Laughing Water Capital is a long-biased boutique investment partnership that runs a concentrated portfolio of equity securities aiming to realize good profits. It often invests in businesses that are not much popular among other Wall Street investors because of some current issues, which the fund believes are solvable in time. The fund’s Portfolio Manager and Managing Partner is Matthew Sweeney. Recently, Laughing Water Capital released its Q1 2019 Investor Letter, which you can download below. It disclosed its quarterly returns of 4.5%, underperforming the S&P 500’s return of 13.7% and the Russel 2000’ return of 14.6%.
As you know, I prefer to only write twice per year in order to discourage the negative effects that come from discussing our portfolio too frequently. However, I am failing miserably to abide by this preference, in part due to our portfolio’s current tilt toward special situations (as discussed in our Q3’18 letter) which are shorter term investments by their nature, and in part due to new capital joining our partnership. Regardless, as much as I would prefer to limit communication, I feel it is important that all partners understand what we own and why we own it, so that when difficult times inevitably come, we can focus on the quality of our businesses, our management partners, and the cheap prices we pay, rather than the noise that will dominate the headlines.
Laughing Water Capital (“LWC”) returned 4.5% in the 1st quarter of 2019 after all fees and expenses, versus 13.7% and 14.6% for the SP500 and R2000 respectively. In the past, when we far out performed the indexes over 3 month periods, I noted that this period is inconsequentially short. This remains true today, although I acknowledge it is easier to ignore the short term when you are outperforming than when you are underperforming. Of note, this quarter was our worst ever in terms of relative performance.
Simply stated, we don’t own the index, so there is no reason to believe our returns will track the index. In fact, at present none of our stocks are in the SP500, and only a quarter are in the R2000. However, I believe that on average, our companies are cheaper than the indexes, led by more incentivized management teams than the indexes, and they have a better chance for long term operational improvement than the indexes. All of investment history suggests that this is a winning combination over time.
You can download a copy of Laughing Water Capital’s Q1 2019 Investor Letter here: