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CCM Blog For The Week Ended May 11, 2018

Summary

Weekly commentary and observations.

Dropbox Earnings.

Risk and balancing short book. In the past few weeks, I have made a few modest investments reducing the portfolio cash position. As I think about managing the risk of the short book and the full portfolio, I will feel more comfortable if 50-75%+ of the value of the shorts is matched with cash. CCM is currently at about 67%. This isn’t new information per se, and it has previously been fully offset, but wanted to share this important thought and additional guideline I am putting in place. Such principles and guidelines are subject to change given market conditions and other factors.

“Rapid Update” growth numbers. Rapid Update - An outlook for U.S. GDP The most recent data was published on May 10 and the current Wall St expectations for Q2 are 3.7% (annualized), quite a bullish prediction. There are also opinions that capital spending will occur in the second half of the year, offering further growth and gains to the broader economy.

Dropbox Earnings. Dropbox earnings beat expectations after IPO, but stock still dips The clear challenge is a company with 500+million users but as of Q1, only 11.5 million paying subscribers, a little more than 2%. I wrote about one strategic avenue that included three products I rely on heavily: Dropbox, Evernote, and Grammarly. Dropbox is facing a tough battle to convert consumers from free to paying (even the “successes” almost always have paltry numbers) and the best course of action to me if to grow through offering higher value services and acquiring said customers through M&A.

Medium - Read, write and share stories that matter@ClarendonCapMgt/my-thoughts-for-grammarly-evernote-and-dropbox-b4bf74e68212

PIPEs and direct deals presented. I was presented with a few private placement investments in OTC stocks this week. These were not self generated ideas. I found the companies and their promoters to lack Careful Research and Adequate Presentation. The capitalization of the last sentence is intentional. Basic information was consistently absent, you know, LIKE A BALANCE SHEET.

Poker benefits. I wrote how many investors should play games of probability and strategy, bridge and poker among the more common. As I thought about the week’s events and a couple of sessions I played this week, there were two lessons. There is a tremendous benefit of quick decision making that is required. CCM does not have the resources that firms with hundreds of millions/billions in AUM have. One of the most precious resources we have is our time. And it is the same 168 hours per week that Warren Buffett, David Einhorn, Seth Klarman, etc. have. Being able to make a quick decision on which opportunities to pursue and which to pass on must be an emphasis and consistently improved. In an online game, you may only have 10-20 seconds to make tough decisions. The second lesson is to be reminded of fallibility and the limits of analysis. A “bad beat” I took involved me having a straight on the turn (four cards are on the board) and me correctly identifying my opponent's hand as either top set (three of a kind) or two pairs. I am at a significant advantage and the opponent likely is not identifying the strength of my hand as it is of lower numbered cards (2-6). I wager all of the money I currently have in the game and the opponent calls my bet. I am correct, they have two pair. I am a 91% favorite. The fifth card is dealt and the opponent makes a full house. I lose the hand. I would make the same decision because you have to bet (invest) when the odds are significantly in your favor and that hands and investments don’t always turn out, so don’t sit down with or invest with more than you are prepared to lose. Don’t worry, the sums I play for are modest.

Thanks for reading. Carlos Sava, CFA, CPA