77767252 tilson full year

8/2/2019 77767252 Tilson Full Year

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The GM Building, 767 Fifth Avenue, 18th Floor, New York, NY 10153

Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160 Managing Partners fax: 2

www.T2PartnersLLC.com

January 4, 2012

Dear Partner,

We hope you had wonderful holidays and wish you a happy new year!

In each of our annual letters we seek to frankly assess our performance, reiterate our core investmentphilosophy, and share our latest thinking about various matters. In addition, we discuss our 15 largestlong positions and so you can better understand how we invest, what we own and why, and why we haveso much confidence in our funds future prospects.

Performance

There is no way to put a positive spin on 2011: our fund had a dreadful year, its worst ever on both anabsolute and relative basis. While we made a bit of money on the short side, nearly all of our longsentering the year did very poorly and, compounding this, most of the investment decisions we madeduring the year subtracted value. It has been an extremely frustratingand humblingexperience.

December 4th Quarter Full Year

TotalSince

Inception

AnnualizedSince

Inception

T2 Accredited Fund - net 0.1% 6.5% -24.9% 114.2% 6.0%

S&P 500 1.0% 11.8% 2.1% 29.2% 2.0%Dow 1.6% 12.8% 8.4% 79.6% 4.6%

NASDAQ -0.5% 8.1% -1.0% 23.6% 1.6%Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2 Accredited Fundwas launched on 1/1/99.

This chart shows our funds net performance since inception:

-40

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0

20

40

60

80

100

120

140

160

180

200

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

(%)

T2 Accredited Fund S&P 500


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This table shows our funds net performance by month since inception:

Note: Returns in 2001, 2003, and 2009 reflect the benefit of the high-water mark, assuming an investor at inception.

Performance Objectives

In every year-end letter we repeat our performance objectives, which have been the same since our fundsinception (no changing the rules in the middle of the race): Our primary goal is to earn you a compoundannual return of at least 15%, measured over a minimum of a 3-5 year horizon.

We arrived at that objective by assuming the overall stock market is likely to compound at 5-10%annually over the foreseeable future, and then adding 5-10 percentage points for the value we seek to add,which reflects our secondary objective of beating the S&P 500 by 5-10 percentage points annually overshorter time periods. While a 15% compounded annual return might not sound very exciting, it would

quadruple your investment over the next 10 years, while 7-8% annuallyabout what we expect from theoverall marketwould only double your money.

Since inception 13 years ago, we have not met our 15% objective, thanks in part to one of the worstperiods ever for stocks. We have outperformed the S&P 500 by 4.0 percentage points per year, just belowthe low end of our 5-10 percentage point goal. We are not satisfied with our performance and aredetermined to improve it.

Performance Assessment

We struggle with how bad of a grade to give ourselves for 2011 because in some ways its too early totell. Yes, many of our stocks took beatings during the year, but only time will tell whether we were

wrong or just early. We think in most cases the latter, given that we still own meaningful positions in 8 ofour 10 (and 15 of our 20) biggest losers on the long side in 2011. If even a handful of these stocksperform like we think they will in the next 1-3 years, we wont look as dumb as we do today and thuswe might give ourselves a C for 2011. If these stocks dont recover, then we deserve a D.

Why not an F? Because an F is reserved for blowing upand we didnt. In fact, when things got ugly inAugust and September, we didnt panic and dump everything and go to cash or a market neutral position.

T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P

AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500

January 7 .8 4.1 -6.3 -5.0 4.4 3.6 -1.8 -1.5 -5.5 -2.6 4.7 1.8 1.1 -2.4 1.9 2.7 2.4 1.7 1.9 -5.9 -3.6 -8.4 -1.6 -3.6 -2.8 2.4

February -2.9 -3.1 6.2 -1.9 -0.6 -9.2 -1.1 -2.0 2.9 -1.6 7.0 1.5 2.1 2.0 -3.1 0.2 -3.3 -2.1 -6.9 -3.3 -8.9 -10.8 7.3 3.1 4.1 3.4

March 4.1 4.0 10.3 9.8 -2.6 -6.4 3.0 3.7 1.4 0.9 3.9 -1.5 3.9 -1.7 3.9 1.3 -0.8 1.1 -2.3 -0.5 2.9 9.0 4.6 6.0 -4.1 0.0

April 2.1 3.7 -5.1 -3.0 5.1 7.8 -0.2 -6.0 10.5 8.2 2.4 -1.5 0.6 -1.9 2.2 1.4 4.4 4.6 -0.9 4.9 20.1 9.6 -2.1 1.6 1.9 3.0

May -5.7 -2.5 -2.8 -2.0 1.8 0.6 0.0 -0.8 6.6 5.3 -1.4 1.4 -2.6 3.2 1.8 -2.9 2.5 3.3 7.9 1.2 8.1 5.5 -2.6 -8.0 -1.9 -1.1

June 2.2 5.8 4.1 2.4 4.6 -2.4 -7.3 -7.1 2.9 1.3 0.1 1.9 -3.1 0.1 -0.2 0.2 -3.0 -1.5 -1.2 -8.4 -5.0 0.2 4.5 -5.2 -2.4 -1.7

July -0.7 -3.2 -3.6 -1.6 -1.1 -1.0 -5.0 -7.9 2.3 1.7 4.6 -3.4 0.5 3.7 -0.9 0.7 -5.4 -3.0 -2.5 -0.9 6.8 7.6 3.5 7.0 -4.6 -2.0

Augus t 4.1 -0.4 5.4 6.1 2.5 -6.3 -4.3 0.5 0.4 1.9 -0.9 0.4 -3.2 -1.0 2.9 2.3 1.7 1.5 -3.3 1.3 6.3 3.6 -1.5 -4.5 -13.9 -5.4

September -3.3 -2.7 -7.2 -5.3 -6.1 -8.1 -5.4 -10.9 1.7 -1.0 -1.6 1.1 -1.5 0.8 5.0 2.6 -1.1 3.6 15.9 -9.1 5.9 3.7 1.7 8.9 -9.3 -7.0

October 8 .1 6.4 -4.5 -0.3 -0.8 1.9 2.8 8.8 6.2 5.6 -0.4 1.5 3.5 -1.6 6.3 3.5 8.2 1.7 -12.5 -16.8 -1.9 -1.8 -1.7 3.8 7.0 10.9

November 2.8 2.0 -1.5 -7.9 2.3 7.6 4.1 5.8 2.2 0.8 0.8 4.0 3.1 3.7 1.9 1.7 -3.6 -4.2 -8.9 -7.1 -1.2 6.0 -1.9 0.0 -0.6 -0.2

December 9.8 5.9 2.3 0.5 6.5 0.9 -7.4 -5.8 -0.4 5.3 -0.2 3.4 -1.3 0.0 1.4 1.4 -4.3 -0.7 -4.0 1.1 5.5 1.9 0.5 6.7 0.1 1.0

YTD

TOTAL31.0 21.0 -4.5 -9.1 16.5 -11.9 -22.2 -22.1 35.1 28.6 20.6 10.9 2.6 4.9 25.2 15.8 -3.2 5.5 -18.1 -37.0 37.1 26.5 10.5 15.1 -24.9 2.1

1999 2000 2001 2002 2003 2004 20112005 2006 2007 2008 2009 2010


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Instead, we stayed calm, added to our favorite positions, and recouped some of our losses in the fourthquarter.

Were in the Same Boat

We believe in eating our own cookingwe have a higher percentage of our net worths in our funds thananyone, by farso it goes without saying that no-one has lost more money or feels worse about ourfunds recent performance than we do.

Were not only in the same boat financially, but also in terms of the decisions we have to make whenfaced with poor performance. To the extent that you choose to invest in funds, you have thousands ofchoices, just as we have thousands of stocks to choose from. As we discuss below in the section entitledGuaranteed Underperformance, it is a certainty that every fund you invest in will underperform attimes, just as every stock we invest in will do so as well.

The critical question all of us face is: what should we do when a fund or a stock we own performs poorly?There are only three choices: sell, hold, or buy more. This decision, more than any other, is the key tolong-term investment successfar more important than timing the entry point exactly right.

