Letter to Investors
The dose of philosophy in this letter is intended to explain Tsai Capital’s investment approach and some of my limitations. I want to make sure that investors have enough information to make a sound decision in choosing an investment manager.
Historically, the S&P 500 Index has outperformed the great majority of money managers and most other indices. It is my belief that this index is a suitable alternative to Tsai Capital and I therefore propose to use it as a long-term benchmark to our performance. I must, however, clarify one point: while our performance may yield surprising results – good or bad – relative to the benchmark over the short-term, this phenomenon should neither be cause for concern nor celebration. I recommend investors judge our performance using evaluation periods in excess of five years. Anything less than that is far too short a time frame to evaluate investment performance.
My only objectives are the long-term growth and preservation of capital. But first, let’s get what many others are obsessed with – namely the general market – out of the way. I don’t think that anyone can consistently predict what the market is going to do. That’s a fool’s game. Rather, all of my attention is and has been devoted to finding the best individual investments that offer significant upside potential and a margin of safety at the time of purchase. If you feel that an alternative strategy is essential to an investment program, you should not be invested with Tsai Capital.
Ideal investments are hard to find, especially in times of market euphoria. I seek to avoid investing in trees that appear to grow to the sky – that is, situations in which valuations drastically exceed intrinsic business values. This approach has helped us weather the dot-com and housing bubbles. And since our buying and selling decisions are not tied to general market behavior, we may be wearing the shoes of a spectator for long periods of time. Our preference for inaction motivates us to swing hard when the odds are in our favor. This results in a relatively focused portfolio – which, as previously mentioned, may substantially deviate from our benchmark over short time frames. But these fluctuations are of little importance to the long-term investor, as the only risk is the permanent loss of capital (not short-term quotational loss). I ignore them – and ask you do the same.
Finally, let me be clear on this point: volatility does not determine risk. On the contrary, it occasionally grants us the chance to buy high-quality, growth businesses at large discounts to intrinsic value. I therefore focus on preserving capital to be in a position to capitalize on these rare opportunities and allow the 8th wonder of the world – compounding – to do its miracles.
If I have not been clear in any respect, I welcome your questions.