Burr Capital 1Q17 Letter: Art of Compounding

Smart Money

Burr Capital LLC First Quarter 2017 Letter, April 1, 2017

Performance / Portfolio Review:

  • In Q1 2017, Burr Capital posted a 12.1% gain versus a 6.1% gain for the S&P 500
  • Contributors:
    • Domestic cable investments: Liberty Ventures (LVNTA) and Liberty Broadband (LBRDK) rose 21% and 17% respectively in Q1; remain very constructive on the US cable industry which benefits from strong secular tailwinds
    • Allergan preferred shares (AGN-A): Leading pharmaceutical company with a dynamic management team; in spite of strong performance YTD, preferred shares remain attractive sporting a 6.5% dividend yield with material capital appreciation potential
  • Detractors:
    • Income-oriented investments: drag on returns as market participants priced in expectations for rising interest rates
    • Oil investments: commodity businesses are bad businesses because they rarely earn their cost of capital and oil is the worst of them; yet, they continue to seduce investors with sweet promises of outsized gains with modest tweaks to supply/demand projections
      • Given the volatility in oil, we believe we can create a 15-20% annualized income yield before capital appreciation with this investment; income yield protects our downside because even if our investment falls by 15% we hope to break even in a year and if there’s any recovery in oil prices, we could make out like bandits

The Stock Market’s Remarkable Long-Term Record:

  • Scars from 08-09 financial crisis and 99-00 tech bubble may not have completely healed
  • May be hard to fully appreciate the remarkable long term track record of the stock market
  • In the 50-year period (1967-2017), average (geometric) mean return for S&P 500 has been around 10% which is very respectable
    • Roughly a double every 7.3 years: not hard to see why the stock market remains an attractive long-term vehicle for wealth creation

Historical return

  • Compound math:
    • $100,000 investment compounding at 10%/yr translates to $672,750 in 20 years
    • Perhaps less obvious is the same investment amount compounding at 15 translates to $1.6 million in 20 years

Burr Capital is a fee-only investment management firm, led by Rahul Ray (Portfolio Manager).

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