Unfortunately, there is no easy answerevery fund and every stock is differentbut here are a fewthoughts: First, to quote Ben Graham, you must let the market be your servant, not your guide. Justbecause other investors are selling in a panic doesnt mean you should. In some cases, the herd is right,but the real money is made betting against the herd when its wrong. It may be the right thing to sell andmove onyou dont have to make it back the same way you lost itbut the decision whether to do somustnt be guided by other investors behavior.

Our approach is to tune out the short-term noise and carefully evaluate the company and its management,focusing on the long-term track record rather than the short-term poor performance. The key question toask is: has anything changed that leads us to believe that the recent performance is likely to be permanent,or is this just one of those inevitable periods of bad luck and/or fixable mistakes, such that the company is

likely to revert to its long-term outperformance?

In the case of most of our poorly performing stocks of 2011, we believe the latter is the case, so we heldor bought more. We think the same will prove to be true for our fund, as neither our investment approach,which is rooted in the timeless principles of value investing, nor our ability to execute on it has changed.

Deviating from the Crowd and Guaranteed Underperformance

Stocks are volatile and since we invest in a concentrated fashion, often in unpopular sectors, are willing tocatch falling knives if theyre cheap enough, and never engage in closet indexing, weve always knownfrom the day we started this business 13 years ago that our portfolio would occasionally suffer lossesand/or trail the market, perhaps to a significant degree. In other words, we guarantee underperformance at

times.

Our investment strategy is rooted in deviating from the crowd with contrarian bets. We think its the onlyway to outperform the market over the long term, but it also carries with it the riskindeed, the certaintythat there will be periods during which one underperforms the market, which is why most moneymanagers dont do it. Buffett once said, As a group, lemmings have a rotten image, but no individuallemming has ever received bad press. Jean-Marie Eveillardput it even more succinctly: Its warmerinside the herd.


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Its easy to deviate from the crowd, of course, but its much harder to be right and even harder to beright on the timing. For example, as we discuss in Appendix A, were confident that Iridiums stock willtriple over the next 3-5 yearsbut we dont know when this will occur. In the meantime, the stock can and doesfluctuate quite widely (it was our biggest loser in 2011). We think well eventually be provenright on the positions we hold, both long and short, but sometimes it takes time for our investment thesisto play out.

Guaranteed underperformance isnt a topic often discussed publicly by money managers, but itsextremely important for both investors (you) and investment managers (us) to understand that virtually allmoney managers will underperform at times, occasionally badly and for extended periods, yet the long-term results can still be excellent. Indeed, the well-respected Davis Funds did astudyof the 192 large-capfunds with top-quartile performance during the decade ending 12/31/10 and found some stunning results:

93% of these top managers rankings fell to the bottom halfof their peers for at least onethree-year period

A full 62% ranked among the bottom quartile of their peers for at least one three-year period,and

31% ranked in the bottom decile for at least one three-year period, as this chart shows:

Davis Funds concluded:

When faced with short-term underperformance from an investment manager, investors may lose convictionand switch to another manager. Unfortunately, when evaluating managers, short-term performance is not astrong indicator of long-term success.

Though each of the managers in the study delivered excellent long-term returns, almost all suffered througha difficult period. Investors who recognize and prepare for the fact that short-term underperformance is
http://davisfunds.com/document/read/the_wisdom_of_great_investors#page_7http://davisfunds.com/document/read/the_wisdom_of_great_investors#page_7http://davisfunds.com/document/read/the_wisdom_of_great_investors#page_7http://davisfunds.com/document/read/the_wisdom_of_great_investors#page_7


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inevitableeven from the best managersmay be less likely to make unnecessary and often destructivechanges to their investment plans.

Weve Been Through This Before

We feel badly about our recent performance and obviously wish wed done many things differently, butwe are not at all discouraged, as weve been through this before. If you look at our performance table atthe beginning of this letter, you will see that weve lost more money, much faster, on two other occasions:

we were down 27.4% in eight months from June 2002January 2003, and down 32.8% in five monthsfrom October 2008February 2009. In both of these cases, by playing a strong hand and buying more ofour favorite stocks as they plunged, we made back all of the losses (and then some) remarkably quickly:in only nine months in 2002-03 and a mere seven months in 2008-09. We could not be more confidentthat we will rebound strongly from our latest losses as well.

This chart compares our funds performance over our worst five months last year from May throughSeptember 2011 to the five months from October 2008 through February 2009:

There are striking parallels between these two five-month periods. In both cases:

We identified and invested in materially undervalued stocks, but with the benefit of hindsight(which is always 20/20), we bought too early, as we didnt fully appreciate how much stocks

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0%

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February 2009

May - Sept 2011


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would tumble amidst the market turmoilin other words, we bought cheap stocks, but theybecame much cheaper;

We maintained our conviction in the great majority of our holdings and kept adding to many ofthem at lower and lower prices, reducing our average cost significantly;

Our largest position (mid-teens percentage) was Berkshire Hathaway; We made significant investments in the most out-of-favor U.S. financial and consumer-related

sectors;

We purchased a number of what we call mispriced options such as General Growth Properties inearly 2009, which turned into the biggest winner in our funds history (today we own a few similarsituations);

We ended the five-month periods with similar positioning: at the end of February 2009, our fundwas 113% long by 55% short, whereas at the end of September 2011 it was 119% long by 50%short.

Our actions paid offlast time, and were confident that they will again (though we cant predict thetiming). This chart shows our funds performance in the subsequent seven months in 2009 and in the lastthree months:

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5%

0 1 2 3 4 5 6 7 8 9 10 11 12

Month

October 2008 -

September 2009

May - Dec 2011


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How Weve Built Our Business

Armed with the knowledge that we are certain to underperform at times, weve built our business towithstand such periods. As Warren Buffett said at the 2009 Berkshire Hathaway annual meeting, Youdont want to be in a position where someone can pull the rug out from under you or, emotionally, whereyou pull it out from under yourself. Here are the key ways in which weve done this:

1. We read constantly, with an emphasis on company and industry reports, market history, andlessons from the greatest value investors. We do everything we can to tune out the short-termnoise so, for example, we almost never watch financial television.

2. We have never pursued hot money and, while thats cost us in terms of assets under management,today were happy to say that we have no fund of funds or any institutional money whatsoever.All of our investors are investing their own money, with no intermediaries.

3. Our redemption termseither full redemption once a year or redemptions quarterly, with 45days noticehave also no doubt cost us substantial assets, but ensure that investors who choose toredeem, which tends to happen when our performance is worst, cant pull the rug out from underus.

4. Weve done everything we can think of to build a level of trust with our investors. We know of noother fund that communicates with as much openness, depth, and frequency as we do. We wantour investors to understand what were doing so that when tough times come, they stay (or evenadd to their investments).

Thanks to these stepsand thanks toyouwe were able to play a strong hand during recent periods ofmarket turmoil and are confident that we will all ultimately be rewarded for this.

Economic Overview and Our Funds PositioningIn September, we attended a private dinner with Warren Buffett, who, thanks to Berkshire Hathaways

numerous operating businesses, has his finger on the pulse of the American economy better than perhapsanyone. In response to a question about whether hes still bullish on economic growth prospects for theU.S. over the next 2-3 years, he replied:

Sure, and over the next six months for that matter. We have 70-plus businesses and about five of them arerelated to residential home construction and they are flat on their rears, as they have been for more thanthree years. But the other 60-plus are doing very well, as is the rest of American business.

We have three jewelry businesses with over 300 stores and I thought same store sales might be down inAugust and September, but they were up significantly. We have a number of furniture businessesandpeople dont have to buy furniture and their same stores sales are up significantly. We are seeing goodbusiness across the board except for residential home construction.

Buffett is only one of many data points we use in forming our economic views, but most of what wereseeing is consistent with his remarks. To be sure, economic growth is tepid, unemployment remainsstubbornly high, and consumer confidence, spending, and the housing market are quite weak, butcorporate profits and profit margins are at all-time highs and corporate balance sheets are extremelystrong, so its a mixed picture. Overall, however, the U.S. economy is hanging in therefor now. Thoselast two words are key, of course. The market is always forward looking and investors are very worried


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about various storm clouds on the horizon, especially the sovereign debt crisis in Europe and signs that, inChina, growth is slowing and/or a real estate bubble may be bursting.

