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January 10, 2015
Dear friend:
In my closing remarks last year, as I looked forward to the new addition to our household, I wrote that "my leisure
time would be better spent by investing in the next generation". At the time, I really thought it would be years
before I formally review my investment activity again and put it down on paper. I actually wrote my first annual
letter thinking it was a now-or-never opportunity to put myself in the shoes of a fund manager and embrace the
reporting exercise in which my heroes of the business world take part each year or quarter. But here we are again,
setting pen to paper (or setting key to file) and pretending awhile to have the most exciting occupation one can
dream of landing on Wall Street (though I would prefer a quiet office far away from the incessant buzz of traders,
speculators, market forecasters and the financial media).
Performance review (unaudited)
In 2014, the overall stock portfolio returned 15.4%, net of commissions on a pre-tax and pre-social charge basis and
excluding dividends, bringing the average annual returns as of December 31, 2014 to 24.8% since inception (April
15, 2010).
Excluding the investment made in Arkema in 2010 (which success I attribute to luck rather than skill), the overall
stock portfolio returned 20% in 2014, net of commissions on a pre-tax basis and excluding dividends, bringing the
average annual returns as of December 31, 2014 to 18.7% since August 27, 2010 when I first bought shares in a
company.
Though I invest in companies regardless of their market capitalization and across geographical regions, sectors and
industries without considering any benchmark, I believe that finding out how one’s performance stacks up against
an index could sometimes be a real eye-opener.
Let’s leave aside the CAC All tradable. The portfolio’s performance was already ahead of it when I wrote last year.
This year, it was in the doldrums. As a result, the CAC All tradable, not to mention the CAC 40’s lackluster
performance, is completely useless as a benchmark.
Conversely, the S&P 500 tells an interesting story. It only returned 11.4% in 2014 but, if purchased in euros, it
would have returned 26.7% (unlike 2013, the dollar strengthened quite a bit against the euro in 2014), thus leaving
me in the dust. Sure enough, careful readers will notice that I tend to pick whichever currency favors the
benchmark’s performance best: measuring the S&P 500 in dollars in 2013 but switching to euros in 2014. As a
prominent investor once wrote, “I believe in setting high goals rather than easily clearable low ones.” Let me add
that if indexes were in negative territory, I would just discard them and see if the portfolio could both make more
than 10% as well as beat the rate of inflation.
Well, in all fairness, my performance is just average: from the standpoint of an investor managing assets in euros,
the S&P 500 returned 17.8% yearly on average since August 27, 2010. You may think 18.7% is acceptable but I may
actually have been lucky. Even if we were to attribute this to skill, this extra percentage point would simply be
offset by hypothetical management fees were I to manage money for investing partners, meaning I would not add
any value for them. Worse, were I to manage non-permanent capital, I would have to keep a portion of the assets
in cash in the event of redemptions from my partners, which would further act as a drag on performance.

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That being said, the worst performers that significantly impacted the portfolio in 2014 were Arkema, energy stocks
and, because I'm psychologically-wired to catch falling knives, some new positions I took, the largest of which I will
discuss in this letter.
On top of that, I was slow to learn my lesson. When I wrote last year, I realized that turnarounds seldom turned.
Instead of acting quickly and selling with a modest gain in early 2014, I exited a troubled teen apparel retailer at a
loss and a restaurant chain business whose concepts failed to stay fresh with a break-even result. Better late than
never, both situations have deteriorated since.
A perfect gift for a baby shower
Baby Constance was due in March and I knew I would be busy from then on. So, I wanted to deploy most of the
cash I intended to invest in 2014 early in the year. Still, I hate buying stocks when they are richly priced, but
somehow fortune smiled on me: a sell-off in the winter – though relatively modest in size – coincided perfectly with
the weeks leading up to the delivery. This enabled me to amass shares of Coca Cola and increase my position in
Berkshire Hathaway. I couldn't have expected anything better.
Outsourcing my investment decisions
Free time is at a premium for working parents and capital allocation is not the be-all and end-all of life. Don't get
me wrong, I feel duty bound to sensibly allocate the resources entrusted to me.
It is not just about stewardship. I actually love investing in stocks. I relish the intellectual exercise, the learning
opportunity, the great fun of a treasure hunt, the challenge of solving puzzles and the rewards we eventually reap.
Unfortunately, though capital grows over the years, people are equal with respect to time: we all have 24 hours in a
given day. Considering that I already have a full-time job and need to sleep, there is only so much left, hence the
necessity to wisely allocate the time the Lord has given me.
You already know Berkshire Hathaway accounts for a large chunk of the portfolio. I initially invested in Berkshire
Hathaway because it was a collection of wonderful businesses overseen by capable and shareholder-friendly
managers, the entirety of it being available at a substantial discount (there were multiple markdowns in 2011
following a blizzard of natural disasters that impacted the reinsurance industry, the resignation of a key senior
executive, the growing uncertainty due to the European debt crisis and the debt-ceiling crisis in the United States).
