According to certain models in theoretical physics, a vast multitude of parallel universes coexist alongside our current reality, varying in ways ranging from the picayune to the cosmic. Presumably, then, there's a universe out there where a little company called Valeant Pharmaceuticals never came into being, never rocketed to the top of virtually every hedge fund's stock portfolio, and never wiped out nearly 90 billions of dollars in investor cash following a flagrant accounting scam.
It is residents of that alternate universe to whom the Sequoia Fund's most recent letter to investors is addressed:
Two large investments—one much more widely discussed than the other—account for Sequoia’s underperformance over the past decade: Valeant Pharmaceuticals and cash. Excluding them, the stocks in Sequoia’s portfolio returned 9.70% from 2007 through 2016, versus the aforementioned 6.95% for the Index. While there are no do-overs in our business and actual performance is all that matters, this performance gives us confidence in the Fund’s portfolio and our ability to pick stocks.
In other words, if you leave aside all the money we lost, boy, we really made some good money. Cf. the old chestnut: “Other than that, Mrs. Lincoln, how was the play?”
It's not the first time Sequoia Fund manager Ruane, Cunniff & Goldfarb has asked its investors to step into the multiverse in order to grasp the full extent of the hedge fund's value proposition. In July, 2016, after Valeant had lost 90 percent of its value from a year before, Sequoia noted that “absent Valeant, the rest of the Fund’s portfolio generated a positive return of 2.3% for the first half.” Too bad Valeant was the fund's top position at the start of 2016.
The basic argument here is to judge the fund by its cumulative batting average, not its winning percentage, which is a fair request to make of any investor who resides in a universe where the purpose of investing isn't to get returns.
Michael Mauboussin of Credit Suisse recently addressed the point on the FT Alphachat podcast. He recalled a piece of advice he'd heard handed down to a recent college grad by an old hand at a bank where the kid was training: “In our business, if you can be right 53 percent of the time, you're gonna do great.”
“That's really bad advice,” Mauboussin said. “It really doesn't matter how frequently you're right, what matters is how much money you make.” Mauboussin cited an anecdote about George Soros making the right call only 30 percent of the time. “When he was wrong, he sold his positions fairly quickly, and when he was right he let it run to a big huge profit.”
Maybe there exists a universe in which Sequoia dumped Valeant in the first, second, third, fourth, fifth, sixth, seventh, eighth, ninth, or tenth month of Valeant's downfall. But in this universe, Sequoia waited nearly a full year to leave.
(Thanks to Twitter's Barbarian Capital for flagging the Sequoia note.)