Commentary on LifeLock (LOCK)

The following commentary is excerpted from the 2Q14 quarterly letter of Anabatic Fund, L.P. dated July 15, 2014. The fund’s portfolio manager is Philip C. Ordway, a principal of Chicago Fundamental Investment Partners, LLC. Please note that the complete text of the disclaimer included with the fund’s quarterly letter is also reproduced below.

LifeLock is a consumer services company that sells identity-protection alerts to children and adults across the country. The benefits of a LifeLock subscription are, in our view, dubious at best, and the company’s history is littered with allegations of questionable business practices and personal misconduct. After the recent news that LifeLock failed to implement very basic data security standards, the company’s brand and growth rate are potentially at issue.

The company is exceptionally promotional, spending nearly half of its revenue on marketing and advertising. You may remember the ads that the CEO placed in many newspapers a few years ago displaying his real Social Security number. (Unfortunately for him LifeLock didn’t work and his identity was stolen more than a dozen times.) LifeLock may also be in violation of a prior FTC consent order regarding allegations of false advertising.

We recently reduced our position significantly when the price crashed on news of the aforementioned data security problem. (Incidentally, the lapse occurred at a subsidiary acquired in late 2012 for $42 million despite negligible revenue, a $5 million annual operating loss, and a recent history of using very expensive corporate debt to buy Bitcoin in a private transaction with the CEO; it sold the Bitcoin back to him a few months later for a gain of approximately 36%.)

The most compelling argument I can find regarding the company’s prospects is that identity theft is scary, and consumers do especially dumb things when they’re scared. The sky-high valuation certainly incorporates rapid and continuous growth along those lines. As with many short ideas, however, the ride has been and will likely continue to be bumpy – this year the stock price went from under $16 to nearly $23 before crashing to $11 and since recovering to $14 – and our aggregate gain (approximately 0.2% in gross fund performance year-to-date) has been far smaller than hoped.


THE INFORMATION PROVIDED HEREIN IS CONFIDENTIAL AND PROPRIETARY AND IS, AND WILL REMAIN AT ALL TIMES, THE PROPERTY OF CHICAGO FUNDAMENTAL INVESTMENT PARTNERS, LLC, AS INVESTMENT MANAGER, AND/OR ITS AFFILIATES. THE INFORMATION IS BEING PROVIDED SOLELY TO THE RECIPIENT IN ITS CAPACITY AS AN INVESTOR IN THE FUNDS OR PRODUCTS REFERENCED HEREIN AND FOR INFORMATIONAL PURPOSES ONLY.

THE INFORMATION HEREIN IS NOT INTENDED TO BE A COMPLETE PERFORMANCE PRESENTATION OR ANALYSIS AND IS SUBJECT TO CHANGE. NONE OF CHICAGO FUNDAMENTAL INVESTMENT PARTNERS, LLC, AS INVESTMENT MANAGER, THE FUNDS OR PRODUCTS REFERRED TO HEREIN OR ANY AFFILIATE, MANAGER, MEMBER, OFFICER, EMPLOYEE OR AGENT OR REPRESENTATIVE THEREOF MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION PROVIDED HEREIN. AN INVESTMENT IN ANY FUND OR PRODUCT REFERRED TO HEREIN IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY SUCH FUND OR PRODUCT WILL BE ACHIEVED. MOREOVER, PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS A GUARANTEE OR AN INDICATOR OF THE FUTURE PERFORMANCE OF ANY FUND OR PRODUCT. AN INVESTMENT IN ANY FUND OR PRODUCT REFERRED TO HEREIN CAN LOSE VALUE. INVESTORS SHOULD CONSULT THEIR OWN PROFESSIONAL ADVISORS AS TO LEGAL, TAX AND OTHER MATTERS RELATING TO AN INVESTMENT IN ANY FUND OR PRODUCT.

