Letters
2008 3rd Quarter Letter
Dear Investor’s,
It has been said that living life is heroic.
Today many investors and money managers can appreciate such a statement. The day to day or minute to minute emotional volatility makes surviving each day feel heroic. The most seasoned and non-emotional are not even immune. The VIX is one such measure and it is at historic highs.
Year to date thru the third quarter, the S & P is down 16.6% whereas Saddle Peak is up 1%.
July and August were very good months for our portfolio. However, this return is in the past, and, we like the market have most recently turned down. OUR focus is on the future with the S&P now down approximately 30% year to date (as of today); the appropriate question is how the portfolio is being positioned for the future. This letter is dedicated to communicate our positive outlook for the future. We are realist and understand where the economy is today and the challenges moving forward, but we are opportunistic that our portfolio is well positioned.
Some current and historical observations are in order given the wild speculation that we are entering an economic depression or a stock depression.
First would be Warren Buffett’s recent quotation “I am betting on Congress doing the right thing for the American Public and passing this bill. I certainly have a vote of confidence in Goldman and a vote of confidence in Congress.” When the world’s greatest investor makes such a strong affirmation, we should all listen. Likewise we should consider; are we investing with him or against him? From a probabilistic standpoint he is not someone I personally want to bet against when his confidence level is high. Please refer to JP Morgan’s role in the panic of 1907 for historical perspective when investing with or against great investors in times of trouble. History indicates to invest with the great investors.
Secondly, we would like to address the issues of volatility, trading, and investing. It is Saddle Peak’s observation that the vast number of assets and Hedge fund managers are traders not investors. They trade based on short term pattern recognition and themes. Many of which have recently bet wrong. Some are going out of business while others continue their high wire act.
We applaud and respect the trader that out trades Wall Street and others. We just don’t believe that many can succeed over the long term. The increased trading volatility was anticipated by Saddle Peak, but we underestimated the magnitude and resulting negative sentiment. The
outcome is clear; we are in an economic slowdown made worse short term by Wall Street’s price movement. We believe it will reshape our economy for the better as resources are
allocated to stronger long term institutions. Given the health of the worldwide economy, our starting point, and the government’s actions we are not going into depression just a painful but natural reallocation of resources.
Saddle Peak has been very busy reshaping the portfolio for the future. The two largest changes have been the additions of Goldman Sachs and Old Republic to the portfolio. Much has been written about the investment banks over the last eighteen months and after careful consideration, Saddle Peak made Goldman Sachs a large investment. When Warren Buffett and Julian Robertson also make an investment in Goldman Sachs we feel we are in with the right type investors. Likewise, Goldman Sachs employees have a large investment in their stock. Put differently, we are investing in human capital of what we consider are the best and brightest. Traders have given Saddle Peak a wonderful opportunity which we believe will produce a good if not great rate of return. Likewise, Old Republic is another financial company trading meaningfully below its intrinsic value. Old Republic is a diversified insurance company with its largest business in the specialty areas of the Property and Causality. However, its exposure to the mortgage and tile insurance business has dominated the press and investors fears. Despite a solid book value of mostly government bonds, the stock is trading for less than a 40% discount. CEO and long term investor Al Zucuro has personally been buying shares. Thus, Old Republic entered the portfolio this summer.
Saddle Peak has also made investments in Intel and International Game Technology. Both of which are technology leaders: Intel in semiconductors and IGT in gaming technology (both slot machines and a wide area of progressive networks). Such investments both represent companies that are leaders in their industry, large installed bases, and high returns on capital (with human capital is the largest input in the business). Other investments include Meredith Corporation a leader in specialty publishing business, Penske Automotive Group in the automotive dealer business, and Monster Worldwide in the internet recruitment business. Additionally, an investment was made with the Poultry business (buying three companies). Unfortunately, our investment in Pilgrim’s Prides has gone down meaningfully because of short term losses and too much debt. In hindsight, we made a poor investment in our timing of an industry recovery.
In summary, the volatile markets of the summer and fall have dictated substantial changes to the portfolio which by in large have taken place. We will not rest on past success as the markets change and opportunities will continue. We are entering a more challenging economic time and flexibility will be important. Likewise, I want to acknowledge that Scott Morris has
taken over the responsibility of client development and compliance. As a partner at Saddle Peak, Scott will play an increasingly important role in aiding the growth of Saddle Peak.
On the research side Josh Lipman has also been added to the firm. Josh will be focusing much of his time on informational gathering with a stated objective of determining where Saddle Peak is possibly wrong on any investment.
Thank you for your interest and time.
Sincerely,
Saddle Peak Asset Management
Douglas W. Grey,
Partner
