EFTA00295570.pdf

lb" 1/12/2018 • • • Clifford Sosin CAS Investment Partners, LLC 8 Wright Street, P' Floor Westport, CT 06880 Performance Summary Sosin Partners, LP' SPY.. 2012*** 14.0% -1.5% 2013 66.6% 32.3% 2014 6.3% 13.5% 2015 14.5% 1.3% 2016 22.0% 12.0% Q12017 1.6% 5.9% O2 2017 17.6% 3.1% O3 2017 3.9% 4.4% 04 2017 5.8% 6.8% 2017 31.2% 21.7% Cumulative return since inception 270.1% 104.1% Annualized return since inception 28.4% 14.6% See disclaimer regarding comparison to indicies at the end of this letter. * Performance net of 2% management fee and 20% performance allocation. "Includes dividends reinvested. "'Sosin Partners LP launched 10/9/2012; •e ormance or both the and and SPY shown rom that date. To My Partners: As shown in the performance summary, Sosin Partners, LP reported gains on a mark to market basis net of all fees, expenses, and performance allocations of 5.8% and 31.2% during the three and twelve months ended December 31, 2017, respectively. The broad market as represented by the SPY ETF was up 6.8% and 21.7% including dividends during those periods. Since its inception on October 9, 2012, Sosin Partners, LP has reported gains on a mark to market basis net of all fees, expenses, and performance allocations of 270.1%; this represents a 28.4% compound annualized rate of return. The SPY ETF is up 104.1% including dividends Clifford Sosin • 1 EFTA00295570 hE during that period representing a 14.6% compound annualized rate of return. The Balance Sheet We ended the quarter with eight stock positions on the long side of the balance sheet, totaling 109% of equity capital. Two of our holdings are direct competitors, so it would be appropriate for you to think of us as having seven positions on the long side of the balance sheet. Our largest holding, representing 25% of equity capital, is our investment in World Acceptance Corporation. Our other holdings range in size from 8% of equity capital to 20% of equity capital. We also have a short position in the portfolio at 2% of equity capital. No other positions are material individually or collectively. Volatility The way we invest lends itself to volatility in the market value of our holdings. However, as I described in my last letter, this attribute is not a bug, it is a feature since the volatility deters others from copying our investment approach and the resulting reduced competition allows us to find bargains and thus to profit over time. That said, given that returns to date have been good and we have yet to experience any significant drawdowns, it is worth spending a few minutes contemplating the bad times, which are inevitable. The table below shows the investing performance (gross returns — i.e. before fees or performance allocations) of an idol of mine over a fourteen year period. Take a moment to go through this track record year by year. Try to imagine living through this investment. Year Investor S&P SOO Annual Cumulative Annual Cumulative 1 30.1% 130.1% -8.8% 91.2% 2 71.7% 223.4% 22.6% 111.8% 3 49.7% 334.4% 16.4% 130.2% 4 &4% 3615% 12.4% 146.3% 5 12.4% 407.4% 10.0% 131.7% 6 56.2% 636.4% 23.8% 163.1% 7 40.4% 893.5% 10.8% 1.80.7% 8 2&3% 1146.4% -8.2% 165.8% 9 .0.1% 1145.3% 3.6% 171.7% 10 25.4% 1436.2% 14.2% 196.1% 11 &3% 1555.4% 18.8% 232.9% 12 .31.9% 1059.2% -14.3% 199.6% 13 .31.5% 725.6% -25.9% 147.9% 14 73.2% 1256.7% 37.6% 203.5% Annual 19.8% 1256.7% 5.2% 2033% Clifford Sosin • 2 EFTA00295571 • Note that this investor underperformed the market in years 11, 12 and 13. That is three years in a row! • Note that in years 12 and 13 this investor's returns were negative 31.9% and negative 31.5% respectively. Thus, an investor with $1,000 in his account at the start of year twelve had only $446 left in the account by end of year thirteen. • Notice that during the five years from year 9 through the end of year 14, this investor was only up only 9.7%, while the market was up 18.5%. Also, this performance is before fees and performance allocations. Limited partners did even worse. Imagine that these were your results. What would be your opinion of this manager? Would you continue to believe in this individual or would you redeem? For most people, it looks like this manager has lost his/ her way or possibly was nothing more than lucky for the first nine years. However, this track record belongs to none other than Charlie Munger and runs from 1962 to 1975. At the end of 1975, he shut down his investment partnership and went on to become vice chairman of Berkshire Hathaway, where returns have been more than adequate. While Munger's volatility is a bit greater than average, the simple fact is that any long term focused, concentrated, value based investor will inevitably