THIS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY AN INTEREST IN A FUND OR PRODUCT. ANY SUCH OFFER OR SOLICITATION WILL BE MADE ONLY BY MEANS OF DELIVERY OF A FINAL OFFERING MEMORANDUM, PROSPECTUS OR CIRCULAR RELATING TO SUCH FUND AND ONLY TO QUALIFIED INVESTORS IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW.

ALL FUND OR PRODUCT PERFORMANCE, ATTRIBUTION AND EXPOSURE DATA, STATISTICS, METRICS OR RELATED INFORMATION REFERENCED HEREIN IS ESTIMATED AND APPROXIMATED. SUCH INFORMATION IS LIMITED AND UNAUDITED AND, ACCORDINGLY, DOES NOT PURPORT, NOR IS IT INTENDED, TO BE INDICATIVE OR A PREDICTOR OF ANY SUCH MEASURES IN ANY FUTURE PERIOD AND/OR UNDER DIFFERENT MARKET CONDITIONS. AS A RESULT, THE COMPOSITION, SIZE OF, AND RISKS INHERENT IN AN INVESTMENT IN A FUND OR PRODUCT REFERRED TO HEREIN MAY DIFFER SUBSTANTIALLY FROM THE INFORMATION SET FORTH, OR IMPLIED, HEREIN.

PERFORMANCE DATA IS PRESENTED NET OF APPLICABLE MANAGEMENT FEES AND INCENTIVE FEES/ALLOCATION AND EXPENSES, EXCEPT FOR ATTRIBUTION DATA, TO THE EXTENT REFERENCED HEREIN, OR AS MAY BE OTHERWISE NOTED HEREIN. NET RETURNS, WHERE PRESENTED HEREIN, ASSUME AN INVESTMENT IN THE APPLICABLE FUND OR PRODUCT FOR THE ENTIRE PERIOD REFERENCED. AN INVESTOR’S INDIVIDUAL PERFORMANCE WILL DIFFER BASED UPON, AMONG OTHER THINGS, THE FUND OR PRODUCT IN WHICH SUCH INVESTMENT IS MADE, THE INVESTOR’S “NEW ISSUE” ELIGIBILITY (IF APPLICABLE), AND DATE OF INVESTMENT. IN THE EVENT OF ANY DISCREPANCY BETWEEN THE INFORMATION CONTAINED HEREIN AND THE INFORMATION IN AN INVESTOR’S MONTHLY ACCOUNT STATEMENT IN RESPECT OF THE INVESTOR’S INVESTMENT IN A FUND OR PRODUCT REFERRED TO HEREIN, THE INFORMATION CONTAINED IN THE INVESTOR’S MONTHLY ACCOUNT STATEMENT SHALL GOVERN.

NOTE ON INDEX PERFORMANCE

INDEX PERFORMANCE DATA AND RELATED METRICS, TO THE EXTENT REFERENCED HEREIN, ARE PROVIDED FOR COMPARISON PURPOSES ONLY AND ARE BASED ON (OR DERIVED FROM) DATA PUBLISHED OR PROVIDED BY EXTERNAL SOURCES. THE INDICES, THEIR COMPOSITION AND RELATED DATA GENERALLY ARE OWNED BY AND ARE PROPRIETARY TO THE COMPILER OR PUBLISHER THEREOF. THE SOURCE OF AND AVAILABLE ADDITIONAL INFORMATION REGARDING ANY SUCH INDEX DATA IS AVAILABLE UPON REQUEST.

Commentary on Rentech (RTK)

The following commentary is excerpted from the 2Q14 quarterly letter of Anabatic Fund, L.P. dated July 15, 2014. The fund’s portfolio manager is Philip C. Ordway, a principal of Chicago Fundamental Investment Partners, LLC. Please note that the complete text of the disclaimer included with the fund’s quarterly letter is also reproduced below.

