intro to value investing

Our Lawyer Says Hi! This presentation is for educational and informational purposes only. Nothing contained here should be construed by anyone as an invitation or solicitation to buy or sell any security. This presentation does not contain personalized legal, tax, investment, or financial advice. Viewers should consult with a qualified adviser to obtain advice suited to their personal circumstances.

The performance discussed here is highly unusual and cannot be sustained. Because the portfolios contains a limited number of companies, their returns will be more volatile than a portfolio investing in a higher number of stocks. Tarpon Folio inception date 11/20/2008. Gecko Folio inception date 1/26/09. Returns are through the dates as indicated in the presentation. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss. The performance data is “net of all fees” reflecting the deduction of advisory fees, brokerage commissions and any other client paid expenses and includes the reinvestment of capital gains. The publication of this performance data is in no way a solicitation or offer to sell securities.

•  Value investing •  Two funds: Tarpon

& Gecko •  Fiduciary oath •  Eat our own cooking

Mutual Funds

A good idea gone wrong.

???

Spoke Funds

All in it together.

Why Islamorada?

Yes!

No!

Reason #1,432…

Once in a Decade

+91% Tarpon Folio

+70% Gecko Folio

Gecko Folio ‘09 A high-yield fund for income investors.

Tarpon Folio ‘09 A long-term growth fund.

Biggest 1st Year Gainers

98% 107%

126%

144%

105%

154% 153%

81%

194%

67%

0%

40%

80%

120%

160%

200%

ACL BLKB CCOI DISCA GOOG IGT JBT KMX PZN TGT

Why Stocks?

Source: Jeremy Siegel, “Stocks for the Long Run.” June 2002, McGraw-Hill.

Why Fees Matter

Average Mutual Fund Fees? 1.73%

Sources: Karceski, Livingston, O'Neal, "Mutual Fund Brokerage Commissions," January 2004. Shoven, Dickson and Sialm, "Tax Externalities of Equity Mutual Funds," April 2008.

Taxes and Trading

Sources: Tweedy Browne, Morningstar

Average Mutual Fund Turnover? 89%

Three Approaches Long Term

Fundamental (Value)

Gaps

1. 2. 3. Short Term

Fundamental Technical

Changes Momentum Price/Vol Charting

Efficient Market

Asset Allocation

Value Investing “We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price."

Net worth $50B

Valuing A Business “The critical investment factor is determining the intrinsic value of a business and paying a fair or

bargain price.”

- Warren Buffett

Circle of Competence “If we have a strength, it is in

recognizing when we are operating well within our circle of

competence and when we are approaching the perimeter.”

- Warren Buffett

Moats Low Cost Producer Switching Costs

Economies of Scale Intangibles Regulatory

IP Network Effects

Mr. Market Stock prices are quotes from an

emotionally unstable business partner.

Use or ignore them as you see fit.

Margin of Safety

“Confronted with a like challenge to distill the secret of sound investment into three words, we

venture the motto, MARGIN OF SAFETY.”

- Ben Graham

Concentrated Ideas

“Wide diversification is only required when investors do not understand what

they are doing.”

- Warren Buffett

Neutral Tandem (TNDM) Warning: May not be in your circle of

competence!

Currently one of the biggest values in Tarpon and…

A Distinguished Alum

“Mr. Wren joined us in February 2006 and has served as our President, Chief Executive Officer and Director since that time….holds a B.S. degree in Electrical Engineering from

the New Jersey Institute of Technology and an M.S. in Management from Stanford University, which he attended as a Sloan Fellow.”

CEO Rian J. Wren:

Is This Rational?

*Would your car’s value change so much?*

Worthy of a Look?

Moat?

Cheap?

Margin of Safety?

Inside my

circle!

At a high level… “Provides tandem interconnection services to competitive carriers”

Solve two problems: 1 – No direct connect 2 – Neutral solution

Ignoring new potentially large business

Key Point About Risks Risks unequivocally exist in TNDM…

…but important to distinguish between Volatility in stock price and business risk…

…and my point is that none are large or imminent enough to explain why shares are so cheap.

Simple DCF

Sign of Competitive Advantage

Q: Is this a great business?

Network Effect

TNDM Adjusted P/E Average long-term P/E = 15

Neutral Tandem P/E: 13 Market Cap = $530M

TTM Earnings = $41M $161M in cash (no debt) or $4.75 per share

Cash-adjusted P/E is 9

Earnings Yield of 11% is Too Cheap

Data as of 2.17.10

TNDM is 7.5% of Tarpon

Bottom Line “You need to worry about where the

company and the stock will be in three to five years. If you can buy something today

with little chance of permanent impairment and a high likelihood that you'll

double your money over the next five years, you should go ahead and do it.”

- Seth Klarman

Start Early!

Source: Traders.com

Contact Info www.islainvest.com

csmith@islainvest.com

Twitter: @CaleintheKeys Blog: www.caleinthekeys

FB: www.facebook.com/IslandInvesting

(305) 522-1333 (cell)