Saturday, July 4, 2015

1st Half 2015 Fund Performance Update Letter to Investors


 Dear Partner,

During the 1-st half of 2015 (Jan 2 – June 30th), the Green Valley Fund (“GVF” or “Fund”) appreciated by +26.1% on a gross return basis. Since the inception of the “GVF” on March 1, 2014, the Fund has appreciated by +73.8% before LP related allocations.


2014 (from 03.01.14)
2015
Since Inception (03.01.14)
GVF Gross Return
+38.3%
+26.1% (YTD)
+73.8%
S&P 500 
+13.6% (full year)
-0.14% (YTD)


Fund Performance

During the first half of 2015 (close of June 30th, 2015), our fund has appreciated by + 26%, while the YTD S&P 500 (ETF SPY) Index has returned – 0.14% and Dow Jones Industrial Average (ETF DIA) has returned – 1.34%. This result should not make our partners to assume that future will be like the past. I would strongly advise not to project our future profitability on the back of 1H 2015 results. In essence, our primary goal is to have a rate of return no less than 35% and preferably higher on an annual basis. In addition to that, we are full aware that there will be a time when our judgment will be wrong or the general market conditions might affect our performance. Despite the fact that our major goal is to have absolute returns, S&P and DJIA are two benchmarks that we use to measure our performance against.

Portfolio Related Events
In the early part of the year, we had established positions in a number of industries, such as healthcare, energy, telecoms, technology and financials. The portfolio has been well diversified, across the number of companies that we believed would drive our performance. However, beginning from the early part of May, we had a number of positions in a financial sector that dragged our overall performance lower. We have a view that in a near future (3-6 months period), the markets might see a major correction in the range of 10% or more. Therefore, starting from June 15th, we have either completely sold off or reduced our positions in a number of companies. By the end of the 2nd quarter, we had nearly half of our capital sitting in cash or short term safe investments. However, the members of our core portfolio is still intact.

Investing Tenets

In general there are several tenets that we follow in building a portfolio of companies.
1.       First, we have to make a little confession though. Macroeconomic events, that are taking place in the world, though do affect the way many businesses make decisions, invest and grow. However, it does have no effect on the processes of business analysis that we undertake with each and every company. In our mind, there is absolutely no bearing of economic events to how companies should be evaluated. Case in point is the latest developments in Greece with its creditors. We actually used the opportunity in drop of prices in a number of companies due to the fear from Grexit.
In general, it has never been a good policy to base investing decisions on macro events, such as political intricacies, interest rate predictions or fiscal/monetary policies of certain countries. The reason for that is very simple; we believe that nobody has any predictive power to know in advance what will be the outcomes of macro events. Therefore, our motto is to “concentrate on things that are knowable and important, than waste time and energy on things that are not knowable and unimportant”.
2.       In our mind, a balanced portfolio has to have both elements of growth and value. Which entails being long on the names that has a sizeable upside potential and the names that have recently been lost out of favor due to various factors. The first ones (growth) are generally volatile in their price movements, while the latter ones (value) are not. However, as we don’t try to predict the short term price gyrations of companies, it has almost no relevance to our investing philosophy. Because, once we purchase shares, we become a long term holders of equities, alternatively up until the point where company has changed its business model, become seriously overvalued or had made irreversible mistakes. In addition to that, sometimes we find better opportunities in terms of capital appreciation, which makes us sell our current holdings to use on other more profitable ideas. Given the fact our fund has a tiny amount of capital in comparison to major hedge funds, it is to our advantage to be nimble in our approach to buying and selling stock more actively taken into account the risk/reward calculations.
3.       In terms of value plays, the appraisal of the business’s intrinsic value is very important, as well as having a margin of safety in place. While we might make mistakes in our calculations, the margin of safety should serve us a safety mechanism in the case of downside. Even the best businesses of the world, can’t be considered as the best investment vehicles, unless they have attractive valuation. In the short term prices might gyrate, and it might keep us from utilizing capital more effectively.
4.       In any business endeavor, the quality of management should be a cornerstone of any investment thesis. We study the records of management very intensely. Great managers make investing decisions easier to take.

Final Remarks

We define investing as “acquiring and holding quality securities at suitable prices”. We are not trying to predict the short term movements but consider ourselves to be partners in companies that we are in, which basically means that we stay through thick and thin with the companies that we have selected to be a part owner of. These companies might have lagged in performance, but it has no bearing on their attractiveness in our eyes. The collection of companies that we own, are fine businesses that has yet to show its true value. As the Benjamin Graham once said, “The market can stay irrational longer than you can stay solvent”, we take our tasks seriously and do not have any margin at all. In addition to that, we keep certain amount of our capital in cash, to seize opportunities when they arise. Probably, you have already guessed that our collective view for the markets and many securities, at a current time is that they are being very overvalued and frothy. We believe that some sort of market correction seems imminent, though we are agnostic as per the date for that event. We have time, and we are waiting. Just be sure, that when the time comes, we will be ready to load our vaults.

On a personal note, you can find the most favorite ideas published on seekingalpha.com, where I am a regular contributor. The link is here: http://seekingalpha.com/author/talgat-akhmetov. From here you can go to my articles tab, which is located on the left side of the page.

Also, please check my blog where, I publish articles on general topics of personal finance, investing, investing philosophy and other interesting topics. The link is here: http://greenvalleyinvesting.blogspot.com/

You should also understand that, we will be providing updates at quarter ends only, so that we all have certain yardsticks to measure performance. And, you should also understand that I can’t guarantee that results will always be positive, as I don’t know what prices of stock will do the next day, next week or even year.

But, what I do know is that businesses we have taken positions in and will take in the future, will become substantially more valuable in the next 2-3 years of our involvement. Please don’t hesitate to get in touch with me if you have further questions.


Cordially,
Talgat Akhmetov


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