We are closely monitoring developments and have been increasing our short exposure selectively, but weremain substantially net longas of the end of 2011, our fund was 142% long and 69% short (76% netlong)because, unlike 2008, when we were convinced that the bursting of the housing bubble was goingto lead to a major shock to the system, today we think that the most likely scenario is that the U.S.

economy will muddle along for the next few yearshitting air pockets on occasion, no doubt, butavoiding any major crises. Under this scenario, the market will likely be choppy and range-bound, notsteeply declining, in which case we expect our portfolio to do well.

Winners and Losers in 2011

Here are our 10 biggest losing positions last year, with the percentage losses to our fund:

1. Iridium -3.3%2. Grupo Prisa -2.8%3. Berkshire Hathaway -2.3%4. Netflix -2.2%5. Seagate -1.9%6. Howard Hughes -1.8%7. CIT Group -1.7%8. dELiA*s -1.7%9. Citigroup -1.4%10.Microsoft -1.4%

These stocks accounted for the great majority21 percentage pointsof our losses last year. Offsettingthis were almost no winners on the long sidehere are our ten largest, which generated only 5 percentagepoints of gains:

1. J.C. Penney 1.7%2. MGIC 0.7%3. Jeffries 0.5%4. Dell 0.5%5. SanDisk 0.4%6. Kraft 0.4%7. AB-InBev 0.3%8. ADP 0.3%9. Echostar 0.2%10.Wells Fargo 0.2%

What can we learn from this? First, the paucity of winners is strikingand very unusual. In 2010, forexample, we had plenty of losing positions on the long sideTarget alone cost us 3.3 percentage pointsof returnbut they were more than offset by four big winners:


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1. General Growth Props. 8.1%2. Berkshire Hathaway 5.4%3. Liberty Acquis. Warrants 5.2%4. BP 4.3%

In 2011, we had no material winners other than J.C. Penneybut we dont think this is a permanent stateof affairs.

A second thing to note is that weve made no single, obvious mistake. For example, unlike a number ofwell-known funds that have performed poorly last year, we werent heavily exposed to financial stocksearly in the year.

Finally, and most importantly, as noted above, we think nearly all of our losses last year are temporary.We continue to holdand in many cases have added tosubstantial positions in eight of our ten largestlosing positions last year (we no longer own Seagate and CIT Group). Thus, we believe the losses wevetaken to date will ultimately become large profits.

How We Approach Investment Decision Making Today

It is possibleindeed, almost certainthat we will be wrong in our assessment of one or more of thesepositions. But rest assured that we arent clinging to them, refusing to acknowledge our mistakes, in anirrational attempt to make back our losses. Instead, we are pretending like it didnt happen. Seriously.Allow us to explain

Beyond the financial impact, we have our reputations on the line, take pride in what we do, and knowmost of our investors personally, so we feel like weve let our friends and families down a truly lousyfeeling. Given this, it would be very easy to fall into a number of mental traps: self-pity, obsessing aboutwhat we could have done differently, going to cash or a market neutral position or, most dangerously, theopposite: swinging for the fences in an attempt to quickly make back the losses. We are doing none ofthis. Instead, were carefully evaluating our entire portfolio with the following question in mind: if we

were starting our fund from scratch today and held only cash, what would we do?

The answer is that our portfolio would look just like it does. It hasnt been this attractive since the marketbottom in early 2009its not quite as cheap as it was then, to be sure, but the risks of a systemicmeltdown and another Great Depression arent nearly as great either. Simply put, we think everysignificant position in our fund could easily double in the next 2-3 years, with the possible exception ofour safest big-cap stocks, which only have 50-80% upside.


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Discussion of Our 15 Largest Long Positions

In Appendix A, we discuss our 15 largest long positions across all three hedge funds we manage, whichare (in descending order of size, as of 12/31/11):

Position 2011 Performance*1) Berkshire Hathaway -4.7%2) J.C. Penney 8.5%

3) Iridium stock/warrants -6.5%/-39.7%4) Citigroup -44.4%5) Howard Hughes -18.8%6) Dell 8.0%7) SanDisk -1.3%8) Grupo Prisa (PRIS & PRIS.B) -49.3%9) Goldman Sachs -46.3%10) Netflix -60.6%11) Microsoft -7.0%12) Pep Boys -18.1%13) MRV Communications -25.4%

14) AB InBev 6.8%15) Wells Fargo -11.0%

* Certain positions were acquired during 2011, such that the 2011 performance does not reflect our actual gains or losses.

Our 10 Largest Short PositionsOur 10 largest short positions as of the end of 2011 were (in alphabetical order): Ethan Allen, First Solar,Garmin, Green Mountain Coffee Roasters (see Appendix C), InterOil (discussed in ourJulyandNovemberletters1), ITT Educational Services, Lululemon Athletica, Nokia, PVH Corp., andSalesforce.com (discussed in ourJulyletter).

Quarterly Conference CallWe will be hosting our Q4 conference call from noon-1:30pm EST on Thursday, January 12th. The call-innumber is (209) 647-1600 and the access code is 627309#. As always, we will make a recording of thecall available to you shortly afterward.

ConclusionWe want to acknowledge and thank Damien Smith, who has been an outstanding analyst for us for nearlynine years, and Kelli Alires, who does a fabulous job as office manager and handling investor relations.

Thank you for your continued confidence in us and the fund. As always, we welcome your comments soplease dont hesitate to call us at (212) 386-7160.

Sincerely yours,

Whitney Tilson and Glenn Tongue

1 To access our private web site, the user name is tilson and the password is funds.
http://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-nov11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-nov11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-nov11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july11.pdf


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Appendix A: 15 Largest Long Positions

Notes: The stocks are listed in descending order of size as of 12/31/11.

1) Berkshire HathawayThe Berkshire juggernaut continues to roll along and we have increased our estimate of intrinsic value to

nearly $172,000/A share, yet the stock languishes at $115,000, so we see 50% upside (even beforefactoring in continued growth of intrinsic value, which we peg at approximately 10% annually). Morethan $1 billion per month from Berkshires operating businesses is pouring into Omaha every month forWarren Buffett to allocate, and hes doing a great job of this.

Other than perhaps a lingering effect from the Sokol affair (which we discussed in ourMarch letter), theonly reason we can think of for the stocks recent weakness is that earnings were impacted by insurancelosses from the tsunami in Japan, the earthquake in New Zealand, flooding in Australia, and a dozen $1+billion-in-claims natural disasters in the U.S., among others. Losses from such events are a normal part ofthe super-cat insurance business, so it doesnt affect our estimate of Berkshires intrinsic value in fact,we welcome the recent losses, which will hopefully reduce the excess capacity and soft pricing in theindustry, which hurts Berkshire.

In September Berkshire Hathaway issued a press release announcing an open-ended share repurchaseprogram. This was a bold statement by the worlds savviest investor, Warren Buffett, who said a numberof important things, not only to Berkshire shareholders, but to investors in general. Overall, it made useven more bullish on the stock and, though it was already our largest position, we added to it as we thinkthis effectively put a floor on the stock price slightly below the current level, while the upside remainslarge. See Appendix B for further comments in an article we published on the share repurchaseannouncement.

We have posted a detailed slide presentation of our analysis of Berkshire at:www.tilsonfunds.com/BRK.pdf.

2) J.C. PenneyGiven our many investments over the years in the retail sector, of course wed looked at J.C. Penneyperiodically, but nothing got us excited about the company (or the stock) until Pershing Square CapitalManagement and Vornado Realty Trust took more than a 25% stake in the company and, soon thereafter,the CEOs of both organizations, Bill Ackman and Steve Roth, respectively, joined the J.C. Penney board.We got even more excited when the company announced the hiring of a new CEO, Ron Johnson, thearchitect of Apples retail strategy, who we believe is the best retail CEO in the world. Obviously theyrecompletely different businesses, but we like the fact that J.C. Penney, which has sales per gross squarefoot of $153, has brought in a new CEO who was responsible for building from scratch Apples retailbusiness, which generates $4,355 per square foot (28x higher).

