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Rowan Street Q2 2015 Letter


Dear Partners,

We are happy to report that we have made a lot of progress in our second quarter of operation. In particular, we found five new companies with which to invest your capital. This is in addition to the three companies in which we initiated positions during the first quarter. Our total portfolio right now consists of eight exceptional companies, all leaders in their industries with strong competitive advantages. These companies are well diversified among various industries; we own an industrial distributor, a leading distributor of vehicle products and replacement parts, a marketing services firm, a bank, a frozen foods company, a leading provider of travel and related services, and a manufacturer of complex metal components and products for the aerospace industry, which we will discuss next.

As you may recall from our Q1 letter, we had outlined our investment thesis for Precision Castparts (PCP). We started building this position in April and added to it several times over the quarter as the price declined further, which made it the biggest holding in our Rowan Street fund. On August 11th, Warren Buffett announced that Berkshire Hathaway has agreed to buy Portland-based Precision Castparts for $32.4 billion in cash. Berkshire is paying $235 a share, a 21% premium to the company’s stock price as of Friday, August 7th. The Wall Street Journal reported:


Warren Buffett needed only a half-hour with Precision Castparts Corp. Chief Mark Donegan to decide that his aerospace company was worthy of Berkshire Hathaway Inc.’s largest acquisition ever. And Mr. Donegan wasn’t even pitching a deal. Describing their first meeting on July 1 as akin to seeing “the girl across the room,” Mr. Buffett said he was impressed by Mr. Donegan’s knowledge and passion for the business. “The guy is fantastic,” the Berkshire Hathaway chairman and CEO said in an interview Monday. “He’s as in love with his company as I am with Berkshire, and that’s saying a lot.”


This deal was right up Warren’s alley and we believe he is getting great value at $235 a share. As for us, the news is both good and bad. On one side, we get to book a very attractive short term profit while also receiving a complimentary vote of confidence from the world’s greatest investor on the biggest position in our fund. On the other side, we wanted to own this company for a long time, and now Mr. Buffett does, so we have to find another idea to deploy the capital we receive from the deal. We are hardly complaining though.


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S&P 500 was up only 0.28% in Q2 2015 and up 1.2% year-to-date as of July 31. A lot of positive developments in U.S. economic activity are tempered by concerns about Greece, the volatile Chinese stock market, U.S. stock valuations and a potential rate hike by the Fed in September. These seem to be the most common sources of anxiety. Our experience assures us that there are always worrisome issues in the world. As we mentioned in our first letter, we believe the best remedy for an uncertain world is a portfolio of exceptional businesses that are led by trustworthy and skilled managers purchased at rational prices. We dedicate all our time and energy in pursuit of these rare businesses and are staying focused on building a portfolio that is well-positioned in this manner.


Ammunition for the Hunting Season


Having said that, we would like to mention that the U.S. stock market has not experienced a 10% correction in over three years. A dip of this size is normal and inevitable. When it happens, all the negatives that have been apparent for years may suddenly seem important. Some speculators will be caught short and will have their own personal liquidity crises. This is all a normal part of investing. Anything can happen in the stock and bond markets in the short run. Fear causes selling and selling can feed on itself. The trick is to watch calmly as it unfolds and take advantage when securities are being sold at distressed prices.


We wish to remind our investors that fear, pessimism and falling stock prices could be perceived as a negative by most, but in fact it’s our dear friend as we work to build a portfolio that will compound capital at attractive rates of return over the long run. Our estimate of S&P 500’s expected annualized rate of return for the next 5 – 10 years is around 5 – 6% (not exactly a return anyone would brag about at cocktail parties).


On a positive note, we are finding some companies that can be acquired at attractive prices to compound at double digit rates of return over the next 5 – 10 years, and we are maintaining plenty of “ammunition for the hunting season”. We are certain that as volatility picks up, more attractive opportunities will come our way…and we will have plenty of cash to take advantage of them. As Warren Buffett pointed out in his 1987 shareholder letter:

"Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun.”

Well, ladies and gentlemen, our gun is loaded, and as new partners come on board and add to our “ammunition levels”, we expect to be fully ready for the hunting season!


Thank you again for allowing us to manage money for you. It is a great pleasure for investment managers to work with patient, long-term oriented investors.


Best regards,


Alex and Joe