Goldfarb accepted the blame for over-staying Sequoia’s welcome in their formerly mega-successful position in Valeant Pharmaceutical. He also took credit for the mistake of adding to the position in the fall of 2015 on the way down. We as a firm believe that there are things to learn as high-conviction stock pickers from this episode at Sequoia and the examples of history.

Sequoia had always been a concentrated fund, but its concentration had been centered around owning Berkshire Hathaway. Valeant effectively used borrowed money to create a fund of healthcare companies and Sequoia put the same amount of confidence in Valeant’s CEO as they had put over the years in Warren Buffett, from a position-size standpoint.

Ironically, Goldfarb and Sequoia have had two prior major underperformance streaks in its 45-year history. They underperformed in their first four years during the height of the ‘Nifty-Fifty’ stocks from 1970-1973. They lagged during the tech bubble when the other highly thought of managers got knocked out of the box (the baseball season just started, after all). Hear the rhyme?

We believe our readers can benefit from this discussion because of what it tells us about portfolio management. We can learn a great deal about the risks worth taking and the ones that warrant avoidance. Like Sanborn and Vanderheiden, our discipline does not require us to apologize for taking a contrarian stance, even of the most unpopular sort. We currently believe that the major banks are historically cheap and worth participating in. We own numerous old-media stocks that tech fans believe will not exist in ten years. It is hard not to buy even more of our favorite healthcare stocks which politicians have scared most investors out of. We are getting very favorable prices from the lack of cheery consensus in these areas.

These vignettes can also give strong anecdotes towards risk management. While we actively let our winners run, we will also trim our positions once they grow to 8-10% of our portfolio. Sequoia’s results would have suffered in 2013 and 2014 from trimming back on their position in Valeant, but it would have saved them the current torture chamber and Robert Goldfarb’s sword could still be a decoration on the wall. His resignation is sad because of the good stock picking discipline he practiced over 45 years at Sequoia!

Secondly, we believe it is possible that Mr. Goldfarb had a vision of repeating his long experience with Berkshire Hathaway, a buyer of businesses, in the shares of Valeant, a healthcare conglomerator. Even Warren Buffett has over-stayed his welcome in companies over the years. He admitted he should have been selling Coke and Gillette when he called them “the inevitables” back in the 1990s.

In conclusion, contrarian investing as practiced in a concentrated portfolio with low turnover is an easy thing that is hard to execute. We are thankful to be able to examine other successful disciplines and learn more about which risks to take and which ones to avoid.

Warm Regards,

William Smead

1 Source: TheStreet