Enclosed are the return calculations for your account(s). Where applicable, three, five, ten-year and returns since inception are included as well. The S&P 500 returned 11.96% including dividends in 2016. Our composite returned 13.55% in 2016 (individual results may vary). Since inception on 01/01/2000, our composite has returned 263.70% vs. 111.57% for the S&P 500 with dividends. That represents a compound annual return of 7.89% for the composite vs. 4.51% for the S&P 500 with dividends.
The dominant theme in 2016 was to expect the unexpected. This refers not only to the U.S. presidential election but also to the Brexit vote which took place in June 2016. The actual outcomes were viewed by most polls as highly improbable and very negative for the stock markets if they occurred. Well, the polls were wrong and so were the predictions about the effects on the stock markets. While there was an immediate post-Brexit sell-off of approximately five percent, markets were higher in the aggregate within a month. With respect to the U.S. presidential election, the overnight futures markets were down sharply following the announcement of the Trump victory only to rally sharply the following morning and throughout the balance of the year. As a firm, we received more than a handful of phone calls questioning whether a dramatic asset allocation shift was in order in response (or preemptively) to these important macro events. Our answer is that we make no attempt to position portfolios in response to macro events; either preemptively or subsequent to. To do so would be an attempt to divine the unknowable and thus a waste of our time and research efforts.
Significant contributions to last year’s returns came from a variety of securities. Our investments in the distressed debt of oil & gas exploration companies and gas transport pipeline companies performed exceptionally well; some returning in excess of 50%. Other important contributors referenced in last year’s letter include Valmont Inc. (+33%), Colony Starwood Homes (+29%), Flowserve Inc. (+16%) and MGIC Investment Corp. (+15%). We also continue to hold and own well-managed and valuable franchise companies such as Berkshire Hathaway and the Bank of New York. While not deeply undervalued, our conviction in the durability of their respective franchises and their capital allocation decision making gives us confidence that at current prices, future returns should be satisfactory.
In 2016 we established or substantially increased several positions. Specifically, Calgon Carbon was increased and two manufactures of generic drugs- Teva Pharmaceuticals and Mylan N.V.- were added/increased. Calgon is primarily engaged in applying activated carbon technologies to