Rentech was founded as an alternative energy company more than 30 years ago. It was mostly unsuccessful in several iterations of that strategy before stumbling into a home run investment in an Illinois nitrogen fertilizer plant it bought for $60 million in 2006. The fertilizer business has produced a massive amount of free cash flow – nearly half a billion dollars in the seven years following the acquisition – which has been channeled into alternative energy projects that, unfortunately, never produced a nickel of revenue.

Investor dissatisfaction with that track record created an opportunity to buy RTK at a significant discount to the value of its stake in the fertilizer business (RNF), which was carved out as a separate company in 2012. The market was essentially assuming that RNF’s cash flow would be wasted in perpetuity, and such cynicism would have been fully warranted if not for management’s commitment to both discontinue the alternative energy business (the sale of which is currently pending for approximately $15 million) and subsequently pursue a more stable, predictable business in wood chipping and wood pellets. Several problems arose along the way, of course. The fertilizer business had a very bad year in 2013 for a few reasons, including normal agricultural volatility, a questionable acquisition, and a fire at the Illinois plant. Activist investors were involved behind the scenes during 2012 and 2013, and when results deteriorated in late 2013 they went public and threatened a proxy fight. Management and the board are long-serving but own very little equity, and a result in the activists’ favor seemed likely.

In April the company resolved both the proxy battle and its need to finance the build-out of the Canadian wood pellet operations when it received an investment from GSO, the investment affiliate of Blackstone. GSO put in $100 million of convertible preferred (on terms that were encouragingly reasonable) and made a $50 million term loan, with the cofounder of GSO and the former CEO of Smurfit-Stone replacing two existing Rentech directors on the board. The activist investors will also name an additional director later this year.

With the capital structure and financing needs addressed, and with GSO providing crucial oversight and expertise in the board room, RTK can focus on operating its assets. If all goes to plan in Canada – certainly a big “if” – RTK plans to carve out the wood business in 2015. That, combined with more normal results in the fertilizer business, provides significant upside from the current market price despite a 33% increase so far this year. Volatility – both operationally and in the market price of our investment – is likely to continue, but the cash flow and asset values across Rentech’s businesses provide cushion over time. RTK is one of our four largest investments and one that we’re likely to hold for the foreseeable future.


THE INFORMATION PROVIDED HEREIN IS CONFIDENTIAL AND PROPRIETARY AND IS, AND WILL REMAIN AT ALL TIMES, THE PROPERTY OF CHICAGO FUNDAMENTAL INVESTMENT PARTNERS, LLC, AS INVESTMENT MANAGER, AND/OR ITS AFFILIATES. THE INFORMATION IS BEING PROVIDED SOLELY TO THE RECIPIENT IN ITS CAPACITY AS AN INVESTOR IN THE FUNDS OR PRODUCTS REFERENCED HEREIN AND FOR INFORMATIONAL PURPOSES ONLY.

THE INFORMATION HEREIN IS NOT INTENDED TO BE A COMPLETE PERFORMANCE PRESENTATION OR ANALYSIS AND IS SUBJECT TO CHANGE. NONE OF CHICAGO FUNDAMENTAL INVESTMENT PARTNERS, LLC, AS INVESTMENT MANAGER, THE FUNDS OR PRODUCTS REFERRED TO HEREIN OR ANY AFFILIATE, MANAGER, MEMBER, OFFICER, EMPLOYEE OR AGENT OR REPRESENTATIVE THEREOF MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION PROVIDED HEREIN. AN INVESTMENT IN ANY FUND OR PRODUCT REFERRED TO HEREIN IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY SUCH FUND OR PRODUCT WILL BE ACHIEVED. MOREOVER, PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS A GUARANTEE OR AN INDICATOR OF THE FUTURE PERFORMANCE OF ANY FUND OR PRODUCT. AN INVESTMENT IN ANY FUND OR PRODUCT REFERRED TO HEREIN CAN LOSE VALUE. INVESTORS SHOULD CONSULT THEIR OWN PROFESSIONAL ADVISORS AS TO LEGAL, TAX AND OTHER MATTERS RELATING TO AN INVESTMENT IN ANY FUND OR PRODUCT.

