Dear Partner,
In the second quarter of 2021, Woodbridge Capital Partners (the “Partnership”) returned -3.13% while the S&P 500 returned 8.55% (with dividends reinvested). Since its inception on September 1st, 2018, the Partnership has returned 128.95% compared to the S&P 500’s 56.05%.
This is the first quarterly letter we have had to write with a negative return. To add insult to injury, it happened in a quarter when the S&P did quite well. It was, however, inevitable. We have reiterated that our strategy, value investing, works because it does not work every day of every year, or even every quarter. If it did, everyone would do it, and it would no longer work.
That being said, the slight decline in our portfolio this quarter does not represent a decline in the attractiveness of our portfolio, rather it is quite the contrary. We believe that our portfolio currently consists of shares in businesses that possess significant competitive advantages and are available for very reasonable prices.
Though stock prices must converge toward intrinsic value over the long-term, price changes in the short term very often do not reflect changes in value. We do not worry about this. In fact, we are happy to see the price of our stocks go down (provided it is not the result of deterioration in fundamentals) as it gives us the opportunity to buy more for less, and it also makes share repurchases more powerful.
The preceding assumes, of course, that our analysis as to the value of a particular stock is correct. In the nearly three years that the fund has been operating, we have only made one error which had a significant impact on the portfolio, but I am comforted by the fact that, despite it, our returns have been quite satisfactory. Part of our investment process involves constantly reassessing our original investment theses and comparing what we own to the wide range of alternatives available to us.
When we make a mistake (which will happen eventually) we will be candid with you. For the present, however, we believe that our portfolio is quite attractive, especially relative to the alternatives presently available to investors. We estimate the yield on our portfolio to be over 10%. The earnings yield on the S&P is currently about 4%. In other words, the earnings of the S&P 500 would have to more than double just to catch up with our portfolio. Bonds yield even less and have no prospect of growth or protection from inflation.
We are quite happy with how we are positioned. We believe the probability is high that we will outperform the S&P over the long-term. Over the short-term we make no guarantees. We are very grateful to have partners who are long-term oriented and that trust us. We do not take that trust lightly. If you ever have questions or concerns about your investment, please do not hesitate to reach out to us. As always, we remain committed to your investment success.
Thank you,
Jesse Flowers & Kyosuke Mitsuishi