have significant drawdowns and long spells of underperformance. In fact, this idea can be taken to its logical extreme. Imagine a prescient investor who knew the best stocks to buy over the next five years but knew nothing about the path those stocks would take along the way. Such an investor would be a perfect long term investor. How would he/ she perform, how significant would his/ her drawdowns be? Wes Gray recently wrote a wonderful blog1,2 imagining just such an investor and analyzing his/ her performance using historical stock price data. Here is how he summarized the results. "Our bottom line result is that perfect foresight has great returns, but gut-wrenching drawdowns. In other words, an active manager who was clairvoyant, and knew ahead of time exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times over if they were managing other people's money." I httpdialphaalthited.COM12016/02/02/eVell-gOd-would-get-fired-as-an-aCtive-investod 2 Those of you who saw our earliest marketing materials from 2012 and 2013 may recall that we had a similar analysis to Wes Gray's with similar findings. However Mr. Gray's is more recent and more complete so we are using his. Clifford Sosin • 3 EFTA00295572 As Gray shows in his blog, while an investor with perfect foresight and a five year time horizon would compound at an eye popping 29% (20% better than the market), the results would come in anything but a straight line. The table below shows the drawdowns that such an investor would have experienced: Drawdown Rank Drawdown Date of PdorPeak Date of Low Date of Recovery Peakto Low (days) Lowto Recovery (days) Peakto Peak (days) 1 -75.9% 8/30/1929 5/31/1932 6/30/1933 1,005 395 1,400 2 -40.8% 5/31/2008 2/28/2009 3/31/2010 273 396 669 3 .39.5% 8/31/2000 9/30/2001 9/30/2003 395 730 1,125 4 .38.5% 2/27/1937 3/31/1938 12/31/1938 397 275 672 5 .30.8% 12/31/1973 9/30/1974 4/30/1975 273 212 485 6 .27.7% 8/31/1987 11/30/1987 1/31/1989 91 428 519 7 .26.9% 5/31/1946 11/30/1946 4/30/1948 183 517 700 8 .24.6% 11/30/1980 9/30/1981 8/31/1982 304 335 639 9 •21.5% 2/28/1962 6/30/1962 1/31/1963 122 215 337 10 •20.1% 3/31/1934 7/31/1934 4/30/1935 122 273 395 Even ignoring the 76% drawdown in the Great Depression, this theoretical ideal investor would have experienced four drawdowns of 25-40% in the thirty years spanning 1980-2010. That is roughly one drawdown every 7.5 years! What's more, this idealized investor makes no mistakes and has a highly diversified portfolio consisting of the best 50 stocks out of the largest 500 stocks. More concentration, smaller stocks and a few mistakes would undoubtedly increase the frequency and severity of drawdowns. The simple fact is that substantial drawdowns are a fact of life if you invest long enough. My goal is for our Partnership to last a very long time. As such, big drawdowns are inevitable (although I can't predict when they will occur). That we haven't had a big drawdown yet is merely a consequence of luck and our Partnership's limited life to date. So what does one do with this realization? The answer: be prepared. To be clear, being prepared does not mean avoiding potentially volatile or cyclical investments, holding cash in lieu of making compelling purchases, or any other effort to sidestep price volatility. Over time, steps taken to avoid occasional drawdowns end up being extremely costly to long term compounding. Instead, preparation is about building a personal life and maintaining an organization which will facilitate equanimity and rational choices in the face of Clifford Sosin • 4 EFTA00295573 market price declines. It comes down to creating a headspace where good long term choices will come naturally, even when stocks are crashing. At CAS, we try to create this environment in a number of ways. Financially, our Partnership avoids excess leverage, we keep the management company's operating expenses low, and I keep my living costs low relative to my wealth and income. Thus, as asset prices fall, we can avoid being governed by the near term necessities of bills or margin calls and instead focus on the long term "You can argue that if you're not willing opportunities presented to us. to react with equanimity to a market Psychologically, we mentally rehearse price decline of 50% two or three times a maintaining a rational and long term century you're not fit to be a common disposition in all our thinking and use shareholder, and you deserve the public pre-commitment devices (such as mediocre result you're going to get this letter) to tie our future selves to a compared to the people who do have rational course of behavior. the temperament, who can be more Institutionally, we seek to attract Limited