THIS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY AN INTEREST IN A FUND OR PRODUCT. ANY SUCH OFFER OR SOLICITATION WILL BE MADE ONLY BY MEANS OF DELIVERY OF A FINAL OFFERING MEMORANDUM, PROSPECTUS OR CIRCULAR RELATING TO SUCH FUND AND ONLY TO QUALIFIED INVESTORS IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW.

ALL FUND OR PRODUCT PERFORMANCE, ATTRIBUTION AND EXPOSURE DATA, STATISTICS, METRICS OR RELATED INFORMATION REFERENCED HEREIN IS ESTIMATED AND APPROXIMATED. SUCH INFORMATION IS LIMITED AND UNAUDITED AND, ACCORDINGLY, DOES NOT PURPORT, NOR IS IT INTENDED, TO BE INDICATIVE OR A PREDICTOR OF ANY SUCH MEASURES IN ANY FUTURE PERIOD AND/OR UNDER DIFFERENT MARKET CONDITIONS. AS A RESULT, THE COMPOSITION, SIZE OF, AND RISKS INHERENT IN AN INVESTMENT IN A FUND OR PRODUCT REFERRED TO HEREIN MAY DIFFER SUBSTANTIALLY FROM THE INFORMATION SET FORTH, OR IMPLIED, HEREIN.

PERFORMANCE DATA IS PRESENTED NET OF APPLICABLE MANAGEMENT FEES AND INCENTIVE FEES/ALLOCATION AND EXPENSES, EXCEPT FOR ATTRIBUTION DATA, TO THE EXTENT REFERENCED HEREIN, OR AS MAY BE OTHERWISE NOTED HEREIN. NET RETURNS, WHERE PRESENTED HEREIN, ASSUME AN INVESTMENT IN THE APPLICABLE FUND OR PRODUCT FOR THE ENTIRE PERIOD REFERENCED. AN INVESTOR’S INDIVIDUAL PERFORMANCE WILL DIFFER BASED UPON, AMONG OTHER THINGS, THE FUND OR PRODUCT IN WHICH SUCH INVESTMENT IS MADE, THE INVESTOR’S “NEW ISSUE” ELIGIBILITY (IF APPLICABLE), AND DATE OF INVESTMENT. IN THE EVENT OF ANY DISCREPANCY BETWEEN THE INFORMATION CONTAINED HEREIN AND THE INFORMATION IN AN INVESTOR’S MONTHLY ACCOUNT STATEMENT IN RESPECT OF THE INVESTOR’S INVESTMENT IN A FUND OR PRODUCT REFERRED TO HEREIN, THE INFORMATION CONTAINED IN THE INVESTOR’S MONTHLY ACCOUNT STATEMENT SHALL GOVERN.

NOTE ON INDEX PERFORMANCE

INDEX PERFORMANCE DATA AND RELATED METRICS, TO THE EXTENT REFERENCED HEREIN, ARE PROVIDED FOR COMPARISON PURPOSES ONLY AND ARE BASED ON (OR DERIVED FROM) DATA PUBLISHED OR PROVIDED BY EXTERNAL SOURCES. THE INDICES, THEIR COMPOSITION AND RELATED DATA GENERALLY ARE OWNED BY AND ARE PROPRIETARY TO THE COMPILER OR PUBLISHER THEREOF. THE SOURCE OF AND AVAILABLE ADDITIONAL INFORMATION REGARDING ANY SUCH INDEX DATA IS AVAILABLE UPON REQUEST.

