Financial advisers, or financial planners, work with clients to understand their goals and create financial plans based on those goals. Financial advisers and planners generally create financial plans for clients based on “asset allocation”, or the percentage of a client’s portfolio to be invested in a given asset class, such as stocks or bonds. For example, a financial adviser might recommend that an individual with a high risk tolerance and many years until retirement have the majority of her investment portfolio in stocks. Most financial advisers outsource the actual investment portion of their clients’ portfolios to mutual funds or other institutionally managed financial products.

Money managers, in contrast, actively manage portfolios of financial securities for clients in accordance with a stated investment strategy. Mutual fund managers, for example, are money managers. Money managers and financial advisers generally possess different professional skills, with money managers usually being trained as securities analysts, i.e., researching, analyzing, and valuing financial securities. Few financial advisers have training in advanced securities analysis. Financial advisers, however, will generally be much more knowledgeable than money managers on matters such as types of retirement accounts and estate planning strategies.

Generally both money managers and financial advisers are registered investment advisers (investment adviser representatives are the individuals themselves who hold the series 65 license) who have a fiduciary obligation to act in their client’s best interest.

Value investing is an approach to security selection in which an investor purchases a security when the security’s price is substantially below the security’s underlying appraised business value and patiently waits until other market participants recognize the mispricing and force up the security’s price. Value investing is, thus, a long-term approach to investing. The difference between a security’s price and its appraised business value is referred to as the security’s “margin of safety”. The value investing approach was first formulated by Benjamin Graham and David Dodd in their 1934 work Security Analysis. This approach is followed by such famed investors as Warren Buffett, Seth Klarman, Carl Icahn, Bruce Berkowitz, Mason Hawkins, and Mohnish Pabrai, among others.

The value approach is at odds with the “modern finance” view of capital markets, which assumes that security prices at all times appropriately reflect all available information. To value investors, the modern finance view of security prices seems to ignore the institutional constraints and behavioral perversions which often underpin modern capital markets.

We define a security’s intrinsic value based on the “private market value” of a company, or what we believe a sophisticated and informed buyer would pay for the entire business. We then allocate that value to the financial claim (security) being analyzed. In other words, we view ourselves as business owners when analyzing a security.

We calculate intrinsic value primarily by discounting a company’s future free cash flows. We define free cash flow as the discretionary cash flow available to all capital providers after all expenditures have been made to maintain the business in its current state. This approach, referred to as the discounted cash flow approach, is based on the premise that an asset is worth the present value of the future cash benefits which it will generate over its life. We supplement the discounted cash flow approach by also analyzing a company’s net asset value and by viewing market valuations on similar companies.

Business valuation is as much art as science, requiring many subjective inputs. We try to be very conservative in our assumptions, placing particular emphasis on downside scenarios. We deal with the inherent subjective nature of business valuation by using multiple valuation methods and performing rigorous scenario analysis. We also only invest in businesses whose economics we can thoroughly understand, shunning firms whose cash flows are too unpredictable or whose assets are unanalyzable.

We view investment risk as the permanent loss of capital. This definition of risk is in strong contrast to the definition of risk espoused by academics and professionals who adhere to the modern finance view of markets. To such individuals, a security’s risk equates to the volatility of past returns.

Inherent in the modern finance view of risk is the assumption that security prices fully and appropriately reflect all available information. In other words, modern finance adherents view a security’s price changes as perfect recalibrations of value. We at Tortuga Capital highly refute this assumption. We have observed that often a security’s short-term price volatility is far in excess of changes in a company’s underlying fundamentals.

In view of how we define risk, we seek to minimize risk by (1) always demanding a margin of safety, (2) diversifying among securities to eliminate any overexposure to a particular company or industry, (3) holding large amounts of cash in client portfolios when bargain prices are difficult to find, and (4) hedging when appropriate.

A mutual fund is a “pooled” investment vehicle, meaning that investor contributions are aggregated and managed by an investment adviser in accordance with the fund’s objectives and stated strategy. Investors in the fund own shares, which can be redeemed from the mutual fund at the fund’s current net asset value per share. Mutual funds are most beneficial for smaller investors, in that they offer participation in a diversified, professionally managed portfolio.

Separately managed accounts (SMAs) are not pooled investment vehicles, but rather accounts which are uniquely owned by individual clients and professionally managed by an adviser. Although numerous SMAs may be managed in accordance with a given investment strategy, each portfolio is unique to the client’s account.

We recommend that a client work with a financial adviser or financial planner on certain aspects of their financial life, since we do not provide many of the services which such professionals provide. However, we prefer to work directly with clients with regards to any capital invested with us. It is important for a client to understand that true value investing has very little institutional representation. As such, it is likely that most financial advisers and financial planners will have different views of security selection and portfolio management than we do. We believe it should be up to the client to determine if our approach is right for them.
A custodian is a financial institution which holds a customer’s funds. Custodians are generally large financial institutions, such as broker-dealers. Because custodians have full access to a client’s investment funds, it is important for a client to choose a reputable and financially sound custodian. Tortuga Capital does not serve as a client’s custodian.
Our fee for the focused Value Strategy is 2% of the account value, assessed in quarterly increments of .5%. Our fee for the Deep Value and Special Situations Strategy is based on performance and is 25% of any account gain over 6%, assessed yearly.
Interactive Brokers (IB) is Tortuga Capital’s preferred broker-dealer and custodian for clients of the firm. All clients of Tortuga Capital hold their brokerage accounts at Interactive Brokers. Tortuga Capital then manages these accounts in accordance with the firm’s advisory services agreement. Interactive Brokers is the largest electronic brokerage platform in the U.S., as measured by daily dollar trading volume. Tortuga Capital chose IB because of the firm’s financial strength and reputation as a user-friendly trading platform. Tortuga Capital’s clients can retain their account with IB even if the advisory agreement with Tortuga Capital has been terminated.