Remick Capital 3Q15 Letter To InvestorsVW Staff
Remick Capital letter to investors for the third quarter ended September 30, 2015.
Remick Capital – Market Overview
As I suspected in my last letter, the US stock market could not maintain its extended streak of positive returns. Volatility resulted in the markets due to various concerns from China and the US recession watch; and then there was the Federal Reserve rate increase that seems always just over the horizon, but like Godot, never seems to show up. Remick Capital bucked the general market a little this quarter but still only escaped with a small loss.
As many of you know, my annual meeting and presentation was in August, and I have now posted those slides to my website (see here: http://www.remickcapital.com/files/remickagm2015.pdf). The link here has a few redacted slides; clients should have received a copy of the full presentation.
Below is a table designed to summarize the most recent returns for some key investment markets compared to the Remick Capital account composite. The Wilshire 5000 represents the aggregate US stock market, the MSCI World represents the entire developed world stock market excluding the US, and the Lehman Aggregate Bond is a representation of the entire US Bond market. These market indices are listed so you can keep your own portfolio performance in perspective.
Below I have highlighted the three major goals (http://www.remickcapital.com/perf.html) I always strive to achieve for Remick Capital accounts as well as a delineation of my performance towards these goals. As these are long-term goals (3-5+ years), clients should judge my performance over time based on the criteria below:
As always, please note that the performance results of the recent past (whether good or bad) should never be forecasted into the future. While it has been (and will likely continue to be) a very volatile ride, I will continue working toward the goals listed above, although, as has been the case recently, they may not be achieved. Thank you for entrusting your capital with me.
Remick Capital – Investment Updates
Below I share a few commentaries on key investments with recent share price and fundamental developments this quarter.
Berkshire Hathaway (BRK.B) – As I mentioned a few letters ago, we had sold Berkshire Hathaway stock toward the end of 2014 as the price escalated. The majority of the position was sold just above $150 / share. Moving into 2015, Berkshire’s business has continued to march forward, but the share price had declined down into the $130’s and even dropped below $130 / share recently. Following this relative increase in valuation I have added back a good amount of our Berkshire stake as we sold down other positions.
Fairfax Financial (FRFHF / FFH.T) – Similarly to Berkshire, I mentioned dramatically reducing our position in Fairfax earlier this year as the price rose rather fast compared to the value of the company. However, quickly after our sale, Fairfax stock price came back down to a much more attractive level and we have already added back a nice chunk of what we have sold earlier in the year. In the case of both Berkshire and Fairfax, I have not much changed my opinion of their business; it is merely that the market’s interpretation of the businesses has changed very fast, which has allowed some adding and reducing of our stakes to gain a small additional return.
Gyrodyne (GYRO) – I wanted to make a quick note on Gyrodyne regarding this quarter’s activity as after 7 quarters, our Gyrodyne distribution (marked at $0 in Remick accounts) was converted from a non-tradable entry to a tradable security, valued roughly at $14 per pre-reorganized share. Suffice to say, it was pleasant to have the shares salable (finally). Also, I would like to quickly note that clients who owned no shares of the Gyrodyne distribution (most taxable clients, but also clients who weren’t invested with Remick at the end of 2013) would have seen a lower return this quarter than other Remick clients due to this one time mark up. We now own no shares of Gyrodyne.
Un-named Asian real estate firm – The news out of China continues to worsen, but our investment here continues to do well. As shared with clients in the Remick Capital annual meeting, this investment has been a story in absurd market pricing of a fairly easy to value, hard asset. Management continues to behave rationally and our investment has done well. It continues to buck the trend of China and emerging markets in general.
Daily Journal (DJCO) (short position) – Daily Journal is a company run by Warren Buffett’s partner Charlie Munger, which I have followed for many years. Charlie has run Daily Journal a bit differently than Berkshire and has been quite successful. Daily Journal, largely due to Charlie’s patience and savvy, has wisely invested a large cash hoard that has turned into a massive portfolio of publically traded stocks attached onto a lackluster legal publishing business that makes limited cash flows. The historical performance of this stock portfolio (astutely purchased mostly during the crash of 2008 – 2009) has rocketed forward, but Daily Journal’s stock price has flown even faster. The resulting valuation of Daily Journal is comical and makes no sense in any context of valuation with which I am familiar.
Investor’s in Daily Journal are paying greater than 40% above what a reasonable value should be for the stock portfolio and business assets of the company. While it may be argued (rightly) that Mr. Munger is a great investor and a premium for his stock picking skills is warranted, it is just as true that the stock portfolio of Daily Journal is (mostly) public information, and anyone wishing to coattail on his investment prowess has no need to pay a premium; they can buy the portfolio directly (and in fact Remick Capital clients own a few of the same companies already). Thus Daily Journal is a rare short in which the upside risks to the shares for our short sales are very limited, and the valuation certainty is very high, which makes it ideal for a short position.
Other Updates – Last quarter I mentioned two stocks we had short positions in (FXCM and Home Capital Group). Both stocks declined dramatically during the 3rd quarter, and we exited our short positions with good profits. A 3rd stock we are short, Solarcity (covered in the annual meeting) also declined substantially, but I am maintaining our position for now.
Remick Capital – If You Cannot Say Something Nice…
Each quarter I try to share some wisdom or something interesting with my clients at the end of this letter. I find this fun, but often it takes time for an idea to percolate in my mind. The quarter has closed, and a month has passed with still no great insight for an idea of what to write, so to stay with my keep-it-simple philosophy, I will defer writing something additional this quarter and instead provide a few links from others for those interested (I do not plan to make this a habit).
The first link is a paper I read that I found interesting in its commentary on the Oil market and the changes from the past in terms of how companies are funded (with a lot more debt) and how that may change the response to oil price changes by oil firms. It also comments on an aspect of risk spreading that debt introduces by making more aspects of the economy impacted by a firm / industry prospects once it has incurred a large amount of debt: Effectively when a risky business finances itself more and more in the debt or loan markets, it’s risky activities can impact the “safe” investors running banks and investing in bonds which can cause economy wide impacts from struggles in specific sectors.
(1) Bank of International Settlements, Oil & Debt (10 pages) – http://www.bis.org/publ/qtrpdf/r_qt1503f.pdf
The second link is a presentation done by Leucadia National for their investor day meeting in October. While I have written about Leucadia and Jefferies extensively in these letters over the years, perhaps some clients would like to see what the managers of Leucadia have to say about the company in their own terms. The presentation is very long, but perhaps interesting to glance through. It contains a summary of how the Leucadia shareholders’ equity is allocated among the different business units and also a description of most of the main business units and how they are positioned. An investor presentation by management should be viewed skeptically given the biased nature of the presenter, but Leucadia management is pretty solid and honest, and the presentation goes into a lot of detail.
(2) Leucadia National, 2015 Investor Day (186 pages) – http://www.leucadia.com/luk_investor_day_october_2015.pdf
Page 3 & 4 provide a summary of all businesses of Leucadia and approximate reporting value of each. The remaining slides go into detail on all of the underlying businesses, which are many, and provides a lot of color on the company. Hopefully you either enjoyed my uncharacteristically short letter or you get something interesting from one of the links above; either way, I will endeavor to provide extra insight next quarter!
As always, my money will be invested right alongside yours so you can be sure that I will work diligently to make sure our investments will be profitable ones, regardless of the market conditions. I appreciate the trust you have placed in Remick Capital as your Investment Advisor; I will work hard to make our relationship as profitable as possible.
If you ever have any questions about this report, your investments, or anything financially related in general, please do not hesitate to call me.
Remick Capital, LLC