Hazelton Capital Partners letter to partners for the second quarter 2014.
Dear Partner,
Hazelton Capital Partners, LLC (the “Fund”) declined 1.7% from April 1, 2014 through June 30, 2014, declined 2.9% year-to-date, and has returned 86% since its inception in August 2009. By comparison, the S&P 500 gained 5.2% in the same quarter, increased 7.1% year-to-date and has returned 103.2% since the Fund’s inception.
Hazelton Capital Partners Performance – The Quarter in Review
Hazelton Capital Partners ended the 1st quarter with a portfolio of 17 equity positions and a cash level equivalent to 25% of assets under management. The Fund’s top five portfolio holdings, which are equal to 33% of the Fund’s net assets, are: Western Digital Corp (NASDAQ:WDC), Xerox Corp (NYSE:XRX), Northern Tier Energy LP (NYSE:NTI), Dreamworks Animation Skg Inc (NASDAQ:DWA) and WellPoint Inc (NYSE:WLP). The remaining protective put options purchased between the 4th quarter of 2013 and 1st quarter of 2014 have expired out-of-the-money, while Hazelton Capital Partners has switched to selling calls and call spreads on specific names within the portfolio slated to be reduced or sold.
A Shocking Discovery: The Better Part of Valor is Thoughtful Patience
“All men’s miseries derive from not being able to sit in a quiet room alone.” – Blaise Pascal
A recent study published by Timothy Wilson, a professor of psychology at the University of Virginia, found that entertaining yourself for a short period of time is not as simple as one would think. Participants in his study were asked to sit quietly in an empty room for 6-15 minutes with only their thoughts to engage them. Even though there was nothing competing for their attention, most participants found they had difficulty relaxing or keeping a coherent train of thought, calling the time “unpleasant.” A total of 11 different experiments were conducted. In additional tests, participants were asked to spend the same amount of time in isolation, but this time they were allowed to read or listen to music. These test subjects found their time “enjoyable.”
This finding led the researches to consider whether participants would rather engage in an unpleasant activity over no activity. A new test group of 42 participants, 18 men and 24 women, were asked to sit quietly in a room for 6-15 minutes, but this time the subjects could administer a mild electric shock to themselves from a 9 volt battery. Each subject was able to experience the impact of the electric shock before the test began. Twelve of the 18 men and 6 of the 24 women elected to give themselves at least one shock during their “quiet” time. One test subject, whose data was removed from the study, gave himself 190 shocks, but most participants, on average, delivered 7 shocks during their time alone. From the results of this study, one could easily infer that modern technology has created a society so reliant on constant mental stimulation that even spending 6-15 minutes alone with one’s own thoughts has become a daunting task. I disagree. I believe that Wilson’s results reveal the fact that even though our brains have evolved over time, they still are “hard wired” to be actively engaged and ready to react to changes (danger) within our environment.
Unlike what is popularized in the financial media, investing is not about reacting to the minute by minute changes within the financial markets, looking for a swift return and then moving on to the next opportunity. Investing is thoughtful patience requiring the mental strength to resist the primordial urge to take action. Much of the energy surrounding investing is spent learning about companies and their respective industries. But this is just the starting point. The real heavy lifting comes from distilling down the hours of reading, research, and fundamental analysis into a coherent investing thesis that can be summed up in a simple paragraph. When it comes to evaluating the competitive edge, the scarce resource, or the future cash flows of a company, there is no app, computer program or algorithm that can replace deep thinking. The determination of whether to make an investment is only achieved after spending “quiet” time reflecting upon the company’s future intrinsic value.
