Quarterly Letter

“Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world.”

- Walt Disney

For the most part, the second quarter saw a continuation of the first quarter’s positive performance across many asset classes. This furthered a reversal of the dismal 2018 when every primary asset class was negative: US equities, long-dated US government bonds, gold, and commodities.1 While Q1 2019 was a “risky” asset story with equities and commodities leading the way, during Q2 2019 “haven” assets were strongest. Gold led the way, up 9.2%, and long-dated US Treasury bonds gained 5.7%. It was not all haven assets – the S&P 500 notched a respectable 4.2% increase. Commodities were the sole laggards – down 1.9%.2

While we used the weakness in the fourth quarter of 2018 and early 2019 to increase our equity exposure, this reversed in the second quarter. As markets continued to rally in the April through June period, we were more often sellers, rather than buyers. This was less a reflection of our views on the overall market and more a consequence of “events” and transactions that naturally occur when market sentiment is ebullient.

Four Days in June3

During the second quarter we closed four equity positions. Two provided meaningful gains and two were small losses. When we invest in individual securities we want to have more winners than losers, but we also want our winners’ gains to be much larger than our losers’ losses.4 In the small sample defined by the parameter “positions closed in the second quarter of 2019,” we had the same number of winners and losers.5 On the second criteria, we did much better – our winners’ gains were quite a bit larger than our losers’ losses.

Over the course of four business days in late June, significant corporate events had a largely positive impact on four of our portfolio holdings. On June 24, Bristol Myers Squib (BMY) announced that in order to accommodate Federal Trade Commission (FTC) requests, they would have to divest a business line prior to the acquisition of Celgene (CELG). Also on June 24, Eldorado Resorts (ERI) announced the acquisition of Caesars (CZR). The next day, June 25, AbbVie (ABBV) announced plans to acquire Allergan (AGN). Finally, on June 27, Howard Hughes (HHC) announced that it had retained investment bankers to explore “strategic alternatives” for the company. We sold Celgene, Caesars, and Allergan on June 25. We sold Howard Hughes in early July.

We had purchased Celgene in early April just subsequent to both of the principal proxy advisory firms coming out in favor of Bristol Myers Squib’s acquisition of Celgene. We felt that there was close to 6% upside (with optionality related to a contingent right6 included in the deal), and there was a high probability the deal would close and do so within three months. In other words, modest risk but for well better than cash returns – so, a reasonable place to put some idle cash to work. On June 24, Bristol Myers announced that the FTC was requiring that Celgene divest a business line prior to the merger and that the deal would take until at least the end of 2019 and possibly into early 2020 to close. We decided to move on given the elongated period and the likely headline risk drug companies will experience as we move toward another US presidential election. We lost about 0.6% on the position.