Dear Partners,

For the month of August, Caravel returned +3.59% compared to +2.91% for the benchmark (+2.72% for the S&P 500 & +3.10% for the SPTSX). This brings year-to-date total net return to +10.81% for the fund and +14.74% for the benchmark, respectively.

I am fresh off back-to-back conferences over the past two weeks, meeting with both existing and prospective energy and mining companies for our portfolio in Toronto and Colorado, respectively. As such, August’s letter is coming in just under the wire. Fortunately, I have had a plan for this letter for some time.

August 31^st, 2026 marked ten years since Caravel first opened its doors to clients and began operations. It’s been a remarkable decade, and we count our blessings every day for the opportunity and responsibility we have been given. We are fortunate that many of our clients have been with us since the very beginning. All told, we would say we have met our stated goals over this period. For newer readers, I will provide a brief refresher before getting into the subject of this month’s letter.

Caravel considers itself an absolute return fund. Over the long term, we target net annualized returns of 15% or more, with low absolute volatility and a low dependence on stock market returns (also known as ‘beta’). Since inception, we have delivered 15.03% net annualized returns with a standard deviation of 8% (vs. 15% for the S&P 500 & 13% for the TSX), and a beta of 0.1. To my grandparents, I promise I will explain these terms tonight at dinner if you are interested, and to anyone else wanting an explanation, please give me a call any time. For the sake of brevity, I will assume everyone else knows what these statistics mean.

A 15% annual rate of compounding equates to a doubling of your money every five years. We have thus delivered a ~4x of our original investors’ capital, and hope to deliver at minimum another 4x over the next ten years. However, we will never take what we assess to be unnecessary or irresponsible risks, including leverage, speculation, greed, or hope, in order to achieve these goals. As the saying goes, hope is not a strategy. We would rather fail responsibly than succeed by the wrong means. This does not mean we will never lose money over the course of a month, or even a year, as such outcomes must be accepted as possibilities in pursuit of 15+% returns over the long run. What we can assure is that we will always employ our long-developed tools of risk management and capital preservation to mitigate losses along the way. We have written at length in past letters about how we do this, but again, please reach out to hear more about them. As holders of over 20% of the fund’s units, we will continue to manage the capital as if it were our own, because it is.

To commemorate ten years in business, I drew inspiration from one of my favourite personal development books. I hope you enjoy.

Caravel’s Ten Investing Lessons for the Next Decade (And Beyond)

1. Compounding is the magic, but patience is the trick.

Warren Buffett’s right-hand man for nearly his entire career, the late great Charlie Munger, had a famous piece of wisdom for the average person – you can get rich slowly, or stay poor forever. His meaning can be well understood through the lens of Mr. Buffett’s own wealth over time. The Oracle of Omaha first became a millionaire in 1962. Today he is worth an estimated $145 Billion. Of course, he had income and other sources of funds to reinvest, which he did continuously over the intervening years. Still, even if he had never invested another dollar from 1962 onwards, that astonishing growth represents a 20% annual rate of compounding over the last 64 years. Mr. Buffett is the greatest investor of all time. If instead he only achieved Caravel’s historical average returns over that period, his initial $1 Million would be worth a paltry $8 Billion today (the extra 5% per year really adds up over the long run). The point is this: for most people, investing is an exercise in patience, discipline, and sacrifice. We believe in a balanced approach – enjoy your life today. The time you have with your family and friends is fleeting, and maximally delaying all gratification and joy is no way to live. But, invest with discipline, consistency, and patience, and the results can truly change your life. Lastly, be incredibly wary of anyone promising you fabulous wealth without the key ingredient of patience.

