The document provides an annual letter summarizing the performance of an investment portfolio in 2016, noting returns of 10.4% for the year but that the portfolio underperformed market indexes. It discusses several positions, including adding shares of easyJet after its stock price declined on Brexit uncertainty, exiting positions in Potash Corp and Aéroports de Paris, and initiating a new position in Bolloré due to its complex ownership structure hiding its true value. The outlook expresses that markets appear fully valued currently but that the portfolio has cash available from a client's home purchase to deploy into new investment opportunities as they arise.

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January 30, 2017
Dear friend:
What I predicted last year as I wrote the concluding remarks of my annual letter has come to pass. I admitted that I
could no longer devote as much time analyzing businesses as I did in the past. As a result, I tended to be less
concentrated in most of my new purchases, “diworsifying” and diluting my best ideas in the process. I knew it was
not a recipe for outsized gains in the long term: 2016 bears testimony to my prediction.
First, when the market corrected in February, I bought a few shares of IBM. The price offered a considerable margin
of safety but I had no cash left, so despite the subsequent appreciation, the position was so small that it did not
impact the portfolio’s performance.
Second, I had identified many good businesses available at attractive prices (usually at very low multiples of their
steady and increasing free cash flows). Each time, I allocated a derisory sum to my initial purchase with the hope of
doubling down (or even tripling down) at some point down the line. While this technique had served me well in the
past during periods of increased volatility, no correction lasted very long in 2016 and I had found myself unable to
add to my initial position at a cheaper price almost every time I tried to invest in a new company. Instead, I had
seen my efforts in learning about a business wasted time and time again as I had witnessed their stock prices jump
dramatically shortly after committing a paltry sum to the idea, leaving me to buy a few more shares at a higher
price and then scramble for new ideas. Most often, the position was too small to meaningfully impact the
portfolio’s performance.
Performance review (unaudited)
In 2016, the overall stock portfolio returned 10.4%, net of commissions on a pre-tax and pre-social charge basis and
excluding dividends, bringing the average annual returns as of December 31, 2016 to 16.2% 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 10.4% in 2016, net of commissions on a pre-tax basis and excluding dividends, bringing the
average annual returns as of December 31, 2016 to 12.5% 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.
The CAC All tradable ended 2016 4.8% higher than a year ago at 3 769.25 while the S&P 500 ended the year 9.5%
higher at 2 238.83. Still, in euro terms, the S&P 500 gained 13.0%, meaning I would have been better off buying the
index.
Sterling-denominated holdings accounted for approximately 25% of the portfolio at year-end. Though the fall of the
British currency may have acted as a drag on performance, I must admit that I have fared rather badly so far when
it comes to my investments in the UK. Undeterred, I added a new British holding to the portfolio in 2016.