We think J.C. Penney is a good business (contrary to popular perception, this is nothing like Sears/K-Mart) with plenty of room for improvement, run by a new team of world-class people withcomplementary skills: a capital allocator (Ackman), real estate expert (Roth), and retail CEO (Johnson).
http://www.tilsonfunds.com/private/monthlyletter-mar11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-mar11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-mar11.pdfhttp://www.tilsonfunds.com/BRK.pdfhttp://www.tilsonfunds.com/BRK.pdfhttp://www.tilsonfunds.com/BRK.pdfhttp://www.tilsonfunds.com/private/monthlyletter-mar11.pdf


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The stock tumbled to below $24 in August, so we took advantage and added meaningfully to the position,which has worked out well so far, as the stock finished the year at $35.15.

We presented our analysis of JCP at a conference in October:www.tilsonfunds.com/T2PartnersValueInvestingCongressPresentation-10-18-11.pdf.

3) Iridium

Iridium operates a constellation of low-earth orbiting satellites that provide worldwide real-time data andvoice capabilities over 100% of the earth. The company delivers secure mission-critical communicationsservices to and from areas where landlines and terrestrial-based wireless services are either unavailable orunreliable. It is one of two major players in the Global Satellite Communications industry.

The company has a tumultuous history. Originally a division of Motorola, Iridium spent $5 billionlaunching satellites in the late 1990s, but filed for bankruptcy in 1999 with only 50,000 customers due totoo much debt and clunky phones that didnt work inside buildings. Since then, however, Iridium hasthrived. It is growing very rapidly and is taking market share from its competitors.

The company went public in late September, 2009 by merging with a Special Purpose Acquisition

Company (SPAC) and the stock has been weak since then, despite recently reporting strong results.

Iridiums stock jumped after the company reported very strong earnings on November 8th. The companysoundly beat analysts estimates and its own guidance for revenue, margins, EBITDA, and subscribergrowth, with particular strength in both the machine-to-machine and legacy commercial voice productlines. Operational EBITDA margin hit a new high of 53.5% and management raised its 2011 outlook forsubscriber growth (up 25% year over year) and operational EBITDA (up 20% year-over-year to ~$190million). As an added bonus, the company said it would pay negligible cash taxes from 2011 toapproximately 2020.

We think this earnings report should assuage the concerns weve heard from investors and analysts, and

are optimistic that it will prove to be a turning point for the stock, which we believe is deeplyundervalued.

We continue to believe that this is an excellent company and that the stock is extremely undervalued.Comparable businesses are trading at 10x EV/EBITDA, while Iridium, which is growing significantlyfaster than and taking share from its competitors, trades at under 4x EBITDA. Finally, we are encouragedby the recent large insider purchases by both the CEO and Chairman of the company.

Weve posted a slide presentation on Iridium at:www.tilsonfunds.com/IRDM-4-11.pdf.

4) Citigroup

This is perhaps the most controversial stock we own, as the consensus view on the company couldnt bemore negative, but we have a different view.

We think of Citigroup as two businesses: good bank (Citicorp) and bad bank (Citi Holdings). The formeris a fabulous worldwide franchise that generates robust and growing profits that could easily approach$10/share within a few years (net income was $1.51/share in Q3more than $6/share annualized).Citicorp has been strongly profitable for more than two years, with the majority of (highly stable) profitscoming from high-growth emerging markets, as this chart shows:
http://www.tilsonfunds.com/T2PartnersValueInvestingCongressPresentation-10-18-11.pdfhttp://www.tilsonfunds.com/T2PartnersValueInvestingCongressPresentation-10-18-11.pdfhttp://www.tilsonfunds.com/IRDM-4-11.pdfhttp://www.tilsonfunds.com/IRDM-4-11.pdfhttp://www.tilsonfunds.com/IRDM-4-11.pdfhttp://www.tilsonfunds.com/IRDM-4-11.pdfhttp://www.tilsonfunds.com/T2PartnersValueInvestingCongressPresentation-10-18-11.pdf


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In particular, consumer banking has been exceptionally strong: North American consumer banking had$2.3 billion of net credit margin in Q3, up 28% year over year, and international consumer banking had$4.1 billion of net credit margin, up 14%. In addition, net income in the Securities and Banking divisionrose 58% to $2.1 billion.

Ah, but what about bad bank? Citigroup is rapidly shrinking Citi Holdings via sales, charge-offs andrunoff, as this chart shows:

(1) Peak quarter


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Losses at Citi Holdings have also been shrinking thanks to lower expenses, credit losses, and loan lossreserves:

But what about the balance sheet? Might Citigroup need to raise additional capital or require anothergovernment bailout? We think not. Here are Citigroups key capital metrics, which are quite strong andtrending positively:

Overall, we like what we see: good bank is thriving, bad bank is shrinking and reducing losses, and thebalance sheet is in good shape. The current headlines are grimand may remain so for some timebutwe think the stock more than discounts this: at $26.31, it trades at a 57% and 47% discount to book andtangible book value, respectively, and at a mere 6.5x estimated 2011 earnings.


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For another way to see how cheap the stock is, consider that it has returned to levels not seen since thedepths of the financial crisis in early 2009, yet both the company and macro environment are muchstronger:

We think tangible book value per share, which was $49.50 in Q3, up 11% year over year, will continue togrow and that the stock is worth at least 1.0x tangible book, so we think its a good bet to double in thenext few years.

Note that Goldman, Citigroup and the other financial stocks we own should benefit over time from manyof their competitors encountering distress or even going out of business. As examples, Goldman nolonger has to compete against Bear Stearns or Lehman Brothers, Citigroup should be able to take share inEurope from its weakened competitors, and Wells Fargo no longer has to compete against WashingtonMutual.

5) The Howard Hughes Corp.When General Growth Properties emerged from bankruptcy in early November, 2010, it did so as twocompanies: GGP, which had all of the best malls, and HHC, a collection of master planned communities,operating properties, and development opportunities in 18 states. Many of these properties are generatingfew if any cash flows and are thus very hard to value, but we think the company has undervalued, high-quality real estate assets in premier locations and that there are many value-creating opportunities can betapped. We estimate intrinsic value at $77-$141 vs. the current price of $44.17.

We presented our analysis of HHC at a conference in July:www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdf.

6) DellThe stocks of many big-cap tech companies appear to be very cheap, but we think caution is in order asthere are plenty of value traps. We own the stocks of two great companies in the sector, where we thinkthe pessimism is unwarranted: Microsoft (discussed below) and Dell, which we aggressively purchasedbeginning in August after the company reported Q2earningson Aug. 16th that we thought were excellent,but the market disagreed and the stock dropped 10% the next day. Revenues were up only 1%, butoperating income jumped 54%, net income 63% and EPS 71%, thanks to sharply higher margins. This isthe result of a deliberate strategy by the company to give up low-margin business and focus on earnings
http://www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdfhttp://www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdfhttp://www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdfhttp://www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdfhttp://content.dell.com/us/en/corp/d/secure/fiscal12q2_release.aspxhttp://content.dell.com/us/en/corp/d/secure/fiscal12q2_release.aspxhttp://content.dell.com/us/en/corp/d/secure/fiscal12q2_release.aspxhttp://content.dell.com/us/en/corp/d/secure/fiscal12q2_release.aspxhttp://www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdfhttp://www.tilsonfunds.com/T2PartnersPresentation-7-13-11.pdf


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growth rather than revenue growth. This is exactly the right strategy, we believe, so were not concernedthat Dell revised its full-year revenue-growth outlook to 1-5 percent from the previous range of 5-9percent, which is why the stock sold off. Were delighted that Dell is disciplined enough to walk awayfrom low-margin business.

In Q3 it was more of the same, as revenues were flat yet adjusted net income and EPS rose 12% and 20%,respectively. Dell ended the quarter with $7.8 billion of net cash, equal to $4.24/share or 29% of the

current stock price of $14.63, meaning the enterprise value of the business is only $10.39/share. Withexpected earnings this year of $2.11/share, the stock, net of cash, is trading at a P/E of only 4.9x, which isridiculously cheap. We think a reasonable P/E multiple for Dell is 10-15x, not 5x, so the stock has hugeupside in our opinion.

We have posted our latest slides on Dell at:www.tilsonfunds.com/Dell-T2analysis-10-11.pdf.

