Update No. 154 – 15/03/14

The invitation to invest went out last weekend. The new stock will be issued on 30 March, so funds will need to be received before then, if you had wanted to receive an invitation to invest, but didn’t, please contact me through the e-mail set-out on the website.

As I mentioned, in the ‘offer to invest’, I have commenced buying programs on a number of extremely good, if unusual opportunities and we had a little success this week in acquiring some. To describe them as illiquid would be a disservice to illiquid stocks, but these are excellent companies with good histories and even better futures trading at compelling prices. I will depart from my usual circumspectness in respect of discussing holding once I have accumulated satisfactory positions, however do not hold your breath, based on trading history, I suspect at least a couple of these stocks it may take as much as a year to get our fill without needlessly distorting our buy price.

We own a number of other illiquid stocks, but as we have taken on more external investors, have increased our more conventional/liquid holdings somewhat. If the need should arise and all of our external investors at once decided to withdraw their cash, such funds as would be required could be raised with only a day’s selling work without causing a meaningful change in the prices of any stocks we sold.

It is for this reason I intend to keep EGP a very small fund, these small illiquid opportunities are not available to the large investor. I remarked on Twitter this week that this (the challenge of size) is what makes the records of the likes of Warren Buffett, Seth Klarman and David Tepper so special. Results exceeding 20% per annum achieved over the long term (very long-term in Buffett’s case) are unbelievable given the bank balances they have to work with. I am not certain I have sufficient skill that I could achieve anything like their record over their tenures managing the huge sums of money they do. I am very confident that over an extended period, however, managing a small pool of capital that I can give their records a pretty good run for their money. So we will keep EGP small in order to make me appear more talented than I am…

I have mentioned before in these blog pages (I think) that if we want to be successful as investors, we should invest in the world as we expect it to be, not in the world as we wish it were.

I was reminded of this today after reading an article by a friend Claude Walker, written for Motley Fool. Claude has an ethical bent on his investing, which I quite admire, I have a different take on a lot of things, but I do respect his ethical/environmental passion. In the article, however, I think Claude has mistaken the substantial recent Berkshire Hathaway investments in wind and solar energy as some sort of implicit acknowledgement by Warren Buffett on the effects of climate change. I do not believe that to be the case, Buffett is betting on how the world will be (regulated by politicians who have to be seen to ‘act’ on climate) not on how the world should be (consumers pushing for more sustainable alternatives out of respect for the long-term preservation of current environmental conditions). In case you had any doubts about Buffett aiming for return more than environmental leadership, remember he recently put $4 billion to work in the world’s largest oil extractor (Exxon Mobil) and Burlington Northern Santa Fe carries more oil and coal than any other carrier in the US. I could give other examples, but remember its return on capital not environmental leadership Buffett’s playing for with Solar/Wind and it will probably require substantial government regulation to make cheaper alternative energy sources uneconomic in order to ensure Berkshire Hathaway gets a good return on that big investment. If you need further reminding that Buffett’s no ‘tree-hugging hippy’, try this recent answer about the effects of climate change over the last few years on the insurance industry (Berkshires largest business):

“I think the public has the impression that (the climate is changing) because there’s been so much talk about climate that events of the last ten years from an insurance standpoint in climate have been unusual. The answer is they haven’t.”

I have lived the decision to invest how I thought things would be rather than how I thought they should be. During the GFC, late 2008 & early 2009 when I was deploying capital at a breakneck pace, a friend (and now EGP investor – you know who you are…) was telling me what a maniac I was investing when what should happen is that the whole world should burn for the excesses that had been allowed to creep into the system. Destructive capitalism should be allowed to take hold and the world should be economically ruined for decades, so a lesson could be learned. I believed that there was considerable moral sense in something like that happening, but that only a fool would believe that the (mostly) democratically elected leaders of the world’s economic powers were going to allow complete Global collapse because it was ‘right’. No, they need to be elected at the next ballot they would act, and despite the moral issues, the economy would be stabilised and if it didn’t, I was happy that even in a second ‘Great Depression’, the businesses I was buying would still be worth a good deal more in 20 years and retirement was a long way off for me anyway.

I got to be right in the best way and in performance terms, my 2009 result is one I expect I will spend a lifetime and probably never repeat (though I’ll be trying…)  – Tony Hansen 15/03/2014

EGP Fund No. 1 Pty Ltd. Up by 0.33%, trailing the benchmark by 0.42% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 64.38%, leading the benchmark by 38.63% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}