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easyJet: Brexit gave a golden opportunity at an inopportune time
Recounting how he would get familiar with an industry in his early years, Warren Buffett said he would talk to
everybody from customers to suppliers. He would ask every CEO, “If you could only buy stock in one [company in
your industry] that was not your own, which one would it be and why?“ After a while, he would get a fairly good
picture of that industry by piecing the information together.
In the same way, it doesn’t take long for anyone in the aviation business in Europe – at least in Paris in my case – to
figure out which airlines are so remarkable that they stand out from the pack. Actually, one doesn’t have to work in
the aviation business to know about these low cost carriers that keep attracting passengers year in and year out
while being a thorn in the side of incumbents.
Despite Warren Buffett’s skepticism about the economics of the airline industry, it didn’t take me long after I joined
an airport company in 2011 to figure out that easyJet would make a great investment at the right price. Not only
did everyone talk about easyJet but also the fundamentals looked great:
easyJet is a cost leader even among low-cost carriers,
easyJet is pragmatic: unlike national flag carriers, it is not nation-centered, developing routes from and to
its country of origin, but truly European and developing routes where it makes the most business sense,
easyJet offers flights from and to major airports: unlike Ryanair which has focused on growing in
inconvenient secondary airports, easyJet has the enviable position of operating from easily accessible
major airports where people are used to travel,
easyJet offers flights that increasingly appeal to business executives.
So, after less than a year in my job, an investment in an amazing airline company that was both growing rapidly and
trading at less than 10x earnings presented itself. Still, I wanted to test easyJet for myself and waited till a trip to
Venice in late 2012. I was delighted as a customer but I had never bought a single share as its stock price had
perked up slightly by the time I got back to Paris.
Needless to say, I had been quite distressed at not being a part owner of this extraordinary business as I saw it
grow profitably and kept learning about it as part of an assignment for my employer.
At long last, on the 23
rd
of June, it looked as if Brexiteers felt sorry for my plight and decided to grant me an
opportunity to initiate a position in this European airline at a rock-bottom price. I did not ask for it. I did not expect
it. Actually, I was not even contemplating buying stocks as my one and only client was buying a home and
budgeting for his home improvement project.
Mr. Market believes that the withdrawal of the United Kingdom from the European Union threatens easyJet’s
rights to fly freely across Europe. I believe otherwise:
Considering the enormous outlays involved when building infrastructure ahead of traffic, some players’
interests are already aligned with those of the few airlines that have a proven track-record of bringing
growth,
An airline does not have to be from the European Union to operate in Europe as demonstrated by
Norwegian and Swiss carriers and it just happens that easyJet is not solely a British airline since it also has
an air operator's certificate in Switzerland,

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easyJet is seeking to acquire an air operator certificate in another European country and it is bound to
successfully acquire one as it is in talks with a single market but multiple countries, each of which has its
own problems to attend to. Like in Albert Tucker’s prisoner’s dilemma where the prisoners do not
cooperate even if it is in their best interest, at least one country will find it rational to welcome easyJet
whether or not this is in the best interest of the European Union’s member states taken together. If you’re
not familiar with the prisoner’s dilemma, picture two gangsters fighting over the wheel with the police in
hot pursuit: the latter’s job is made a lot easier by the inability of the two gangsters to present a united
front.
Potash Corp: exited the position at breakeven
Last year, I wrote about how tricky it was to invest in commodities and as I was building a position in a fertilizer
company, I conceded that I might have been speculating instead of investing intelligently. A foolish investment it
was. Potash Corp looked cheap because it generated steady streams of cash flows by selling potash and other
fertilizers while being a low cost producer. Unfortunately, I failed to realize that it was no longer at the lower end of
the cost curve after the Russian ruble had depreciated steeply against the Canadian dollar. What’s more, some
producers look even willing to sell at a loss. Since I was no longer able to forecast a worst-case scenario I was
comfortable with, I decided to exit the position at breakeven even though Potash Corp might still look cheap.
Union Pacific: out of the mouths of babes and sucklings
Last year, I hinted at my interest in railroading. My long-time investment in Berkshire Hathaway had already made
me aware of a rail renaissance but because my daughter enjoys stories of steam engines and loves building tracks
for our miniature rolling stock to haul freight around the home, I started to read more about trains and realized
that trains gained market share from trucking because they are cheaper and trucks sometimes don't have enough
drivers.
Still, I had a concern about how long this cost advantage would last with the advent of the driverless truck.
According to the American Transportation Research Institute (ATRI), the average cost per mile by truck would be
about 1.7$ (2014 figures), of which 35% is related to the drivers.
At the same time, railroads currently enjoy a 10-30% cost advantage over trucking but automating the locomotives
won't make much of a difference when we have 2 engineers for 200 double-stacked containers.
Considering that driverless vehicles were even likely to solve some of the traffic congestion issues we're currently
facing, I kept wondering if trucking could pose a threat to trains once we get rid of human drivers by replacing them
with R2 or BB-8.
As a result, I limited my investment in Union Pacific to 30 shares, way less than I had invested in Potash Corp. The
class I railroad was available on the cheap a year ago. I was too hesitant but a baby girl in our home apparently
knew better.
Arkema: the leadership is a safe pair of hands
Arkema is my first equity investment and has rewarded my client handsomely. I exited the position – probably too
early – this year as my client needed some funds but would have been happy to stay because of the company’s
incredible management.