7) SanDiskSanDisk produces flash memory storage (also called NAND), which is used in a wide range of devices forwhich traditional spinning disk storage isnt appropriate: digital cameras, USB drives, iPads and othertablets, iPhones and other smartphones, and certain lightweight laptop computers like MacBook Airs and

the new Ultrabook PCs. Flash memory is much more expensive, but is more compact and durable andoffers faster access, so its usage has grown dramatically with the proliferation of mobile computing.

We discovered SanDisk as we researched the storage industry in the context of our investments in Seagateand Western Digital. We decided to sell these stocks because we decided there was too much of a riskthat they would turn into value traps, as flash memory took greater and greater market share over time.The beneficiary of this, of course, is SanDisk and its peers.

Historically, the flash memory business has been commodity-like, with chronic excess capacity andrapidly declining prices. Due to industry consolidation and explosive growth in end demand, however,we think SanDisk is on the verge of very strong secular growth, with improving margins, which should

lead to explosive profit growth and a meaningful revaluation of the stock. The best stocks are ones thatcombine high earnings growth and an expanding multiple on those earnings, and we think SanDisk ispoised for both.

Best of all, we dont have to pay for this growth. Though the stock has risen smartly from its August lowsaround $32 to close the year at $49.21, its still only trading at 10.7x 2011 estimates of $4.58. In addition,the company has $3.7 billion of net cash, equal to 31% of its $12 billion market cap. Adjusting for this,the stock is only trading at 7.4x earnings.

8) Grupo PrisaGrupo Prisa is a Spanish media conglomerate with a good business but a bad balance sheet in a troubled

part of the world. Spain, which accounts for 70% of Prisas business, is going through a crisis similar tothe one the U.S. went through in late 2008, so its not surprising that the stock is suffering. Its also notsurprising that the companys operating performance has been affected by the deep recession in itsprimary markets, though the company is holding up remarkably well in light of this: in the first threequarters of 2011, adjusted revenues were down only 1.0%, adjusted EBITDA rose 1.9%, and thecompanys restructuring and cost-cutting is on track.

Grupo Prisa received a boost in November when Mexican billionaire Carlos Slim acquired a 3.2% stake.
http://www.tilsonfunds.com/Dell-T2analysis-10-11.pdfhttp://www.tilsonfunds.com/Dell-T2analysis-10-11.pdfhttp://www.tilsonfunds.com/Dell-T2analysis-10-11.pdfhttp://www.tilsonfunds.com/Dell-T2analysis-10-11.pdf


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Here is a Wall St. Journal article about it:

WSJ,DEALS & DEAL MAKERS NOVEMBER 18, 2011, 9:50 A.M. ET

Slim Buys Stake in Spain's El Pais

ByDAVID ROMANAndANA GARCIA

MADRIDA company owned by Mexican billionaire Carlos Slim has acquired a 3.2% stake in Spain's media groupPromotora de InformacionesSA, in an unexpected move into one of the economies at the forefront of the euro zone's debtcrisis.

Mr. Slim, one of the world's richest men, bought the stake through Inmobiliaria Carso SA de CV, a firm which he controls,according to regulatory filings released Friday. Mr. Slim has also used Carso to build up a 8.1% stake inNew York TimesCo., the publisher of the New York-based daily.

Inmobiliaria Carso didn't disclose how much it paid for the stake. At current market prices, it is worth 12.5 million (about$17 million). The shares of Prisa, as the Spanish company is known, jumped on the news of Mr. Slim's purchase, and they

last traded up 13% at 0.85, valuing the entire company at 383.2 million.

For Madrid-based Prisa, the country's largest media group, Mr. Slim's move is a much-needed show of backing. Thecompany, owner of Spain's best-selling newspaper El Pais, has been restructuring and shedding assets in recent years as itseeks to reduce its heavy debt load.

As in the case of the New York Times Co., Prisa's share price has struggled recently. El Pais has suffered a dip in sales, aswell as a revenue squeeze owing to lower advertising. El Pais sells around 370,000 newspapers a day.

Late last year, Prisa announced a plan to lay off 2,500 staff through the first quarter of 2012. This came after U.S.investment fund Liberty Acquisition Holdings Corp. bought a majority stake in the firm for some 650 million.

This is Mr. Slim's first foray in Spain's media sector, which until recently was flushed with cash owing to the country's

long-running property bubble. The sector is now in dire straits because large corporate and government advertisers havecut down on investments sharply, just as Internet competition and a drop in spending by highly indebted households haslowered demand for newspapers.

Prisa, haunted by a series of bad investments, has been Spain's largest media company for decades. Besides El Pais, it alsoowns Cadena Ser, Spain's largest radio network by audience, and the profitable publisher Santillana, which has a largefoothold in Latin America.

Prisa reported more good news last week when itannouncedthat it refinanced its debt to give it at leasttwo more years of breathing room to get through the current crisis.

Prisa reminds us of our experience with Huntsman in late 2008 and early 2009. Both companies have

strong management and assets, yet are in economically sensitive businesses and have too much debt. Inboth cases, we calculated intrinsic value of more than $15/share in any kind of normal economicenvironment, but the stocks got hammered as the economic environment deteriorated and investorspanicked.

Heres the stock chart for Huntsman in the four months from November 2008 through February 2009:
http://professional.wsj.com/public/page/news-wall-street.htmlhttp://professional.wsj.com/public/page/news-wall-street.htmlhttp://professional.wsj.com/public/page/news-wall-street.htmlhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://www.prisa.com/en/sala-de-prensa/prisa-signhttp://www.prisa.com/en/sala-de-prensa/prisa-signhttp://www.prisa.com/en/sala-de-prensa/prisa-signhttp://www.prisa.com/en/sala-de-prensa/prisa-signhttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/public/page/news-wall-street.html


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The stock chart for Prisa (the B shares, which comprise the bulk of our holdings) since June looks verysimilar:

Were optimistic that Prisa will rebound, as Huntsman did it was a 7-bagger in one year and nearly a 10-

bagger in less than two years, as this chart shows:

We presented our analysis of Prisa and its value at the Value Investing Congress on October 13, 2010:www.tilsonfunds.com/Octpres.pdf(pages 32-46). We also recommend this May 7tharticle in BarronsentitledRead All About It: A Solid Spanish Media Play:http://bit.ly/barronsprisa.
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9) Goldman SachsGoldman, like nearly all of its peers, is going through a very difficult period of market turmoil, especiallyin Europe, and regulatory uncertainty, which is depressing revenues and profits. In Q3, revenues fell 60%and net earnings fell from $1.7 billion to minus $428 million year over year. ROE in the first threequarters of 2011 (excluding a dividend related to the redemption of preferred stock) was a mere 6.0%, andwe anticipate that the Dodd-Frank Act and other regulation means that the business will likely never be asprofitable as it was in its glory days.

So why would we want to own this stock? Because when the dust settles, we think Goldman will remainthe premier investment banking franchise in the world and should be able to earn at least mid-teens ROE,in which case its worth a substantial premium to bookvalue, which as of the end of Q3 stood at $131.09(tangible book was $120.41). (And we think book is good, as Goldman is more aggressive in writingdown assets and marking them to true market prices than anyone.) Thus, at $90.43, a 31% discount tobook (and a 25% discount to tangible book), we think the stock is a steal.

10) NetflixWe wrote at length about Netflix in ourNovemberletter and, in addition, published an article entitledWhy Were Long Netflix and Short Green Mountain Coffee Roasters (attached in Appendix C).

11) MicrosoftMicrosoft continues to put up solid growth and remains one of the most remarkable cash generatingmachines in history, yet it gets no respect, which is why we call it the Rodney Dangerfield of the stockmarket. The consensus view is that Microsoft is a fading giant, doomed to a future of lower market share,sales, margins and profits. It is of course possible to concoct such a scenariopeople have been doing itfor well over a decadebut there is little current evidence to support it. Microsofts market share in itskey business areas is stable or rising, and sales, margins and profits are growing nicely. We think there issolid growth in store for Microsoft, as numerous areas of its business are booming.

In the companys latest earnings release, revenues were up 7% and EPS grew 10%, while the companys

cash hoard (including equity and other investments and subtracting debt) rose to $54.1 billion or$6.37/share, 25% of the stock price of $25.96. Net of cash, the stock trades for 7.3x trailing EPS of$2.69, which is much too cheap.

