Tilson On His New Strategy

In his annual letter to clients, top value investor Whitney Tilson says he is getting back to basics now that he is managing money on his own.

“I truly believe that less is more,” writes Tilson in his first annual letter since he and former business partner Glenn Tongue parted ways. “Going forward, the funds I manage will be concentrated in my very best, carefully researched investment ideas, with approximately 15 meaningful positions on the long side and a similar number of (much smaller) positions on the short side. My target portfolio exposure is 80-100% long and 15-30% short. In this increasingly short-term, trading-oriented environment, I aim to do as little trading as possible, and would be delighted if I am able to generate a handful of great investment ideas each year.”

Tilson says that currently, his fund is 62% long. “My highest priority is to identify a small number of cheap, safe, new investments that will take the fund’s long exposure to the 80-100% range,” he says. “This won’t be easy, unfortunately. In today’s markets, complacency abounds — market volatility levels haven’t been this low since before the financial crisis in early 2007 — so high-conviction long ideas are few and far between right now. I’ve been doing a lot of work on a range of companies and am finding many stocks that are trading at a 10-20% discount to intrinsic value, but that’s not a big enough margin of safety, so I continue to look.” He offers up a list of companies he’s recently been looking into.

Among the stocks in Tilson’s portfolio at the time he wrote the letter: Berkshire Hathaway, AIG, Howard Hughes, Citigroup, Goldman Sachs, and Netflix. He says that, while his fund has struggled in the past couple years, he will not go about trying to bounce back in the “wrong” way. “I’ve seen too many fund managers try to quickly make back losses by swinging for the fences — trading rapidly, using leverage and options, and buying speculative stocks — and they invariably blow themselves (and their investors) up,” he writes. “I’m taking the opposite approach, which can by summarized by the first rule of holes: ‘When you’re in one, stop digging!’ (hat tip to Molly Ivins).”