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I have much to say about Arkema but I do not want to use paper and ink to talk about a former employer. One
thing that’s worth mentioning though: Mr. Thierry Le Hénaff, which I used to refer to as Mr. Touchdown and Lots of
Home runs has led Arkema admirably. He knows the business well, he successfully turned the company around
after it spun off from Total, he delivers what he promises and, above all, he is a great capital allocator. If he were a
portfolio manager, I would call him a value investor and he sure would hit lots of home runs!
Aéroports de Paris: exited the position entirely
Just like Arkema, I will not comment on Aéroports de Paris. It was one of the largest positions in the portfolio as we
began 2016. I exited it entirely so my client could buy a home.
Bolloré: bought at rock bottom
I feel I have to disclose this position to all of you as I had discussed it with a few people this year. One of them had
already told me about Bolloré SA in the past but I felt discouraged to see that its stock price had advanced quickly
and thought at the time that the shares were overvalued as I only had a quick look at the P/E ratio. It was a hasty
conclusion.
Most of you must already be acquainted with some of the shrewd investments Mr. Bolloré has made so I am not
going to paraphrase what you can otherwise read in newspapers. However, the price decline that Bolloré had
experienced for a whole year had not gone unnoticed. Instead, this had revived my interest in this holding
company. My jaw dropped when I found out about its high level of circular ownership masked by its intricate
corporate structure. In short, a quick look at the P/E ratio did not tell the whole story: the shares just appeared
dearer that they actually were.
I was late to the party but I now own some shares of Bolloré.
Outlook
At the end of 2016, the largest positions in the portfolio (weighing more than 5%) are, in alphabetical order,
AerCap, Apple, Berkshire Hathaway, Coca Cola, ITE Group, Microsoft, Oracle, Rolls Royce and VanEck Vectors
Morningstar Wide Moat ETF. As explained in my previous letters, I am outsourcing some of my investing decisions.
As a result, a third of the portfolio is now passively managed.
It looks as if Mr. Trump’s victory in the presidential election in early November 2016 has sent stocks on a tear. At
the time of writing, my opinion is that the market is fully valued. As a conservative investor, I never feel excited
after such a market rally and would be tempted to sell some stocks and hold a sizable amount of cash. At the same
time, I have no way of predicting what the markets will do in the coming months. So I think it wise not to try to
time the market. There is no point in selling a position simply because its stock price has appreciated. As long as
stocks trade within a reasonable range in relation to their intrinsic business worth, it would be foolish to sell them,
incur the associated capital gains tax and have no opportunity to redeploy the resulting cash position.
True, it was unfortunate that I did not have enough cash to buy more shares of IBM when they were so cheap that
an investment in IBM had become a no-brainer. I also believe that I should have rebalanced part of the portfolio so
the dozen ideas identified in 2016 could have meaningfully impacted the portfolio (which is to say that it takes
more than just stock-picking abilities to be a good investor: I need to hone my portfolio management skills as well).
However, I cannot really say that I am without any dry powder this year. My client is almost done paying for the
new furniture and all the improvements he is making to his new home. Since his budget allowed for a wide margin

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of error, the portfolio is sure to have some new money soon and it falls to me to quickly unearth new investment
ideas to deploy the expected inflows.
Though 2016 had brought a few political surprises, Europe faces a series of critical elections in 2017. The road
ahead may be bumpy but, as usual, we will focus on business quality and valuation without paying too much
attention to which way the political winds blow. Instead of trying to guess who will win the election or how many
rate hikes to expect in the year, it makes more sense to find businesses that are worth investing in no matter what
2017 brings. This holds true for what 2018 will bring too!
Sincerely,
Bertrand LUC