Sunday, September 6, 2009

Whitney Tilson, August Letter

From Whitney Tilson's August 2008 Letter
We are bottoms-up stock pickers, but an important lesson we’ve learned from this downturn is the importance of factoring in our macro views when determining the fund’s overall positioning. Historically, we were roughly 100% long and 20% short, but when we became convinced early last year that the U.S. housing market was going to collapse, we tripled our short exposure, which is why we ended the year down less than half of the S&P 500. Down 18.1% means you only need to be up 22.1% to get back to even, whereas the S&P, which fell 37.0%, needs to rise 58.7% to do so.

We don’t know for sure what the future holds for the U.S. housing market, economy and stock market, but our best guess is that housing prices will continue to decline for another year – the recent signs of stabilization are likely due to seasonal and other temporary factors – and, overall, the U.S. economy will face a significant headwind for a number of years as losses stemming from the greatest asset bubble in history continue to be realized. Thus, whereas normal economic growth might be 2-3% annually, our base case scenario is approximately 1% for the next 3-5 years. Such low growth is not a catastrophe – it was only six months ago that we stood
on the precipice of Armageddon, the chance of which has receded materially, thank goodness – but it will likely keep a lid on corporate profits and the stock market.


In addition to reducing our long exposure, we have become more defensive in terms of the nature of the stocks we own. We have trimmed more aggressive positions like Huntsman, Resource America, Crosstex and Borders Group as they’ve rallied, and added a number of blue-chip, cash- rich stalwarts to complement our Berkshire Hathaway position, including eBay, GE, Microsoft, Pfizer and Yahoo.