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Hugo Roque
Hugo Roque
Articles (25) 

A Portfolio Built to Last

Steven Kiel of Arquitos Capital Management has beaten the index by almost 9.8% a year by focusing first on the downside

January 16, 2019 | About:

Steven Kiel of Arquitos Capital Management is one of the most successful managers of the current decade. Since its founding in April 10, 2012, the fund has produced a cumulative net return of 268.8%, or 21.3% annualized. That’s 9.8% above the return of the S&P 500 index over the same period.

In 2018 the fund registered a negative return of 12.6%. In his fourth-quarter 2018 letter, Kiel highlighted the importance of facing tough years as an inevitability: “Investing is (…) challenging because mistakes are guaranteed.”

He added: “It is part of the business. The price of stocks often does not match the underlying value of the company. Stock prices get ahead of themselves at times. Other times, the operations get ahead of the stock price.”

The manager of Arquitos wrote that the structure of his portfolio was built to last. To succeed over the long term, an investor must first endure any kind of shock, but the fund must first achieve permanence:

“Permanence is about intentionally structuring the fund to not allow mistakes to destroy the fund,” he said.

Kiel believes that his fund will persist because:

1. “I don’t buy on margin, so I won’t be a forced seller because of volatility.”

2. “Our largest investor makes up 11% of the fund; so the liquidity needs of one investor cannot negatively affect the entire portfolio. Investors have committed to me that they are in it for the long term (…) I rejected investors who were not like-minded in order to ensure the portfolio’s resiliency.”

3. “Permanence is also about alignment of interests. Most of my family’s net worth is in the fund.”

4. “Just like I don’t want debt in the portfolio through margin loans, I also look for companies with a low amount of debt and strong balance sheets.”

5. “Finally, most of the companies we own in the portfolio were originally purchased below book value. Today, the portfolio is so cheap that most of our holdings again trade below book value, in some cases significantly so.”

There are few commonly known company names in Arquitos' portfolio. There are also no large capitalizations or heavily traded stocks there. Kiel looks into the obscure, ignored camp. He manages a concentrated portfolio that trades with a significant discount, by any metric. And he invests in ideas with much free optionality. He takes care of the downside and lets the upside run. That’s a portfolio built to last!

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Comments

Thomas Macpherson
Thomas Macpherson premium member - 1 month ago

Great article Hugo. I greatly admire Steven's approach. I tend to approach investing in a similar way though not with such a success rate! Thanks for posting. There is a lot of wisdom packed into this article that all of us would be wise to read and ruminate on. Great stuff. Best - Tom

Hugo Roque
Hugo Roque - 1 month ago    Report SPAM

Thank you so much Tom. Its hard to be a value investor. Nothing is the process easy. But it is because of that difficulty that the long term reward can be so extraordinary!

asawhneyy
Asawhneyy - 1 month ago    Report SPAM

Approach is not expained well or there is no approach---?

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