philosophical about these market Partners who are themselves dedicated to fluctuations." - Charlie Munger being rational through a drawdown, and we encourage them to use lockups and other tools as a way of ensuring that they actually behave that way. If we are successful, substantial volatility in stock prices will ultimately prove a boon to our Partnership. To be dear, we will see substantial mark to market price dedines. However, hopefully, we (and the companies in which we are invested) will be able to use the dislocations to make some bargain purchases. In the end, to paraphrase Kipling, if we can keep our heads when all about [us] are losing theirs, we'll emerge from the drawdown far better off than we would be if one had never occurred. Administrative The Partnership's Amended and Restated Confidential Offering Memorandum (the "Offering Memorandum") requires that I disclose whether my investment in Sosin Partners, LP represents over 50% of my liquid net worth. I am pleased to say it does. In fact, it represents over 90% of my entire net worth. My family and I are invested right alongside you. Clifford Sosin • 5 EFTA00295574 In addition, the Offering Memorandum requires that I disclose whether I have any other significant income generating activities. I do not. The management of the Partnership is my sole occupation and source of income. Conclusion I am excited for the prospects of our Partnership. While I expect our short term results will be volatile, I believe that profits over time will be worth the volatility. You'll recall that we endeavor to benefit from a virtuous cycle wherein: 1) our investors trust us and allow us the space necessary to focus on long-term investment performance; 2) this long-term focus allows us to make better investment decisions unclouded by short term considerations; and 3) better long-term investment decisions in turn, (hopefully) allow us to produce better long-term returns, thus earning our investors' trust and restarting the cycle. With this in mind, we continue to look for additional partners who understand and support our approach to investing. The wrong partners, partners who focus on short-term performance, will not be welcome. Prospective investors should review the Amended and Restated Confidential Offering Memorandum for more information. I appreciate your continued trust in me. As always, feel free to call or drop by the office if you'd like to chat. Sincerely, Clifford Sosin CAS Investment Partners, LLC Clifford Sosin • 6 EFTA00295575 ‘SSI AIIII4 IN The information contained in this report is intended for informational purposes only and is qualified in its entirety by the more detailed information contained in the Sosin Partners, LP offering memorandum (the "Offering Memorandum"). This report is not an offer to sell or a solicitation of an offer to purchase any investment product, which can only be made by the Offering Memorandum. An investment in the Partnership involves significant investment considerations and risks which are described in the Offering Memorandum. The material presented herein, which is provided for the exclusive use of the person who has been authorized to receive it, is for your private information and shall not be used by the recipient except in connection with its investment in the Partnership. CAS Investment Partners, LLC is soliciting no action based upon it. It is based upon information which we consider reliable, but neither CAS Investment Partners LLC nor any of its managers or employees represents that it is accurate or complete, and it should not be relied upon as such. Performance information presented herein is historic and should not be taken as any indication of future performance. Among other things, growth of assets under management of CAS Investment Partners LLC may adversely affect its investment performance. Also, future investments will be made under different economic conditions and may be made in different securities using different investment strategies. The comparison of the Partnership's performance to a single market index is imperfect because the Partnership's portfolio may include the use of margin trading and other leverage and is not as diversified as the Standard and Poor's 500 Index or other indices. Due to the differences between the Partnership's investment strategy and the methodology used to compute most indices, we caution potential investors that no indices are directly comparable to the results of the Partnership. Statements made herein that are not attributed to a third party source reflect the views, beliefs and opinions of CAS Investment Partners LLC and should not be taken as factual statements. Clifford Sosin • 7 EFTA00295576