2. Control is an illusion.

Investing is a profession that often selects for a certain type of personality. The analyst resumes I read typically tell stories of people who are highly analytical, intelligent, competitive, conscientious, and above all, goal-oriented. In our opinion, the mistake people often make is viewing goals as outcomes, especially specific outcomes over short time horizons. The better approach is to be goal-oriented in your investing process. The market is made up of many smart people, machines, business cycles, geopolitical developments and risks, acts of God, and other factors that influence security prices over time. For the most part, these forces are out of any one investor’s control. Relinquishing any illusion to the contrary is necessary not only for an investor’s long-term success, but also for their sanity. Focus on honing your process. Make the best decisions you can with as much and as good information as you can gather, analyze, and understand. Learn from your mistakes and how to minimize their cost, but don’t try to eliminate them. You are never as good (or bad) as your best (or worst) individual outcome.

3. Failure is guaranteed.

To illustrate this, I will paraphrase two people I greatly admire.

At a 2024 commencement speech at Dartmouth, Roger Federer imparted much wisdom from his remarkable life and tennis career to a crowd of newly minted graduates. Federer won 20 majors, 28 Masters 1000 titles among 103 ATP tour titles, and gold and silver medals at the Olympics. His professional record was 1,251 wins and 275 losses, good for an 82% win percentage. These accomplishments amount to one of the most decorated tennis careers of all time, and for my money still the greatest to ever play the sport. But, despite his greatness and sheer dominance relative to his competitors, Federer only won 54% of the points he played. “When you lose one out of every two points on average, you learn not to dwell on every shot,” Federer said eloquently.

Ken Griffin, founder of Citadel, is one of the most successful hedge fund managers of all time, and sings from a similar song sheet as Federer. Mr. Griffin has said publicly that his average portfolio manager is right in only 53% of their stock picks. “What a humbling job,” he said. We agree.

If relinquishing control is about focusing on your process, rather than any specific outcome, then accepting failure is about perseverance. Yes, you will fail. Staying in the investing business requires that you must neither dismiss your failures outright nor let them dissuade you continuing to try.

4. Professional investing is a team sport.

Like any company, an investment fund’s success is driven in large part by its people. Our approach to managing Caravel has been heavily influenced by both Glen and my experience as athletes growing up. Our philosophy is simple – there are many ways a person can contribute to the success of the team. As much as we enjoy discovering and implementing successful ideas and strategies, the truth is this business requires much more than that. Having people on your team who are willing to go above and beyond their job description to fill whatever role is most needed by the business at any given time has been essential to our success over the years.

I spend as much time as I can taking calls from people trying to break into the investing industry. Fellow University of Western Ontario graduates, friends of friends, relatives of clients and colleagues, and strangers who reach out over Linkedin. I try to tailor my input based on who I’m talking to, but when asked for advice, I never miss the opportunity to suggest the following: demonstrate that you can be a team player, and then do it. It never goes out of style.

5. Trade the market you have, not the one you want.

When the facts change, change your opinion. Don’t be rigid in your thinking – leave your mind open at all times. Every day we ask ourselves the question, when faced with the characteristic gyrations in the value of our portfolio, ‘has anything changed?’ Sometimes the answer is yes. We’ve seen three major wars, a global pandemic, a massive inflation spike, and countless other phenomena that have changed our thinking over relatively short time horizons. At the micro level, we have interests in enough companies that there is relevant news out every week if not every day. The best we can do is to continually update the software of our brains in order to incorporate as much of this information as possible while filtering out the noise. As managers, we think it would be better to stick our heads in the sand, buy index funds, and enjoy the beaches of the Bahamas than to fall so in love with any idea or theory that it becomes inflexible to change. We don’t believe the market is always right, or we wouldn’t be fund managers. But the market can stay ‘wrong’ longer than you can stay in business. Don’t fail because you couldn’t burn your thesis – another will emerge from the ashes.

6. You can’t put a price on your name.

When we retire, we’d rather be remembered as trustworthy by our clients, colleagues, and friends than for any other attribute. We encounter a great many successful, wealthy, and intelligent people in our business. Many of these happen to also be genuinely good people, but many are not. We would prefer to leave with a clear conscience and a few less dollars in the bank than enjoy success that we had to lie, cheat, or steal for. At the end of the day, no amount of success is worth your good name. 