To Catch an Asian Snake: Detecting Accounting Fraud

We are making our way to Italy to present at two events for value investors:

Value Unplugged:

Why are western-based red flags, fraud detection tools and techniques inadequate in analyzing and detecting accounting fraud in Asian companies? Many have snapped forensic scenes of the fraudulent, but it was usually with a sense of distance, as if they were outsiders peeking in. To paraphrase Sherlock Holmes, to murder (to engage in earnings management) is easy, but to dispose the murdered body (to expropriate or tunnel out the cash and assets out of the company) is harder as it is detectable. We don’t discover the “murderer” or fraud perpetuators by separating ourselves from them or just following clues. We need to delve deep into the psychological state where we can most easily identify with the “murderer”. Yet, too close an immersion can be very harmful when we fail to extricate ourselves out of the situation.

At the Value Unplugged, we will be doing a mini-workshop on “To Catch An Asian Snake: Detecting Accounting Fraud Ahead of the Curve” that draws upon our experience of interacting with the diverse players and “Extractors” in the Asian capital jungles, including the true-north focus on the positive “Compounders” who create sustainable value, to dissect multiple actual and potential cases of Asian corporates. We have been approached by the White Collar Crime Investigation special unit from the relevant Singapore government authorities and we are potentially conducting a workshop for them on detecting accounting fraud.

The exclusive 208-slides workshop material will be available for our Members after the Value Unplugged event. To download the proprietary content, please click here.

Value Investing Seminar:

Q: Why is it that throughout the financial crisis, Italy has remained Europe’s second-largest export economy, after Germany, despite Italy being ranked as the 80th place in the World Bank’s “Ease of Doing Business” survey because of his strong labor unions, seemingly boundless bureaucracy, organized crime, and endemic tax evasion?

At Ciccio’s Value Investing Seminar, we will attempt to shed light on how even in the most austere of environment, wide-moat Bamboo Innovators such as the low-profile IMA SpA, who is the hidden global champion behind our tea bag packaging and pharmaceutical packaging controlled by the Vacchi family, are able to compound value in uncertain times. The predominant form of ownership that drives sustainable value creation in Italy/Europe and Asia is that of the family business. While some family business are known for their patient capital, in both regions, most are value destroyers given that the salient corporate governance risk is expropriation or tunneling of cash and assets by the controlling shareholders. Yet, while corporate control is highly concentrated in both Europe and Asia, there are critical differences to take note at the firm-level, particularly relevant given that Asia is at a critical transition phase in succession risk (and opportunity) with the patriarchs and matriarchs handing over the reins of their business empires to the right capital allocators. We will share briefly about:

  1. Our investment framework to systematically uncover the misunderstood, overlooked, underappreciated and undervalued wide-moat compounder
  2. An investment idea in Asia
  3. Talk about a mistake and at the end
  4. Recommend some amazing books for the audience who are lifelong learners in the art of value investing.

The exclusive 79-slides workshop material at the Value Investing Seminar event is available for our Members. To download the proprietary content, please click here.

Our plans to provide potential value-added content over the long-term:

  1. Video interviews with hidden Asian business leaders
  2. Analysis on Asian financial footnotes for the accounting and governance pitfalls
  3. New Moat Report Asia product focusing on Japan wide-moat compounders, and hopefully China A-share equities
  4. Leadership framework and insights of Bamboo Innovators
  5. Book project on “Compounders Vs Extractors in the Asian Capital Jungles”

We thank you for your patience and understanding while we dedicate our life and energy towards executing and delivering this content. We also seek friends and business partners who wish to collaborate.

Sixty-Three

During April, I organised a series of lectures entitled Equity Investments at the Faculty of Economics and Administration of Masaryk University in co-operation with the Investors Club there. I enjoyed it immensely. It was so refreshing to observe smart young brains as yet unburdened by professional deformation spending their free time pursuing an interest in equities investing. In one of my lectures, I told them that their young age is their greatest investment advantage, as it is quite possible that over the course of their lifetimes they will experience a 100-fold growth in the equity market.

