

I suggest calling Fidelity Specialty Trading 800.343.4683 regarding your ability to buy the fund. I have spoken to them in April and Fidelity is now able hold it (I currently hold directly). Fidelity seems to be working out the kinks...don't know reasons. On Sequoia side, Ruane has been doing a large back office and admin overhaul/update over the past few years.

[Guest]

That's good news that they can hold it. I think at one time even that wasn't the case.

[VersaillesinNY]

May 18, 2018 – Investor Day Transcript

 

https://www.docdroid.net/UMlgtw1/may-18-2018-a-investor-day-transcript.pdf#page=2

May_18_2018_–_Investor_Day_Transcript.pdf

[Liberty]

2018 Q3 letter is out. David Poppe is retiring, they added a bit to FB position and trimmed a few other things:

 

https://www.sequoiafund.com/Download.aspx?ID=b8a058d0-8cb2-4663-ab6c-c8e1652174e0&Name=Q3_2018_-_Investor_Letter

[VersaillesinNY]

David Poppe retiring from RCG at 54 years old!? David is a Natural Born Value Investor!

 

It seems that the Valeant fiasco is still producing some collateral damage at the firm, even if 2 years have passed. Is it a putsch from the young raising stars or an orderly "generational transition"? I hope that David Poppe will eventually explain his move forward, without scaring existing clients. In the meantime, I wish him all the best in his future.

 

I wonder when will they shorten the firm's name to Ruane Cunniff? Perhaps, the day that Robert Goldfarb, a "significant shareholder", will reduce his 25% ownership of the firm.

 

[VersaillesinNY]

May 17, 2019 – Investor Day Transcript

 

https://www.sequoiafund.com/Download.aspx?ID=d2978b9c-4642-4edb-900f-5d222e88aba1&Name=May_17,_2019_%E2%80%93_Investor_Day_Transcript_

 

May 17, 2019 – Investor Day Slide Presentation

 

https://www.sequoiafund.com/Download.aspx?ID=3c672408-ad47-4173-9702-ac8b81b9ec06&Name=May_17,_2019_%E2%80%93_Investor_Day_Slide_Presentation_

[Gregmal]

What are they buying?

 

https://www.jaxdailyrecord.com/article/new-york-group-adds-4-446-acres-to-its-st-johns-county-holdings

 

Some interesting read throughs. Ive spoke with a few developers and investment firms in FL last couple weeks, this "recession" is largely being welcomed as a last chance to get on the train before it runs away. Florida seems unstoppable and many of the developing trends just make it more so the case. The tax heavy and anti business mentality of the blue states will only become more apparent as things slow down.

[Spekulatius]

What are they buying?

 

https://www.jaxdailyrecord.com/article/new-york-group-adds-4-446-acres-to-its-st-johns-county-holdings

 

Some interesting read throughs. Ive spoke with a few developers and investment firms in FL last couple weeks, this "recession" is largely being welcomed as a last chance to get on the train before it runs away. Florida seems unstoppable and many of the developing trends just make it more so the case. The tax heavy and anti business mentality of the blue states will only become more apparent as things slow down.

 

Florida has been producing boom and busts in RE since the 1920’s. Main industries are tourism and especially the theme park and cruises will take a big hit. Plenty of land. I would take my chances elsewhere, like a Rocky Mountain state.

[LC]

The tax heavy and anti business mentality of the blue states will only become more apparent as things slow down.

 

I do agree with Spek that FL has seen boom & bust for decades. We bought foreclosure properties in St. Pete's for 40k in 2012, worth 5-6x that amount now. FL is one of the most volatile areas for real estate. That said, there is a point here regarding hedging tax/political climate. If you live in a state with a heavy tax regime, investments in states with an opposing tax philosophy may provide a valuable and cheap hedge. Choose your state carefully, of course.