The rationale behind the purchase was also that of humility: as a novice investor, I was really learning on the job
with real capital and I couldn't be sure of making every decision right. Besides, as a computer engineer by training,
my circle of competence naturally lies in technology. The timeless nature of tech is such that I don't feel
comfortable devoting too large a portion of my portfolio to these technology firms. So, Berkshire Hathaway came in
handy early in my investing journey. Berkshire will do well but the huge amount of capital it has to work with will
prevent it from achieving the stellar performance of yore.
In my quest to outsource some of my investment decisions, I had to scour the world over for suitable candidates to
manage part of my capital. Here is what I am looking for.
First, I need to be comfortable with the investment strategy and the process. The underlying value of an investment
is the present value of the free cash flows it is expected to generate over its lifespan. As a result, I want to make
sure the price a fund pays for the securities it purchases does not exceed that underlying value. In other words, I
am looking for value investors (but not funds labeled as "value"). In practice, this amounts to looking for either
mispriced securities and wait for the market to recognize their worth or businesses that can grow their value over
time. I would add that a good process should be reflected in a good track record over many years. Note, however,

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that a track record per se does not tell you anything: you may get outstanding results by sheer luck rather than by
skill. In the words of a well-known investor, "A manager that has become overconfident by using a bad process is
like somebody who plays Russian roulette three times in a row without the gun going off, and thinks they’re great
at Russian roulette. The fourth time, they blow their brains out."
Once a good process is found, I would determine how likely a fund will (and be able to) stick to its game plan. Red
flags would include over reliance on a key individual or a fickle investor base that may deter a fund manager from
executing properly. As a result, permanent capital is a great plus and, though I believe concentration should yield
better results, diversification helps to mitigate the "key man event" risk when investing with top-notch managers.
Last but not least, fees have to be as low as possible. Suppose a respectable 10% annual return over time. Now
consider a 2% fee on assets. You're actually being imposed an implicit 20% levy on your returns, without accounting
for the incentive fee structure that further eats up your earnings. Thus, the importance of minimizing not just taxes
but also fees.
This brings me to offer one of my current best ideas when it comes to a hands-off style of investing.
Market Vectors Morningstar Wide Moat ETF (MOAT)
As stated by Market Vectors, MOAT is an ETF that seeks to replicate as closely as possible, before fees and
expenses, the price and yield performance of the Morningstar Wide Moat Focus Index, which tracks 20 US-listed
firms with a wide moat according to Morningstar's equity research team. The index is rebalanced quarterly with the
20 cheapest firms, ie. those having the lowest ratios of stock price to fair value, making the cut.
Unlike sell-side financial analysts who are incentivized to generate fees for their brokerage arm or to be politically
correct vis-à-vis the potential and current clients of their investment banking business, Morningstar is an
independent research firm. Though proprietary, the research methodology it employs is quite transparent and
systematic. Free resources on Morningstar's website provide ample information about how they assess companies
both quantitatively and qualitatively. I also feel at home when I read the 2 books authored by Pat Dorsey who was
director of equity research at Morningstar and I am sure to enjoy Why Moats Matter: The Morningstar Approach to
Stock Investing by Heather Brilliant & Elizabeth Collins. Morningstar's approach to investing is, to say the least,
quite "buffettesque" as it focuses on moats, stewardship, valuation certainty and margin of safety.
Unfortunately, the Wide Moat Focus Index does not take moat trends, stewardship and uncertainty ratings into
account. Still, considering that expenses are capped at 0.49% and a behind-the-scenes research team is not
dependent on any single superstar, I believe we can make do with this simple rules-based ETF that really offers
fundamental analysis and bottom-up stock-picking at an attractive price!
Deep value positions
Last year's letter addressed the rationale behind my purchase of stocks of competitively advantaged companies.
The letter ended with the mention of deep value positions. As none of them made it to the list of the largest
positions in the portfolio and I actually didn't discuss any, many of you might have scratched their heads about
these mysterious stocks.
I also thought you might benefit from a short review here. Hopefully, this will equip you to unearth a few gems and
find ridiculously cheap investment ideas. However, let me warn you that these are generally what Warren Buffett
compares to "cigar butts". In his shareholder annual letter for 1989, he wrote: "A cigar butt found on the street
that has only one puff left in it may not offer much of a smoke, but the 'bargain purchase' will make that puff all

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profit." It basically really amounts to finding a C-note on the street. You pick it for free and it earns you $100 but
won't bring in more. You'll have to either plow it back into a decent investment that will compound in value over
time or keep looking for other free Benjamins… This latter option may generate high returns quickly but it requires
more diligence. Also, beware of taxes on capital gains.
