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Sequoia Fund 2010 Annual Shareholder Letter

March 04, 2011 | About:
The annual shareholder letter for Sequoia Fund was released several days ago. Sequoia's co-managers, Robert Goldfarb and David Poppe were named by Morningstar as the domestic equity managers of the year (2010).

Below is some commentary about the firm's large (but decreasing) stake in Berkshire Hathaway, followed by the full document in scribd.

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The Fund outperformed the S&P 500 Index for the year, though it underperformed during the fourth quarter. For the second consecutive year, the stock market posted significant gains as the economy recovered from the financial crisis of 2008. After losing 37% of its value in 2008, the S&P 500 gained 26.5% in 2009 and 15.1% in 2010, meaning an investor in the Index who stayed the course over three years would have lost about 8 cents on every dollar invested at the end of 2007. An investor in Sequoia would have had a fractional gain over the same three-year period, net of fees.

In 2010, Sequoia generated a 19.5% return despite holding a large cash balance all year. Indeed, we ended the year 79% invested in equities and 21% in cash. Had we been more fully invested in the stocks we already own, performance would have been better.

A lot happened at Sequoia in 2010. Most notably, we sold nearly half the Fund’s holding in Berkshire Hathaway. After comprising more than 30% of Sequoia’s assets as recently as 2006, Berkshire amounted to 10.6% of assets at the end of 2010.

In the same year we sold so much Berkshire, we bought a large position in Valeant Pharmaceuticals and a smaller one in Biovail, a Canadian pharmaceuticals manufacturer. Valeant and Biovail merged during the year, and on December 31 the combined company, called Valeant, was our second largest holding. In recent weeks, rapid appreciation in Valeant shares caused it to surpass Berkshire and become Sequoia’s largest holding. It is the first time in nearly 20 years that Berkshire has not been the largest investment in the Fund.

At the time we sold Berkshire we felt the buyers would probably end up earning reasonable returns on their investment. That’s not a typical sentiment for a seller. But our sale of Berkshire was unusual in several ways.

At the heart of the matter, we continue to believe that Berkshire Hathaway represents an excellent collection of businesses helmed by the best capital allocator in America. But in recent years Warren Buffett has announced loudly and clearly that the law of large numbers is working against Berkshire. That is, as the company’s market capitalization has grown to $200 billion and its shareholders’ equity to $150 billion, it has become harder for Berkshire to grow organically at a fast rate or to make investments large enough to propel earnings rapidly forward. When Warren Buffett tells the public that Berkshire’s growth rate will slow in the future, it behooves one to listen.

Our feeling is that Berkshire is a very fine holding. It delivers to an investor a diversified earnings stream, a fortress-like balance sheet and a CEO who has the courage to make opportunistic investments when others are fearful. But to justify a 20% weighting in the Fund, we must believe a business trading at Berkshire’s valuation level can compound its earnings at a fast rate for a long time. We think Berkshire’s growth rate will be respectable in the future, but not torrid. As a consequence, we believe it makes more sense for Berkshire to be a large, but not outsized, percentage of Sequoia.

Of course, cash currently delivers a negligible return these days and as we sold Berkshire we effectively increased our cash position. But timing also played a role in our decision to sell shares. The entry of Berkshire into the S&P 500 index, and later into the Russell 1000 and 3000, created enormous demand for shares by index funds. We took advantage of this demand by selling a large volume of shares as Berkshire entered these indices.

sequoia Fund


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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