Does that seem like too much? Well, it did to me too at first glance. But let us look at some numbers. Let us say that the students’ average age is around 21 years and their life expectancy is around 84. Looking back 63 years, at the end of 1950, the value of the S&P 500 stood at 20. Today, it is approximately 100 times higher. Could it not in 63 years be at a value 100 times greater than today’s? All it takes is for the future to be similar to the past. That will not necessarily be the case, of course, but I think it is more probable that the next 60 years will be similar to the past 60 years than that they will be radically different. Of course, I am talking about returns on capital and not about geopolitical and social developments. Returns on capital are much more stable over the long term than it might seem.

Yes, the future is uncertain. And the more distant it is, the more uncertain it gets. But investing is not a natural science. Investing is always a matter of probabilities. It is not so crucial whether the markets increase by 50, 100 or 200 times over the next six decades. What is important is that it is highly probable that they will rise very significantly. In order to profit from this probability, we must fulfill the following four conditions:

  1. We must invest. Anyone who does not invest has a probability of returns equal to zero.
  2. We must start early. Every ten years of waiting decreases the final result by approximately one-half.
  3. We must have sufficient discipline to withstand even occasional large market fluctuations and not to deviate from our course.
  4. The probability of large returns is practically zero if we hold cash, bonds or gold. We must buy equities!

Okay, but 63 years?

I know that an argument built upon a 63-year investment horizon invites mockery, as for most so-called “investors” an investment horizon of even 63 days is too long. That 63 years is not, however, meant as a recommended investment horizon. It is rather a number corresponding approximately both to my students’ life expectancy and to a nice round figure for gains that well illustrate the good sense of investing long term into equities.

In practice, it is not necessary to consider horizons longer than half a century. Many people try to make money with horizons of not only 63 days, but also 63 hours, 63 minutes or even 63 seconds. I am not saying that is not possible, but shortening the time horizon sharply decreases the probability of success. If we manage to think in terms of a horizon of at least 63 months, then the probability of good results is many times higher.

Capitalism is essentially based on the fact that capital – which bears risk – yields higher returns than do cash or bonds. If that were not so, then the world would be turned on its head. By investing into equities, we endeavour to profit from that.

What does Warren Buffett say to a long-term investor about asset allocation? In this year’s letter to shareholders, Buffett states that after his death his wife will inherit his money. He issued the following instructions for investing it: 10% cash, 90% equities. I think this says it all.

Buffett is a genius with fantastic results and greater experience than any other living investor, and, most importantly, if you read his letters to shareholders over the more than 60 years of his career, you will find that he is practically always right. So, if you do not agree with him, if you think he is mistaken this time, dear readers, then the burden of proof is on you! (Confession: If we at the Fund had followed Buffett’s advice more often over the past 10 years, our results would have been even better.)

Bob Dylan and Warren Buffett

When I use to play with a band and wrote our songs, I very soon found out that no matter what one writes one finds that Bob Dylan has already written something similar. It is as if you were sitting on a river bank trying to fish, while Bob was sitting a kilometre upstream and had already caught all the fish.

What Bob Dylan is to songwriters, so Warren Buffett is to investors. Any time I use an argument to support long-term investment in equities, I cannot avoid having the feeling that Buffett has already said something similar. If you feel like that as well, it is probably true.

Changes in the portfolio

In the past quarter, we sold one title and bought three new ones.

We sold Microsoft. When we had started buying Microsoft shares about 4 years ago at between $22 and $25, we were met with unexpectedly negative responses. Almost everyone slapped their foreheads in incomprehension. Why would we buy a company that almost everyone knows is gradually dying? This seemed like nonsense to us, and for some time we endeavoured to explain it (albeit in vain). After some time, we rather preferred to stop talking about owning Microsoft and instead to buy more shares. The market’s general rejection of Microsoft seemed to us a good argument for purchasing its shares. Only unpopular assets can be truly cheap. Now we have sold the shares at about $40 apiece, yielding a return of about 70%.

