Eden Alpha’s 2015 year end letter is out and you can download it here. Our top line was a decent 27.7% increase but that didn’t come easy, not at all.
Before we had any time to look back and reflect we got to witness another drama in the markets and at the center of the stage is, once again, The Middle Kingdom or as most people know it, China. But we will leave that for a 2016 post. Here are a few pieces from our 2015 letter…
On the markets:
As we write this letter to you, surveying newspapers’ headlines we come across many articles that summarize the year we’ve just had. The common theme in those headlines is that nothing worked in 2015: not bonds, not stock, neither did gold, nor did commodities—all of which disappointed. 2015 will definitely go down as a difficult year to many investment managers and that is because while the market went nowhere, volatility was rather high in many segments and asset classes. Thanks to our investments in great businesses with fantastic management teams at the right prices we managed to beat the benchmark index by a wide margin while taking very little business risk to achieve this. In addition, a rather high number of special situations contributed to widening the gap versus the benchmark—these factors led to a satisfactory result for 2015.
We wrote a whole section on the very important topic of capital allocation, here is a teaser:
“In theory there is no difference between theory and practice. In practice, there is.” So said Yogi Berra. In theory, capital allocation sounds easy; one just has to allocate capital to investments that offer the best risk-adjusted returns. Yet, reality is that those who become CEOs probably made their way up the company’s hierarchy and excelled at operations or marketing or any other discipline in addition to being well versed in the intricacies of organizational politics. When they become CEOs they suddenly face the unfamiliar and difficult-to-learn task of capital allocation. After all, what does being great at operations management have to do with capital allocation?
On mistakes and misjudgment:
While our return this year was satisfactory, a few mistakes that we made detracted from our return and made a year that could have been excellent into just good. Those mistakes had one thing in common: we stepped too far out of our circle of competency. This showed itself by paying for future growth that didn’t materialize, investing in a business that looked good although we were uneasy with the management team, and we underplayed the importance of political developments.
And it won’t be complete without a good word to our partners that thanks to their outstanding qualities, made this all possible:
Our long-time partners already know the recipe but it’s worth repeating for the partners who just joined: times when markets are turbulent and fear starts to spread are the times in which the seeds of our success are sown. We are always ready for the storm and will know what to do in order to position the partnership for success once such storm recedes. Being able to afford to take such an approach is a luxury that very few investment managers enjoy and we can afford it only thanks to the long-term horizon of our partners, and for that, we are thankful for the continued trust you have placed in us.
I’d really suggest you to take a few minutes and read the whole thing so here is the link, again.
Good luck in 2016, we are all going to need it…