4th Quarter 2016 Commentary

Conference Call Replay

This past year was interesting on so many more fronts than 2015. And this coming year could be more interesting still. In 2016, the financial markets saw all sorts of records and precedents – and not in a good way. We have been taking some time to prepare our client portfolios for advantage. Advantage hinges on the ability to make opportunistic investments, to take what the market gives, not what it doesn’t. Opportunism has a field of play when prices have declined. Sometimes they decline suddenly, other times slowly, sometimes the whole market together, other times just pieces of it. But entry to that field of opportunity itself hinges on having sufficient liquidity; without liquidity, the opportunities are just an idea of what might have been.

Money flows into ETFs and similar funds have not only pushed up the prices of the major index-centric companies, but also created an artificial downdraft among the thousands of non-indexation securities. That is where the companies with less systemic risk will be found. There will be more in the way of idiosyncratic investments with the opportunity for true optionality. Perhaps our portfolios will have to have fewer, but more selective securities with perhaps larger weightings in those companies with truly discounted valuations and a truly superior business position.

So, the watch words are preparedness, and sobriety. Dr. Louis Pasteur said, “fortune favors the well-prepared mind.”

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3rd Quarter 2016 Commentary

Conference Call Replay

Cash. One of the most misunderstood terms in investing (except lately, alongside “defensive” or “low volatility” sector investing, perhaps now one of the most dangerous places to be). The accepted modern approach to investing is to be all allocated all the time. How odd, since the greatest investors for their own accounts, ranging, alphabetically, from Warren Buffett and Carl Icahn through Wilbur Ross and Sam Zell, make generous use of cash. Cash is put at risk not any ol’ time, but only when they believe it will earn a suitable return. And they have plenty of it now. As do we. Having 25% or 35% in cash is a wonderful feeling when you see everyone else is ‘all in’, and it hasn’t had any noticeable negative impact on our performance this year. We believe when you’re in that position, you have a special advantage the market doesn’t.

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2nd Quarter 2016 Commentary

Conference Call Replay

If it has ever been advisable to own idiosyncratic securities – which will rise or fall based on factors specific to each company’s circumstances – as opposed to widely-held stocks that will react primarily relative to systematic risks, now is the time. Many of our portfolios benefited from idiosyncratic exposures this quarter: positions in precious metals royalty companies, a content company that will soon be acquired, and a self-liquidating land trust all appreciated significantly, and none is a significant holding in a major index. As we look to introduce new “orphan” securities to the portfolios, we are finding extremely attractive investment candidates in out of favor sectors and outside the indexation vortex – accept some trading liquidity risk and the market provides a whole range of margin-of-safety opportunities. While their success as investments is not assured, at least their propensity for success or failure will be based more on their own fundamental financial attributes than on rising interest rates or other macroeconomic events.

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1st Quarter 2016 Commentary

Conference Call Replay

Following years of steady flows into the major index funds, coupled with systemic supports for stock prices of the largest, most liquid companies, valuations in the broad stock market are excessively inflated. Yet, most sectors contain companies outside of the major indexes, which are creating shareholder value but which are relatively invisible to institutional investors. Accordingly, they can trade at deep discounts. Those are the stocks we choose to buy, and several are reviewed herein. The broader investing community, however, continues to allocate assets to index products, using descriptive data and backward-looking metrics such as market capitalization and beta (which is simply a measure of past stock price volatility) to make decisions, while ETF providers use beta as a guide when creating new products. But beta is merely a statistic – without context, it is not only uninformative, but potentially misleading, really misleading.

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