We have posted our latest slides on Microsoft at:www.tilsonfunds.com/MSFT-10-11.pdf. We alsorecently published a letter from another hedge fund manager, Ivory Capital, calling on Microsoft to adopta better capital allocation strategy, which we agree with:http://seekingalpha.com/article/279061-why-microsoft-should-borrow-heavily-to-buy-back-shares.

12) Pep BoysPep Boys provides automotive repair and maintenance services, tires, parts, and accessories via more than

7,000 service bays in more than 700 locations in 35 states and Puerto Rico. The stock trades at less than5x EV/EBITDA, less than half its peer group, and margins are also roughly half its peer group, so wethink theres potential to close both of these discrepancies. Additionally, we think theres downsideprotection from Pep Boyss real estate, which was recently valued at nearly the entire enterprise value ofthe company.
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13) MRV CommunicationsMRV Communications operates in the network communications industry. The company grew rapidlyover the last decade, but did it the wrong wayby making a number of high-priced, ill-fatedacquisitions. MRV lost control of its business, became delinquent on its financial filings, and stock wasdelisted. Over the last two years, an activist investment group gained control of the board, stabilized thecompany, divested several underperforming divisions, and brought the financials up to par.

The company now consists of two operating divisions, network equipment group and network integrationgroup, which we believe are worth at least $1/share. After the recent special dividend of $0.475/share, thecompany still has approximately $0.50/share of cash and substantial NOLs, and we estimate the intrinsicvalue of the company to be in excess of $1.50 per share (without incorporating the NOLs) vs. the currentshare price of $0.86.

We were part of an activist group during 2011 and are working hard to unlockMRVs value.

14) Anheuser-Busch InbevAB InBev is the worlds largest brewer, managing a portfolio of approximately 200 brands that includesBudweiser, Bud Light, Michelob, Stella Artois and Becks. 13 brands have over $1 billion in sales and in

its top 31 markets, AB InBev is #1 or #2 in 25 of them. We think the beer business is very stable, withslow growth in most of the worlds largest markets, but with high growth potential in certain developingmarkets like China. Comparable businesses in our minds would be Coca Cola and McDonalds. Thistype of stable, dominant business gives us the confidence to project earnings and cash flows many yearsinto the future, and we expect that we might hold this stock for a long time.

We think AB InBevs management team is among the finest weve ever invested alongside. They arerenowned for being both great operators and also ruthless cost cuttersand theres a lot of fat to cut in therecently acquired Anheuser Busch business, which should lead to substantial cost savings (and a resultingjump in earnings).

We estimate pro forma free cash flow at $5.66/share in 2012. At a 14-16 multiple, thats $79-$91/share,30%-50% above 2011s closing price of $60.99.

We presented AB InBev at the Value Investing Seminar on July 13, 2010:www.tilsonfunds.com/Julypres.pdf(pages 9-26).

15) Wells FargoWe made a lot of money on Wells Fargo during the financial crisis, shorting it around $30 after theWachovia acquisition, covering around $10, and then buying the stock and riding it back to well above$20 (we dedicated an entire chapter of our book, More Mortgage Meltdown: 6 Ways to Profit in TheseBad Times, to Wells Fargo; please contact us if youd like us to send you a free copy of the book in the

mail, or the Wells Fargo chapter via email).

We were nervous about the housing market so we sold Wells Fargo along with most other financial stocksin 2010, but we are great admirers of the company and think its the best banking franchise by far amongthe large U.S. banks, so we were hoping for a pullback in the stock to reestablish a position. Thatopportunity came in August when the stock tumbled nearly 20% at one point and fell below $23.

The stock rallied a bit to $27.56 by the end of the year, but it still trades at 9.8x depressed 2011 earnings.
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Appendix B

Berkshire Hathaways New Share Repurchase ProgramAnd What It Means

September 26, 2011http://seekingalpha.com/article/296012-berkshire-hathaway-s-new-share-repurchase-program-and-what-

it-means

This morning Berkshire Hathaway issued a press release announcing an open-ended share repurchaseprogram. This is a bold statement by the worlds savviest investor, Warren Buffett, who is saying anumber of important things, not only to Berkshire shareholders, but to investors in general. Overall, itmakes us even more bullish on the stock and, though it was already our largest position, we added to itthis morning as we think this effectively puts a floor on the stock price slightly above the current level,while the upside remains large.

Interestingly, this is only the second time that Buffett has offered to buy back stock. The first was in his1999 Letter to Berkshire Hathaway Shareholders(pages 16-17), which was released on Saturday, March

11, 2000 (not coincidentally, the very moment that the Nasdaq peaked). At the time, the stock was at$41,300, but it popped 8% on the following Monday and continued rising all week, closing the followingFriday at $51,300, up 24.2%, so Buffett didnt end up buying back any stock. This chart shows how thestock performed in the subsequent year, rising 72% vs. an 11% decline in the S&P 500:

We wouldnt be surprised to see similar outperformance over the coming year.

Turning to todays press release, heres the full text:

Berkshire Hathaway Authorizes Repurchase Program

Omaha, NE (NYSE: BRK.A; BRK.B)Our Board of Directors has authorized Berkshire Hathaway to repurchaseClass A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value ofthe shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worthconsiderably more than this amount, though any such estimate is necessarily imprecise. If we are correct in ouropinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retaintheir interest.
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Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would reduceBerkshires consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity willalways be of paramount importance at Berkshire. Berkshire may repurchase shares in open market purchases orthrough privately negotiated transactions, at managements discretion. The repurchase program is expected tocontinue indefinitely and the amount of purchases will depend entirely upon the levels of cash available, theattractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discountfrom managements estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any

dollar amount or number of Class A or Class B shares.

Buffett undoubtedly wrote this press release and, as all long-time Buffett-watchers know, he carefulchooses every word so lets closely examine what he wrote and what it means.

Most importantly, Buffett is saying that the stock is deeply undervalued. He wouldnt be buying it back ata 10% premium to book value if he thought its intrinsic value was, say, 20% or even 30% abovebook. How undervalued? Well, the press release says: the underlying businesses of Berkshire are worthconsiderably more than a 10% premium to book value. The word considerably is critical because itsunnecessaryits Buffetts way of saying the stock isnt just cheap, but is screaming cheap. We pegintrinsic value at close to $170,000 ($113/B share)as we outline in our slide deckhereand we thinkthat the announcement today indicates that Buffett thinks its in this range as well.

So up to what price is Buffett willing to buy? (Note that of course its actually Berkshire thats buyingback the stock, not Buffett himself, but he is setting the policy and is the largest shareholder, with a 23%economic ownership, so its effectively him.) The press release says a 10% premium to then-currentbook value. The latest filing is the end of Q2 (June 30), when Berkshires book value was $98,716($65.81/B share). But this isnt the current value, so one needs to consider what book value has donesince then. There are a lot of moving pieces, but the main factors are that the stock portfolio and indexputs have moved against Berkshire a bit, but the company has earned nearly three months of profits, sonet net wed guess that book value today has declined slightly to perhaps $97,000 ($64.67/Bshare). Thus, a 10% premium means that Buffett is willing to buy back stock up to $106,700 ($71.13/Bshare), less than 2% below todays closing price of $108,449 ($72.09/B share).

In other words, you can buy the stock at almost the same price that the worlds greatest investor is willingto payquite an opportunity we think.

We also believe that the share repurchase program likely puts a floor on the stock for a number ofreasons. First, unlike most share repurchase announcements, theres no dollar ortime limitBerkshire isfree to repurchase as much stock as Buffett wishes, for as long as he wishes, as long as the price is below110% of book value. Second, as we discuss below, Buffett likely wants to buy back a lot stock. Finally,Berkshire has enormous liquidity to do so. According to Berkshires Q2 10-Q (postedhere), the companyhas $43.2 billion of cash (excluding railroads, utilities, energy, finance and financial products), plusanother $34.8 billion in bonds (nearly all of which are short-term, cash equivalents), which totals $77billion. In the press release, Buffett notes that repurchases will not be made if they would reduceBerkshires consolidated cash equivalent holdings below $20 billion, so that means Berkshire has $57billion, equal to one-third of the companys current market capitalization, that it can deploy immediatelyin investments or share repurchases. On top of this, the company generated more than $6.5 billion in freecash flow in the first half of the 2011thats right, more than $1 billion/month is pouring into Omaha.

