Few articles that I have read describe the investment philosophy of T&T Capital Management (TTCM) better than the below one by the great value investor Howard Marks. My first six or seven years in the investment industry revolved around the substantive differences between the way that the most successful investors in history have invested, and the cookie-cutter consensus approach in which most portfolios are managed. It is not a stretch to say that 90% of the portfolios that I review have very little chance to outperform over the long-term. They are usually overly diversified and overly exposed to glamor stocks. In addition, most market participants chase whatever funds or stocks are hot at the time, which is why history shows us that most mutual fund investors perform far worse than most mutual funds, despite about 75% of mutual funds underperforming their benchmarks. There is no attempt to achieve great investment results but instead the potential for greatness is eschewed for the “wisdom of the crowd.”
To achieve great returns you cannot do what everyone else does and you have to accept that at times there will be underperformance. This means that the portfolio manager must be willing to run the risk of looking stupid and “unconventional” at times in the effort of doing what is best for the clients. We state our goals of maximizing risk-adjusted returns and reducing the risks of permanent losses of capital very clearly. We also emphasize that short-term mark to market volatility is not a primary concern, as the costs of attempting to prevent it usually greatly outweighs the short-term benefits.
Currently six of our seven largest investments trade at discounts to book value, while the average price to book value for the S&P 500 is about 2.75. Our average price to book in most portfolios would be well below book value, particularly if you use our breakeven prices assuming that we are exercised on our cash-secured put options that we have sold. This is highly unconventional and I think you would struggle to find another portfolio that looks remotely similar. We are quite concentrated in our top positions, many of which carry incredibly unpopular stigmas. When I mention companies like Citigroup, AIG and General Motors to potential clients, it often generates an audibly disgusted response. I understand this as these are unpopular companies for valid reasons in many cases, but usually that just makes me more confident in our investment theses.
As Warren Buffett said “you pay a rich price for a cheery consensus.”
The recent sell-off in glamor stocks such as Facebook, Tesla and Twitter are perfect examples of this. It is my opinion that even after the sell-off, there is huge risk in most of these glamor companies, with downside potential of at least 50% being quite possible. Two of our significant positions have sold off a little bit over the last month due to their own respective issues and the general market decline, but both trade at single-digit earnings multiples and discounts to our appraisal of liquidation values so all we have done is back up the truck and buy more!
I believe the risk of us taking permanent losses of capital is less than 5% on these particular positions and I believe our chances of making 50-100% returns over the next 3-5 years are greater than 75%. There are very few opportunities like this in the market currently, but the ones that we are in are very good with very high probabilities of very strong profits, hence the need for concentration. Enjoy the quote from the article below and I’d encourage you to read the whole memo. If you have any questions or if I can help in any way please do not hesitate to contact me!
“The answer may not be obvious, but it’s imperative: you have to assemble a portfolio that’s different from those held by most other investors. If your portfolio looks like everyone else’s, you may do well, or you may do poorly, but you can’t do different. And being different is absolutely essential if you want a chance at being superior. In order to get into the top of the performance distribution, you have to escape from the crowd. There are many ways to try. They include being active in unusual market niches; buying things others haven’t found, don’t like or consider too risky to touch; avoiding market darlings that the crowd thinks can’t lose; engaging in contrarian cycle timing; and concentrating heavily in a small number of things you think will deliver exceptional performance.” Howard Marks