I confess that I was at a bit of a loss about what to write today. I have sent a lot of content out this week including an hour long discussion with Chris Swatta of RBC in Annapolis on his radio show. I talked about markets, stocks and banks on the show so I am running low on ideas and new things to talk about at the moment. To top it off just as I sat down to write this sentence I had to run out to take the little one to a Science Olympiad meeting I had totally forgotten and spend an hour standing around a middle school hallway waiting for her to finish. Then a subscriber who apparently searches and reads as much as I do sent along an article form Business insider containing information about Baupost Fund. The fund has announced that Brian Spector is leaving Baupost to concentrate on family and philanthropy. Mr. Spector write a final letter to Baupost shareholders on the way out the door and it contains some absolute gems worth considering.

The letter discusses how the fund approaches the market. The departing analyst said that Baupost sees two types of opportunities in their approach to investing, "needle in a haystack investing" and "tide comes in and tide goes out investing." That has very much been my experience. After several years of needle in a haystack market I have to confess I am looking forward to the next tide goes out phase of the market. For now we are stock in a needle-haystack market experiencing what the letter describes as “"Most of the time we are in periods of haystack investing. We sift through lots of investment ideas to find a few decent opportunities. We sell more securities than we buy and our cash reserves begin to build."

My favorite part of the letter, as reported by Business Insider (and yes this article will contain in large part quotes stolen form a Businessinsider.com article that they stole from the Baupost fund. Just call me a Pirate) dealt with holding cash. Seth Klarman and his crew have always held high cash balances especially after an extended market advance. Mr. Spector wrote that” One of the most common misconceptions regarding Baupost is that most outsiders think we have generated good risk-adjusted returns despite holding cash. Most insiders, on the other hand, believe we have generated those returns BECAUSE of that cash. Without that cash, it would be impossible to deploy capital when we enter a tide market and great opportunities become widespread.”

He also describes a turn of the tide market in way that I remember well form 2000-2003. “We see distressed sellers, illiquid securities, huge redemptions, and an excess of paranoia and fear. We quickly find a number of interesting opportunities, deploying our significant cash balances as we trade our precious liquidity for mispriced securities. We may lose money in the short term, as we add to our portfolio while prices are dropping. But when markets turn, we expect multiple years of strong profitability.” That’s the lumpiness of value investing. Great sums of money are made in the first few years after the tide goes out , match the market as the tide comes in and begins to lag as we near high tide.

We must be nearing high tide. We are down about 8.5% in the deep value letter right now for the year and over the past two years we have returned a negative 7.43% total. Our oil and natural resources stocks have been crushed like a little league team playing the American League All Star team. Renewal rates are horrid and we haven’t sold a new subscription on a few weeks. I cannot tell you how happy that makes me. We are getting ever closer to an important turn in the market that creates great bargain buying opportunities. When? No clue but sometime. Oriably sooner than most think. As Sam Zell pointed out at the Invest for Kids conference this week ““We are in the tenth inning of a nine inning game.” When it happens I will be ready with more than 50% in cash.

Besides as I have said repeatedly I have a heavy tilt towards the community bank stock in Banking on Profits. Right now I am about 80% BOP and 20% deep value. BOP is up 14.98% for the year and 18.63% over the last year. In fact although Deep value is lagging as I would expect 6 years into a bull market the combination is beating the market by more than 3 to 1 and still holds a cash component of roughly 20%.Its tough to get upset about that.

When I compare myself to some of the best value investors on the planet I am pretty happy about where we are right now. Baupost is down 6.6% year to date. Bill Ackman is down 16% so far this year as is David Einhorn. Third Avenue is down about 4.4%. Long leaf is down about 15%. Aegis Value is off by more than 14%. Even FPA Crescent Fund is basically flat for the year. I am not being at all critical of any of these folks and if you have the chance to get money with any of these folks while they are down I would consider doing so. I just want to point out that combining Deep Value and banking on profits is a successful approach to long term investing and I expect it will continue to be one for a long time. If you don’t already have both letters get in touch with me as soon as possible and I will work out some sort of deal with you.

Eventually deep value will come back into vogue, most likely right after the next collapse or sell off. Someday energy and resources will see stock prices soar. When that does we will see both sides of the portfolio beating the market by a huge margin.

I scooped up the new John Irving novel the minute it hit the whispernet this week, It as quirky, weird and well written as his previous books and well worth your time to read. I am also about a third of the way through David Robbins 2007 release Liberation Road: A Novel of World War II and the Red Ball Express. So far it is fantastic. The new release list for the next few weeks leading up to the holidays is a readers cornucopia that will help take some of the edge off not having baseball for a few months.

104 days until pitchers and catchers report.

Have great week everyone

Tim

When ot comes to ideas and stock picks it is often