We bought one financial institution in Japan, one US spin-off, and one US company that combines everything one could wish for – a unique business model, excellent historical results, enormous potential, great management and, especially, an attractive share price. It seems the market is blind once again.

While the first two purchases are more medium-term investments aiming to benefit from a momentary opportunity, the third case may well represent one of our key long-term positions.

Even in the sixth year of nearly uninterruptedly rising equity markets, it is still possible to find attractive investment opportunities. Most are outside the mainstream of investors’ interest. We would like to thank “investors” with 63-hour investment horizons for creating such opportunities.


Note: The above commentary is taken from the Vltava Fund Letter to Shareholders, dated July 2014.

The information contained in this letter to shareholders may include statements that, to the extent they are not recitations of historical fact, constitute “forward-looking statements” within the meaning of applicable foreign securities legislation. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or financial performance, or the estimates underlying any of the foregoing. Any such forward-looking statements are based on assumptions and analyses made by the fund in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the given circumstances. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks, assumptions and uncertainties. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those contained in such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise. This letter to shareholders does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for, the securities of the fund. Before subscribing, prospective investors are urged to seek independent professional advice as regards both Maltese and any foreign legislation applicable to the acquisition, holding and repurchase of shares in the fund as well as payments to the shareholders. The shares of the fund have not been and will not be registered under the United States Securities Act of 1933, as amended (the “1933 Act”) or under any state securities law. The fund is not a registered investment company under the United States Investment Company Act of 1940 (the “1940 Act”). The shares in the fund shall not be offered to investors in the Czech Republic on the basis of a public offer (veřejná nabídka) as defined in Section 34 (1) of Act No. 256/2004 Coll., on Capital Market Undertakings. Historical performance over any particular period will not necessarily be indicative of the results that may be expected in future periods

Babe Ruth, Warren Buffett, and True Icons

Babe RuthOne hundred years ago this week, on July 11, 1914, George Herman (“Babe”) Ruth made his major league debut, for the Boston Red Sox at two-year old Fenway Park. Over the course of his baseball career, The Great Bambino set many records, including leading the league in home runs for twelve seasons; most total bases in a season (457); and highest slugging percentage for a season (.847). In all, he hit 714 home runs, a record that stood until 1974, when Hank Aaron of the Atlanta Braves claimed the title.  But that is not why the Babe is immortal.

Other home run kings have achieved nothing like Ruth’s iconic status. Many decade-leading hitters—such as Harry Davis, Gavy Cravath, or Jimmie Foxx—are barely known.  Even falling short of Ruth’s stature are the two players who passed him in home runs, Aaron and Barry Bonds (Pittsburgh Pirates and San Francisco Giants), who took the top spot in 2007. Nor is Ruth’s immortality due entirely to the fact that he also excelled as a pitcher: for forty-three years he held the record for consecutive scoreless innings pitched in World Series play and his overall win-loss ratio (.671) remains the seventh best of all time.  

Ruth’s immortality, rather, is due to how, through such extraordinary feats, he changed the game of baseball. He brought power to the sport at a time when typical strategy was to move players around the bases one small hit at a time. While baseball was thriving as an American pastime before he played, the Babe’s bold style, vast generosity, and utter unpretentiousness won the public’s adulation. His strength and optimism gave hope to millions during the Great Depression. That, along with his achievements, translated into a richer sport with a wider and enduring following, which is why we all recognize his name a century after his rookie year.    

The immortal greats of American business, legends in Ruth’s league, are iconic figures because they, too, were transformative. Andrew CarnegieJohn D. Rockefeller, and Cornelius Vanderbilt built the nation’s infrastructure; J. P. Morgan and Henry Ford forged its business structures and methods; and Ray Kroc and Sam Walton shaped its culture.  Historically, investors, even great investors such as Philip L. Carret (here and here), Walter Schloss (here and here) and John Templeton (here and here), have not been in that pantheon because, although successful, influential, and worthy role models, they were not game-changers. 