Cash rich companies that trade as low as 3 times Free Cash Flows
Shanda Games. For some reasons, some Chinese videogame companies were outright cheap. Though I'm usually
wary of investing in Chinese companies due to my lack of expertise in the reliability of the reported figures, I
reasoned that it would be tough (though not impossible) to fake the numbers when a firm was listed on the
NASDAQ while simultaneously having the main contributor to its earnings listed in South Korea. So, even though
the economics resulting from the shift to a mobile gaming world was not evident, I couldn't pass up the chance to
buy a diversified online game portfolio of legacy cash cows and newly developed mobile games that came with a
large pile of cash at ~3x EV/FCF. Though already cheap, the investment benefited from potential franchises in the
pipeline, most notably from a game that had a proven track record and was about to be rolled out in Mainland
China.
Groupe Crit. This French company is the fourth largest temporary employment provider in France and thus benefits
from some network effects in his domestic market. I initiated the position when the stock traded at less than 8
times depressed free cash flows (only 6 times depressed free cash flows ex-cash net of debt, overdraft and
retirement liabilities). I kept averaging down as the stock plunged to trade as low as 3.5 times depressed free cash
flows. I initially looked at recruitment companies because David Pastel invested in Hays and Randstad, so I thought
this sector would offer an attractive hunting ground. And it did!
When battered markets offer bargains in Italy
I don't remember the headlines that caused sell-offs across Europe but there might have been some frightening
news about Italy. Still, my only memories of Italy are that of a pleasant stay in Venice and of bargains offered by
Signor Mercato, a not-so-distant relative of the well-known manic-depressive Mr. Market.
Immobiliare Grande Distribuzione. I usually don't like to invest in real estate considering the low yields and
expected returns. However, IGD offered the opportunity to invest in supermarket buildings and shopping malls at a
large discount to NAV. High occupation rates and long-term leases sounded good but might pose a threat on the
event of inflation, so it was fortunate that a portion of the rents was indexed on the FOI, the local equivalent of the
CPI. Finally, the discount to NAV appeared substantial enough to provide some protection against higher cap rates
in the future.
Vianini Industria. Benoît, the only speculator I could win to value investing, came up with this idea. Thanks Benoît!
This is the first time I’ve seen a company trading for less than the cash and conservatively valued marketable
securities minus all the liabilities on its balance sheet. Though I had been drooling over this opportunity, I am
deliberately keeping this position small. First, there is no guarantee the cash would ever be returned to the
minority shareholders and not misspent. Second, I don't like the byzantine complexity of the Vianini corporate
structure. As I told Benoît, I was excited about purchasing such a cheap stock but I would not have bought it if I
were managing someone else's money.
ITE Group
Leading trade shows could be sticky events in that they efficiently connect suppliers with clients in a timesaving
fashion. Take World Routes for instance: it attracts senior representatives from about 300 airlines. Suppose you

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work for an airport company and are involved in route development: would you set up meetings at the head office
of each airline you would like to work with and waste 2-3 days each time traveling back and forth or would you
rather spend just a week in a unique location and meet them all? Needless to say, an industry main event saves
time, energy and money. Considering the value proposition, you would make sure to attend it every year despite
steep price increases. Would you switch to a smaller but cheaper competing event? Well, unless they may attract
all the players you wish to meet and do business with, it may not be worth the distraction. As you can see, a trade
show does enjoy some network effects once it becomes unique and somehow dominant, that is, as long as it stays
relevant to the industry it caters to and fragmented players need to get connected.
Let's put World Routes aside since its owner is about fairly valued.
ITE Group also organizes leading trade exhibitions. It specializes in emerging markets (with a large exposure to
Russia and Eastern Europe), generates lots of free cash flows and has been growing at a fast clip over the years. Its
stock price tumbled following the Ukrainian crisis, which provided a welcomed entry point into a wonderful
business that earns rents without owning the real estate: an organizer usually doesn't pay for anything as both
exhibitors and participants are paying for everything, the organizer also receives cash first and may further
monetize its successful events through sponsorship.
As an international organizer, ITE Group acquires leading trade shows in emerging countries at a fair price and then
creates substantial value by connecting local players to multinationals.
Should geopolitical tensions not prove temporary and economic sanctions lead to a permanent impairment of the
business value in the Russian region, I believe ITE Group, with its virtually debt-free balance sheet, is still able to
reposition its events portfolio to less troubled shores.
Outlook
At the end of 2014, the largest positions in the portfolio (weighing more than 5%) are, in alphabetical order,
Aéroports de Paris, Apple, Berkshire Hathaway, Coca Cola, ITE Group, Microsoft, MOAT and Oracle. As explained
earlier, I am outsourcing some of my investing decisions. As a result, more than a fourth of the portfolio is now
passively managed.
Going forward, I don’t expect returns on an absolute basis to be as high as they have been so far. Many positions in
the portfolio are either fully valued or slightly overvalued. I don’t intend to sell quality stocks. Moreover, stocks
traded in USD, which account for about two thirds of the portfolio at year-end, benefited immensely from the
strengthening of the dollar: such tailwind is unlikely to blow ad infinitum.
Sincerely,
Bertrand LUC