Why is Buffett buying back his stock and, in particular, why now? To answer these questions, lets lookagain at his1999 Letter to Berkshire Hathaway Shareholders, in which he wrote:
http://www.tilsonfunds.com/BRK.pdfhttp://www.tilsonfunds.com/BRK.pdfhttp://www.tilsonfunds.com/BRK.pdfhttp://www.berkshirehathaway.com/qtrly/2ndqtr11.pdfhttp://www.berkshirehathaway.com/qtrly/2ndqtr11.pdfhttp://www.berkshirehathaway.com/qtrly/2ndqtr11.pdfhttp://www.berkshirehathaway.com/1999ar/1999ar.pdfhttp://www.berkshirehathaway.com/1999ar/1999ar.pdfhttp://www.berkshirehathaway.com/1999ar/1999ar.pdfhttp://www.berkshirehathaway.com/1999ar/1999ar.pdfhttp://www.berkshirehathaway.com/qtrly/2ndqtr11.pdfhttp://www.tilsonfunds.com/BRK.pdf


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There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, thecompany has available fundscash plus sensible borrowing capacitybeyond the near-term needs of the businessand, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated.

You should be aware that, at certain times in the past, I have erred in notmaking repurchases. My appraisal ofBerkshires value was then too conservative or I was too enthused about some alternative use of funds. We havetherefore missed some opportunitiesthough Berkshires trading volume at these points was too light for us to have

done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say,2% of a companys shares at a 25% discount from per-share intrinsic value produces only a % gain in that value atmostand even less if the funds could alternatively have been deployed in value-building moves.)

Some of the letters weve received clearly imply that the writer is unconcerned about intrinsic value considerations butinstead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writerwants to sell tomorrow, his thinking makes sense for him!but if he intends to hold, he should instead hope thestock falls and trades in enough volume for us to buy a lot of it. Thats the only way a repurchase program can haveany real benefit for a continuing shareholder.

We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservativelycalculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone tobuy or sell Berkshire shares.) Instead we will give all shareholdersand potential shareholdersthe samevaluation-related information we would wish to have if our positions were reversed.

Please be clear about one point: We will nevermake purchases with the intention of stemming a decline inBerkshires price. Rather we will make them if and when we believe that they represent an attractive use of theCompanys money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in ourstocks intrinsic value.

So Buffett is clearly not trying to prop up the stockrather, he believes that at a price below 110% ofbook value,buying it today is an attractive use of the Companys money. He is also implicitly sayingthat he wants to buy back a lot of stockotherwise it would only have a very minor effect on the futurerate of gain in our stocks intrinsic value.

But in being willing to allocate capital to share repurchases, is Buffett also running up the white flag,

admitting that he cant find better things to do with Berkshires money? He admits in his 1999 letter thatwhen the stock was cheap in the past, he didnt buyit because he was too enthused about somealternative use of funds. So why is he willing to buy it now?

The answer is, in part, that Berkshire has become so large that only very large investmentssay, $5billion and upcan move the needle, which means the investment universe is smaller, making it harderfor Buffett to find exceptional bargains. But the bigger reason is that Berkshire is drowning in so muchcash and free cash flow that Buffett doesnt have to choose: he can buy back billions even tens ofbillionsof his stockandalso have plenty of dry powder to do what he prefers: make largeinvestments. In other words, he can have his cake and eat it too.

To understand why, consider Berkshires largest acquisition ever, by far: the acquisition of BurlingtonNorthern, which cost $26.5 billion for the 77.4% that Berkshire didnt own, of which $15.9 billion wascash and the balance was Berkshire stock. Today, Berkshire could buy three Burlington Northerns (at$15.9 billion in cash each) and still have more than $10 billion left over to buy back stock while retaining$20 billion in cash on the balance sheet. Its simply remarkable

We interpret todays announcement as not only a bullish statement by Buffett regarding Berkshires stock,but also about the markets in general because Buffett wouldnt even consider buying back his stock if he


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thought there was even, say, a 20% chance that the worldand major stocks marketswere going to gooff a cliff, as they did in late 2008 and early 2009. At that time, he was able to invest more than $50billion at distressed prices, which Buffett much prefers to buying back his own stock, so Buffett is clearlysaying that he thinks well muddle through and that a major market correction is quite unlikely.


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Appendix C

Why Were Long Netflix and Short

Green Mountain Coffee Roasters

November 13, 2011

T2 Partners LLCThe GM Building

767 Fifth Avenue, 18th FloorNew York, NY 10153

(212) [email protected]


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Netflix and Green Mountain Coffee Roasters are former market darlings whose stocks have collapsed inrecent months, wiping out a combined $23.2 billion in market capitalization from their peaks ($11.7 and$11.5 billion, respectively). By many metrics, both stocks appear cheap and the terrible headlines areattractive to value investors like us, who like to buy when others are selling in a panic. For example, BPwas one of our biggest winners in 2010 (clickhereto read our analysis at the time). The company, itsCEO and the stock were all universally hated, with endless negative headlines (similar to Netflix today),which provided a wonderful opportunity to buy the stock far below its intrinsic value. We love situations

like thisas long as were convinced that theres a good company and a cheap stock once one cutsthrough all of the noise.

So are Netflix and Green Mountain similar opportunities today? Yes and no. Weve analyzed bothcompanies carefully and concluded that Netflix is an attractive investment at todays price, so funds wemanage own the stock, but Green Mountain isnt, we remain short it. Allow us to explain why.

Similarities

The stocks of both Netflix and Green Mountain over the past three months have suffered similar declines,as this chart shows:

In addition, the companies are remarkably similar in revenues and profitability over the past 12 months:

Yet here the similarities end. Lets take a look at both companies.

NFLX GMCR

Revenues $2,925 $2,651

Operating Income $393 $369

Net Income $238 $201

Operating Margin 13.4% 13.9%Net Margin 8.1% 7.6%

All figures are in millions, over the trailing 12 months
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Netflix

When Netflix fell 35% in one day last month to under $80, we purchased it aggressively, not as a short-term trade, but with a multi-year horizon. Over the next few quarters, the company will likely lose moneyas it invests in international growth and struggles to overcomes its missteps over the past few months.Ultimately, however, we think Netflix is an excellent company and that the market has overreacted to allof the recent negative news, thereby providing us the chance to own it at a cheap price, for reasons wediscussed in our Octoberletter to investors.

Green Mountain

In contrast, we are not only still short Green Mountains stock, but it remains our largest short position,even after last Thursdays 40% decline. Our reasons are superbly articulated in the 110-slidepresentationthat Greenlight Capitals David Einhorn gave on the company at the Value Investing Congress last month.Even if you dont have a position in the stock, its worth studying as a brilliant piece of analytical workand its a must-read if you have a position. Although we were already short Green Mountain, after seeingEinhorns presentation we concluded that it was an even better short than we realized and increased thesize of our investment, which has paid off handsomely.

Theres a saying that pigs get fed and hogs get slaughtered, so why dont we cover our short and take our

profits? After all, the stock, at $43.71, is now trading at only 16.8x the midpoint of the companysguidance for next year, and at 12.5x Einhorns estimate of the companys long-term earnings power of$3.50 (see page 66 of hispresentation).

The answer is that we think only the first shoe has dropped and there are more to come.

Netflix vs. Green MountainHere is a summary of our concerns about Green Mountain, with a comparison to Netflix:

Green Mountain gave strong guidance for next quarter and year, which we think, in light of thecompanys performance last quarter, is too high and will need to be reset downward. Analysts

remain bullish. In contrast, Netflix has given very poorand, we believe, conservativeguidance that we think the company can exceed, and analysts are significantly more bearish.

Though it has similar revenues and profits, Green Mountains market cap, at $7.0 billion, is nearly50% higher than Netflixs $4.7 billion, which means theres more downside and less likelihood ofan acquisition.

Green Mountains business is highly dependent on two key patents, both of which expire onSeptember 16, 2012. Contrary to the companys and bullish analysts views, we believe that soonafter these patents expire, there will be significant competitive pressures that will meaningfullyimpact Green Mountains profitability and growth. Netflix faces no patent risk though it, too,

faces many competitive threats.