[Gregmal]

Raw land is a really low risk, low cost way to play a boom. Especially in a state with minimal RE taxes. St John/Jax/St Augustine is super hot so buying large swaths of acreage like this and then just waiting out developers is a pretty easy game to play. It might ebb and flow, but it does so ascending from left to right. There arent really many scenarios I can find where FL doesnt greatly outstrip most other states in terms of population growth, and this is going to be the case for a long time or until something politically inspired changes drastically(IE taxes).

[sleepydragon]

what does everyone think of buying SEQUX at this level?

The chart on Yahoo Finance looks awful. It's still 50% lower than 5 years ago.

 

Is it a good buy compare to AKREX?

[Guest]

what does everyone think of buying SEQUX at this level?

The chart on Yahoo Finance looks awful. It's still 50% lower than 5 years ago.

 

Is it a good buy compare to AKREX?

 

Not sure what you're looking at (perhaps dividends are being included?). Morningstar has it at basically the same value now as of 5 years ago.

[sleepydragon]

what does everyone think of buying SEQUX at this level?

The chart on Yahoo Finance looks awful. It's still 50% lower than 5 years ago.

 

Is it a good buy compare to AKREX?

 

Not sure what you're looking at (perhaps dividends are being included?). Morningstar has it at basically the same value now as of 5 years ago.

 

yeah, it's strange. I am looking at the chart on Yahoo finance under ticker SEQUX.

I think you might be right, maybe it's the dividends and capital gain distribution.

 

If you invest in the fund, you are basically on hook for unrealized appreciations of 40%. So it seems it would make no sense for someone to invest unless you are doing it in an IRA account?

 

[thowed]

My instinct would be to go with AKREX - only caveat being how long he'll be there for, and if his retirement will see many redemptions.  I know the others have been there a while, and so they've got a better chance than most at continuing, but succession is hard.

 

I just think Akre is class - the concentration, low-turnover is impressive, they haven't made many mistakes, and it's run by the founder with a very defined philosophy.  I mean, I'm sure you know all this...

 

Sequoia has an illustrious past, but it's not all the OG team any more, it feels more sprawling, a bit more turnover, and... Valeant.  I still think they're impressive compared with most other funds, but I don't feel as comfortable as I do about Akre.

[Guest]

I wouldn't buy a mutual fund in a taxable account unless it's a very special situation. I've bought them in the past and it's been a mistake from a tax perspective. I would consider index funds or Vanguard tax managed funds though.

[thepupil]

My instinct would be to go with AKREX - only caveat being how long he'll be there for, and if his retirement will see many redemptions.  I know the others have been there a while, and so they've got a better chance than most at continuing, but succession is hard.

 

I just think Akre is class - the concentration, low-turnover is impressive, they haven't made many mistakes, and it's run by the founder with a very defined philosophy.  I mean, I'm sure you know all this...

 

Sequoia has an illustrious past, but it's not all the OG team any more, it feels more sprawling, a bit more turnover, and... Valeant.  I still think they're impressive compared with most other funds, but I don't feel as comfortable as I do about Akre.

 

I kind of hate the "well if he didn't buy this then..." analysis, but Akre has made his career buying/holding AMT (not unlike many great investors such as Graham (GEICO), Sleep Zakaria (AMZN/COST), etc. I am not saying that he/they are bad investors (they have absolutely kicked my ass and outperformed the S&P over the course of a great bull market). I just think that before you buy Akre, you have to have an opinion on the 12/3% position in AMT. they won't ever sell and it's an extremely "expensive" stock at $136 billion EV, which is 5x the gross value of its property, over half of which has been bought/built since 2012, 16x EV / 2021 Sales, 26x EBITDA, 24x FFO. I am just a bitter / jealous real estate oriented value guy whose index has AMT in it, so take my analysis as the sour grapes that it is. I have thus far resisted the temptation to short it as it's just one of these "inevitables/teflon" stocks.

 

You can buy a lot of property for $136 billion.