Scott Miller’s Greenhaven Road Capital fourth quarter letter to limited partners detailing fund performance – stay tuned for more for more from Greenhaven Q4.
Dear Limited Partners,
The Greenhaven fund had another positive quarterly performance, and finished the year up 23.54% after all fees and expenses. Since the fund was up more than 64% last year, a second year of outperformance was not a given. As a point of reference, for 2014 the S&P 500 was up 13.69%, and the Barclay Hedge Fund index was up 3.69% in 2014. As I often write, the real yardsticks will be our returns over five- and 10-year periods not any given 12 month period. Fortunately, we have outperformed those benchmarks over our first four years to date. As many of the day one investors will remember, before launching the fund, I had a seven-year period of outperforming the indices by thousands of basis points per year. So now, with a decade-long track record exceeding the S&P 500 after all fees and expenses, I want to take a minute to dissect the possible causes and the potential of replicating this success going forward. How does little Greenhaven Road outperform all of these funds that employ dozens of people, charge millions and millions in management fees, and attract billions and billions in assets under management?
Greenhaven Road vs. the universe of larger funds
Greenhaven Road vs. the universe of larger funds does not seem like a fair fight on the surface. The typical large fund has dozens of very bright people with virtually unlimited research budgets and deep expertise in specific domains vs. the research and trading team at Greenhaven Road – which is just me, a generalist. Yet to date, David is beating Goliath. Greenhaven Road is outperforming more than 90% of the funds in the marketplace as well as the index alternatives. Can this continue? Should we double down on Greenhaven Road – or just thank our lucky stars, take our gains, and roll them into an index fund? Given that Greenhaven Road is the investment vehicle for the vast majority of my family’s liquid net worth, “can outperformance continue?” is the multi-million dollar question.
What are the factors that can lead to outperformance? Are they sustainable? One of the value investors that I most respect, Monish Pabrai, has been citing a study by Fidelity in which they did an analysis of their best-performing accounts. The best-performing accounts were for dead people who were obviously not actively managing their accounts. The second best group included people who had forgotten their user name and passwords. Both of these data points suggest that perhaps neglect is the key to performance. Those who believe in efficient markets would say that I have just been lucky. Warren Buffett has pointed out that, if a million people start in a coin flipping contest, there will be an eventual winner who will have all kinds of theories as to their greatness in calling heads or tails under pressure. Given that I am still alive, there is a real possibility that I am just one of the last people standing in a coin flipping contest.
Thank you for the opportunity to manage your assets alongside mine and my family’s.
Sincerely,
Scott Miller
See full PDF below.