There is an ongoing SEC investigation at Green Mountain and we think Einhorns presentationprovides a detailed roadmap that will, in our opinion, likely lead the SEC to uncover variousaccounting shenanigans. Netflix faces no such risk.

Green Mountain has spent $1.4 billion in cash on three richly-priced acquisitions over the past twoyears, which raises questions about organic growth and earnings quality. Einhorn notes: The
http://www.tilsonfunds.com/private/monthlyletter-oct11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-oct11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-oct11.pdfhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://www.tilsonfunds.com/private/monthlyletter-oct11.pdf


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very high allocations to Goodwill raise suspicion about subsequent earnings quality. (See page 53of hispresentation.) In contrast, Netflix has made no acquisitions in recent years.

Green Mountain inventories and cap ex have been growing much faster revenues: last year, on a95% revenue increase, inventories rose 156% from $262 million to $672 million, while cap exrose 125% from $126 million to $283 million. The result has been severely negative free cashflow and a significant worsening of the balance sheet over the past two years, which raises

questions about how the company will fund its cap ex plans for next year. The trends at Netflixare precisely the opposite.

Netflix vs. Green Mountain: A Comparison of Balance Sheets and Cash Flows

The last bullet point warrants further discussion because, while the two companies have similar incomestatements, their balance sheets and cash flows diverge massively. Netflix has a healthy net cash positionof $166 million, while Green Mountain has $561 million in net debt. And Netflix has healthy operatingcash flow, which substantially exceeds both net income and cap ex, resulting in free cash flow of $201million, whereas Green Mountain is the reverse, with free cash flow ofminus $282 million. This chartshows the data for both companies over the past 12 months:

The balance sheet and cash flow numbers are critical because both companies are making largeinvestments to grow their businesses: in Netflixs case, signing deals for streaming content and growinginternationally and, in Green Mountains case, primarily to increase our portion pack packaging andexpand our physical plants. Both companies (and stocks) are at risk if they run into trouble financingthese investments.

Given Netflixs strong balance sheet and free cash flow, we think its highly likely that the company willbe able to fund its growth, even if it loses more subscribers than the company (and we) expect (withinreason). In contrast, Green Mountain is at much higher risk, both because of higher planned expenses andalso a far weaker balance sheet and cash flow statement.

As noted above, in last weeksearnings release, Green Mountain said For fiscal 2012, we currentlyexpect to invest between $630.0 million to $700.0 million in capital expenditures to support theCompanys future growth. Thats a huge amount of money for a company that only had $201 million ofnet income last year and less than $1 million of operating cash flow.

Our question is, where are they going to get the money? Theyve guided to $2.55-$2.65 in EPS in thenext 12 months, but we are highly skeptical that the company will meet this guidance, and it also excludes

NFLX GMCR

Cash & Cash Equiv* $366 $13

Debt $200 $574

Net Cash (Debt) $166 ($561)

Operating Cash Flow $349 $1

Cap Ex** $148 $283

Free Cash Flow $201 ($282)

* For GMCR, excludes $28M of restricted cas h

** For NFLX, cap ex includes "Acquisitions of DVD content library"

All figures are in millions, over the trailing 12 months
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some very real cash expenses like acquisition-related transaction expenses; legal and accountingexpenses related to the SEC inquiry and the Companys pending litigation. In addition, the companysbalance sheet is consuming huge amounts of cash: due mainly to the rise in inventories and, to a lesserextent, accounts receivable, operating cash flow over the last 12 months was a mere $785,000basicallyzero. Nor was this an exception: in the prior year, the company had $80 million in net income yetoperating cash flow ofminus $3 million. On top of this are numerous richly priced acquisitions, whichconsumed $908 million in cash last year and $459 million the year before.

To summarize, over the last two years, Green Mountain has generated $281 million of net income, yet lost$2 million of operating cash flow, plus spent $410 million on cap ex and another $1,367 million onacquisitionsa total cash burn of$1.8 billion! This chart shows the companys accelerating cash burnover the past three years:

So how has Green Mountain funded these huge cash flow deficits? By using cash, taking on debt, andissuing stock. Over the past two years, the company has seen its net cash position go from +$164 millionto -$561 million, a swing of $725 million, plus its raised $990 million by selling stock, as this chartshows:

In summary, we question how Green Mountain will fund its $630-$700 million cap ex plan over the next12 months. Even if one believes the midpoint of the companys guidance of $2.60/share, this onlytranslates into $414 million of net income, plus the balance sheet is likely to continue consuming cash.We think investors will not look kindly on more debt, nor issuing stock at depressed prices, yet thecompany almost certainly will have to do one or the other.

ConclusionWere long Netflix because we think the bad news is out, we like the companys balance sheet and cashflows, and see few red flags. In contrast, with Green Mountain, we think there is much more bad news tocome, are very concerned about the companys balance sheet and cash flows, and see many red flags.

GMCR ('09) GMCR ('10) GMCR ('11)

Operating Cash Flow $38 ($3) $1

Cap Ex $48 $126 $283

Free Cash Flow ($10) ($129) ($282)

Acquisitions $41 $459 $908FCF Minus Acquisitions ($51) ($588) ($1,190)

GMCR ('09) GMCR ('10) GMCR ('11)

Cash & Cash Equiv* $242 $4 $13

Debt $78 $354 $574

Net Cash (Debt) $164 ($350) ($561)

Issuance of Common Stock $395 $9 $981

* Excludes restricted cash


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T2 Accredited Fund, LP (the Fund) commenced operations on January 1, 1999. The Funds investmentobjective is to achieve long-term after-tax capital appreciation commensurate with moderate risk,primarily by investing with a long-term perspective in a concentrated portfolio of U.S. stocks. In carryingout the Partnerships investment objective, the Investment Manager, T2 Partners Management, LLC,seeks to buy stocks at a steep discount to intrinsic value such that there is low risk of capital loss andsignificant upside potential. The primary focus of the Investment Manager is on the long-term fortunes ofthe companies in the Partnerships portfolio or which are otherwise followed by the Investment Manager,

relative to the prices of their stocks.

There is no assurance that any securities discussed herein will remain in Funds portfolio at the time youreceive this report or that securities sold have not been repurchased. The securities discussed may notrepresent the Funds entire portfolio and in the aggregate may represent only a small percentage of anaccounts portfolio holdings. It should not be assumed that any of the securities transactions, holdings orsectors discussed were or will prove to be profitable, or that the investment recommendations or decisionswe make in the future will be profitable or will equal the investment performance of the securitiesdiscussed herein. All recommendations within the preceding 12 months or applicable period are availableupon request.

Performance results shown are for the T2 Accredited Fund, LP and are presented net of management fees,brokerage commissions, administrative expenses, other operating expenses of the Fund, and accruedperformance allocation or incentive fees, if any. Net performance includes the reinvestment of alldividends, interest, and capital gains. Performance for the most recent month is an estimate.

The fee schedule for the Investment Manager includes a 1.5% annual management fee and a 20%incentive fee allocation. For periods prior to June 1, 2004, the Investment Managers fee scheduleincluded a 1% annual management fee and a 20% incentive fee allocation, subject to a 10% hurdlerate. In practice, the incentive fee is earned on an annual, not monthly, basis or upon a withdrawal fromthe Fund. Because some investors may have different fee arrangements and depending on the timing of aspecific investment, net performance for an individual investor may vary from the net performance as

stated herein.

The return of the S&P 500 and other indices are included in the presentation. The volatility of theseindices may be materially different from the volatility in the Fund. In addition, the Funds holdings differsignificantly from the securities that comprise the indices. The indices have not been selected to representappropriate benchmarks to compare an investors performance, but rather are disclosed to allow forcomparison of the investors performance to that of certain well-known and widely recognized indices.You cannot invest directly in these indices.

Past results are no guarantee of future results and no representation is made that an investor will or islikely to achieve results similar to those shown. All investments involve risk including the loss of

principal. This document is confidential and may not be distributed without the consent of the InvestmentManager and does not constitute an offer to sell or the solicitation of an offer to purchase any security orinvestment product. Any such offer or solicitation may only be made by means of delivery of anapproved confidential offering memorandum.

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