Grey Owl Capital Management’s Quarterly Letter

“If the path before you is clear, you’re probably on someone else’s.”

  • - Joseph Campbell

“Of all the paths you take in life, make sure a few of them are dirt.”

  • - John Muir

Dear Client,

Two of our largest individual equity holdings announced game-changing transactions at the end of the first and beginning of the second quarter of 2018. On March 8, Cigna (CI), one of the largest health insurance companies, announced that it would acquire Express Scripts (ESRX) for approximately $92 per share in stock and cash; an almost 25% premium to the March 7 ESRX closing price. Then, on April 9, Leucadia National Corporation (LUK) announced the sale of 48% of its largest subsidiary, National Beef, and 100% of its Garcadia auto dealership group. Combined, LUK’s two divestures result in gains of over $1B. With shareholders’ equity[1] of ~$10B prior to the sales, this represents a meaningful increase in per share book value. The ESRX and LUK deals are big transactions for two important Grey Owl holdings and therefore warrant discussion in their own right. In addition, they provide context for examining an important concept – the uneven path of investment returns.

Investment returns are not linear. This is the case regarding broad market aggregates (e.g. the S&P 500) but even more so the case when it comes to individual securities. Before delving into the details of Express Scripts and Leucadia National Corporation, for perspective it is worth reviewing the historical returns of a more widely known company run by the world’s most famous investor – Warren Buffett’s Berkshire Hathaway.[2]

Berkshire Hathaway’s Uneven Path to Outperformance

From 1965 to 2017, Berkshire Hathaway has grown book value per share at an annual compound rate of 19.1%. In turn, stock price has compounded at a similar 20.9% per year. These numbers are approximately double the 9.9% compound annual return of the S&P 500 over the same period. Yet, while the full 52-year period tells a glowing story, there were several multi-year periods contained within where some portion of the Berkshire machine slumped. Table 1 below summarizes three such periods.