Peering into the crystal ball—ahead to 2064, 2094 or 3014—who among contemporary figures will be etched in the civic consciousness?  In baseball, that status may go less to players than to analysts and coaches. Credit Bill James (Historical Baseball Abstract) for uncovering through statistics the drivers of baseball success and lionize Oakland Athletics manager Billy Beane, who implemented a game-changing strategy based on big data—and became famous for doing so thanks to Michael Lewis’s page turner, Moneyball

Warren BuffettIn business, today’s candidates for tomorrow’s public immortality might include Steve Jobs for visionary leadership, Jack Welch for management prowess, Jack Bogle for shrewd investing, and Warren Buffett for . . . all those skills.  While I root for the immortality of each of these luminaries, my money is on Buffett.

To date, Buffett is heralded primarily as history’s greatest investor—beating the market by double digits over five decades. But that’s like saying Babe Ruth was history’s greatest power hitter: true but inadequate. Just as Ruth was both a famous home run king as well as an unsung pitching ace, Buffett is both a savvy investor and a spectacularly successful yet underappreciated manager, one whom astute investors have come to admire and discerning managers are starting to emulate. More important, just as Ruth’s presence became a game-changer, Buffett’s approach to business promises to revolutionize American capitalism.

In my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values, I describe Buffett’s approach at Berkshire Hathaway Inc. as generating economic profits from virtuous behavior. By reaping returns on capital from intangibles such as thrift, integrity, entrepreneurship, autonomy, and a sense of permanence, Berkshire practices a philosophy of capitalism that does well by doing good, is sensitive but unsentimental, lofty yet pragmatic, and public spirited but profitable. This approach drives power returns for value investors seeking four-baggers as well as a source of sustained growth for operating companies. 

Berkshire’s rivals—whether private equity firms or strategic buyers—often maximize immediate short-term gain by borrowing heavily, cutting workers’ pay, increasing consumer prices, and externalizing the costs of doing business. Berkshire does the opposite. It uses scant debt, respects labor as partners, shares cost savings with customers, and pays a tax bill proportional to its big footprint—$5 to $7 billion annually in recent years.

And this attitude is neither altruistic nor moralistic, but practical and economic. This way of doing business matches today’s zeitgeist, with its heightened sense of stewardship and fair play, where increasing numbers of companies pay more than the minimum wage and those companies seeking to hide income offshore are excoriated. The approach also has a timeless horizon. As the spirit continues to spread, moving across companies from Intel to Whole Foods, the public beneficiaries will have Buffett to thank—perhaps for a century to come.

Warren Buffett and Babe Ruth have often been compared—in part because Buffett has written that he, like baseball’s heavy hitters, awaits pitches in his sweet spot so he can hit it out of the park rather than swinging and missing the many more out of the zone. And while the two greats differ personally—Ruth was extravagant, gluttonous, promiscuous, and pugnacious, whereas Buffett is modest, moderate, faithful, and even-keeled—they share more important attributes. From the outset, they exuded an infectious ethical sense, epitomized by how Ruth rescued baseball from the scandalous fixing of the 1919 World Series and Buffett in 1991 saved Salomon Brothers from scandalized self-destruction; in the end, they shared  bountiful philanthropy, both leaving all their respective fortunes to charity. 

Buffett and Ruth are also bound by a bit of kindred history that kindles friendly rivalries between two great American cities: Ruth was sold early in his career by the Boston Red Sox to the New York Yankees, where he proceeded to illuminate Yankee Stadium; Buffett opted for graduate school not in the hallowed halls of Harvard Business School on the banks of Boston’s Charles River but at Manhattan’s Columbia Business School, hard by the Hudson River not far from the House that Ruth Built.  Neither man, however, is tied to one place or even to one time, as their contributions are not only transformative but transcendent, and investors everywhere can thank Buffett for putting their craft in history’s pantheon.