7. Trust your instincts (when analysis can’t help you).

Sticking with the intangibles, there is a component to this pursuit that requires deep and frequent introspection. Ask yourself what people’s motivations are, and you can often anticipate in which direction their exaggerations, half-truths, and falsehoods will cut. If something seems too good to be true, it probably is. If someone gives you a bad feeling, trust it.

In our experience, however, instincts alone are not a sufficient means by which to produce long-term investing success. A stock, sector, or management team that gives us a ‘good feeling’ means our work has only just begun. Do the math, question your assumptions, and think about what could go wrong as well as what could go right. Trust your intuition to get yourself started on a new idea. But if someone gives you the wrong feeling, no amount of math should change your mind. Trust us – it’s much better to miss out on a success than to catch a loser from this initial condition.

8. Don’t overstay your welcome.

Few texts are as sacred to our industry as Reminiscences of a Stock Operator by Edwin Lefèvre. At one point, the book’s main character quotes a member of the Rothschild family as follows, with regards to the latter’s investing success:

“I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.” 

How do you know when to sell your winners? We think a useful analogy is this – always leave the party while you’re still having fun. If we can capture the middle 70% of a stock’s move from trough to peak, we will drive it to the nearest port and send it off to its next owner with gratitude in our hearts and no regrets. We don’t know when a stock will peak, but that’s the point. Before we enter a position, we have an idea of what we think it’s worth. Our estimations often happen to be too low when we look back on them. But if a stock captures 95% of what we estimate to be fair value, we will sell it. This gives us a disciplined and repeatable framework to rely on throughout market cycles. In short, ‘higher’ is not a price target.

9. There are no bad assets, only bad prices.

Don’t confuse quality for value. Of course, it is wise to look for businesses that exhibit high quality. Strong management teams, resilient and growing cash flows, competitive moats and advantages, industry tailwinds, safe jurisdictions, and strong balance sheets, and clean cap tables are all desirable traits for a prospective investment. But a company that has all of these attributes, yet doesn’t meet your standards for expected forward returns should be left alone. A great asset bought at too high a price can, and often will be, a poor investment. Don’t let the fear of missing out drive you to abandon your investing framework when it comes to a specific stock or sector.

10. You never know what’s good for what.

Ok, this one is more of a personal life lesson, but can certainly apply to business and investing as well. This expression was passed down to me by my grandparents, who originally immigrated to Canada as refugees after they were forced to flee Soviet occupation in their native Hungary in 1956. They were fortunate to end up in Toronto and worked tirelessly to create a wonderful life for themselves, and for their children and grandchildren afterwards.

When I came to Caravel, I had just finished a brief (read: failed) stint at Brookfield and was looking hard for another job. Despite my efforts, I fell short in countless applications and interviews. Banks, pension funds, consulting firms. The rejections came from far and wide. Eventually, I caught wind of a potential opportunity at a small Bahamas-based hedge fund that I had never heard of. After a 6-month-long courtship, I was able to convince the fund’s founders to give me a shot as an analyst.

I started by learning how to settle trades and how the partners like their coffee. Remembering Lesson #4, I became a serviceable barista within a few weeks. Gradually, I started to get some more rope and was given chances to show what I could do. My responsibilities grew quickly in scope and scale, and I became a partner myself in 2024 at the age of 28. I say this only to remark on my incredible good fortune to have failed at so many other attempts beforehand – nothing I was looking for could have ever come close to the opportunity I eventually received. You never know what’s good for what.

I would like to thank Glen and Jeff for their faith, wisdom, and friendship over the years. 

Glen and I would like to thank our clients for their unwavering support. We appreciate the honour of working for you every day, and we look forward to the next ten years of partnership together.

Sincerely,

Jack and Glen

Managing Partners

Caravel Capital