Established in 1998, T2 Partners Management LLC is an investment advisor for private equity funds and mutual funds. The firm also offers its own private and mutual funds investment solutions to its investors. The firm was founded by Whitney Tilson and Glenn Tongue with the primary intention of providing discretionary investment solutions to its clientele. In 2005, however, T2 Partners started its own mutual funds with a price of $10 per share. The firm provides investment advice to pooled investments and institutional investors on both discretionary as well as non-discretionary basis.

T2 Partners offers six funds to its investors. These include two mutual funds: Tilson Focus Fund and Tilson Dividend Fund which are also listed on S&P 500; and four private funds: T2 accredited fund LP., T2 Qualified Fund LP., Tilson offshore fund LTD and T2 SPAC Fund. The Tilson Focus Fund is managed by Mr. Whitney Tilson and Mr. Glenn Tongue whereas the Tilson Dividend Fund is managed by Mr. Zeke Ashton. All of these funds are driven by the firm’s core strategy of traditional value orientation, with palpable deference to Warren Buffett . (Interestingly, unlike many of the hedge fund managers who constitute the 1% who agree with Mr. Buffett’s investment philosophy but not his controversial Buffett Rule stance on higher taxation for the 1%, Mr. Tilson wrote a letter to the media supporting Mr. Buffett’s call for higher taxation on the ultra wealthy.)

T2 Partners investment philosophy is steeped in basic value maximization. The firm invests in stocks which are underpriced relative to their intrinsic value or in other words which are trading at a discount. The underlying strategy is to benefit from long term price appreciations of undervalued securities.

While T2 Partners generally follows a value-driven philosophy, each fund has its own unique investment strategy. For example, the Tilson Dividend Fund skims income from covered calls as well as current dividends. On the other hand, the Tilson Focus Fund reaps its entire returns solely from capital gains. This fund is aptly named Focus as it derives value from within the stocks by concentrating the best investment ideas – it is not hedged and therefore no put or short positions are acquired.

This strategy backfires at times because of a slack in the market, particularly when value is temporarily out of favor. In one of their letter to shareholders, the firm termed this as “guaranteed underperformance” since it believes to ensure long term outperformance in the market necessarily requires that they underperform the market for shorter time horizons.

T2 Partners investment approach being value-oriented, the firm seeks to “catch falling knives” referring to stock whose market value is lower vis a vis its fair or intrinsic value. Once available at a discount, these stocks are bought immediately by the firm. A fundamental bottom up approach is used in stock selection, to ensure that when this underpriced stock will get out of the herd behavior of the market, then will attain its fair price based on its intrinsic value.

Further to security selection, the stocks are selected on the basis of detailed and intensive research. Factors such as market and industry mechanics are taken into consideration during the process of stock selection. A reliable business valuation process is used coupled with a strong buying and selling mechanism to ensure that it enters and exits its long short positions at the right time.

The firm identifies underpriced stocks and assumes a long or short position relying on fundamental analysis of the stock’s long term market performance history, industry reports and advice from large value investors. Generally, most of the stocks forming the firm’s portfolio are overlooked stocks in out of favour sectors, deemed to be undervalued with the potential to achieve their actual value over time. Moreover, another aspect of stock picking process is that short term noise is completely ignored by investment managers of the company since it is usually a temporary bubble (positive or negative, based on greed and fear respectively).

T2 Partners adherence to timeless value principles has resulted in significant outperformance of the general markets. Since the launch of Tilson’s accredited funds it has generated a cumulative return of 113.9% compared to a 27.9% return for the S&P 500 index. However, there have been downfalls to the performance of T2 Partners during recent years. Average return of market had been 15.1% during 2010 while T2 Partners managed 10.3%. Likewise, during 2011, the firm had a comparative underperformance of about 2% in relation to the S&P 500. However, despite the recent underperformance, total assets under management of T2 Partners have remained unchanged and in the last quarter of 2011 their deposits actually increased. It seems their investors are true value believers and are convinced this is one of those “guaranteed underperformance” spells, especially since their largest holding right now is Berkshire Hathaway, the value stock par excellence.

Note about Whitney R. Tilson:

Mr. Tilson, the very communicative co-founder, constantly spreads the message about the superiority of value investing. In that vein, he has co-authored two books: “More Mortgage Meltdown: 6 Ways to Profit in These Bad Times” and “Poor Charlie’s Almanack,” about Vice Chairman of Berkshire Hathaway, Mr. Charlie Munger. Also, he regularly is a contributing writer for Kiplinger’s and Financial Times, while he has previously written for a number of emagazines including TheStreet.com and Motley Fool. He frequently appears in media (yes, including the “noisy” CNBC) to promote value investing.

Mr. Tilson is recognized as one of the most prominent speakers on behavioral finance and value investments and his profiles have been published by Wall Street Journal and Washington Post and appeared on the cover page of the Kiplinger’s July 2007 issue. He was included in the list of 20 rising stars by Institutional Investors and was among the five investors that were included in SmartMoney’s Power 30.

His excellence in the field of value investments does not end here as he is also co-owner of Value Investor Insight which publishes newsletters for value-oriented investors. He is co-founder of the organization that sponsors Value Investing Congress, which is a biannual conference providing the opportunity for investment professionals to put forth their investment ideas on a major platform.

QUOTES

“Numerous studies have shown that human beings are extraordinarily irrational about investing. On average, we trade too much, buy and sell at precisely the wrong times, allow emotions to overrule logic, misjudge probabilities, chase performance, etc. The list goes on and on. To invest successfully, you must understand and overcome these natural human tendencies.”

“I am part of the 1 percent of the 1 percent. By that I mean that I am fortunate to be a wealthy American and I say, ‘It’s okay to raise my taxes’.”

“We call ourselves “opportunistic value investors.” There are a lot of different styles and flavors. But at the end of the day we’re just trying to buy 50 cent dollars and short $5 dollars, I’d say. We like to say we pray in the church of Graham, Dodd, Buffett and Munger.”

“It’s easy to deviate from the crowd, of course, but it’s much harder to be right-and even harder to be right on the timing.”

“We are motivated to produce consistently excellent returns, and we would like nothing better than to have the Fund deliver great results to our investors every year!”

“We can only play the hand we’re dealt as best we can. For us, that means acknowledging the many risks, taking extra care in our research, and leaving ourselves with plenty of room for error in our valuation work. We remain confident that our value-oriented approach will continue to work for us over time if we are patient, diligent, and emphasize protecting capital before profits.”