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info@crystalcovecapital.com | (949) 355-3034
January 16, 2015
Inception – December 31, 2014
Crystal Cove Capital Management, LLC 11.3%
S&P 500 Index 10.3
Dear Investor,
From October 14, 2014 (the inception date of Crystal Cove Capital) to December 31, 2014
investors experienced an 11.3% return compared to the 10.3% return from the S&P 500.
While I’m pleased with the modest outperformance relative to the S&P 500, I present a
significant caveat with the above results: short term results are extremely difficult to predict.
Benjamin Graham prudently commented on this phenomenon: “In the short run the stock
market is a voting machine, but in the long run it is a weighing machine.” While there are
bound to be periods of subpar quarterly performance in the future for the fund and volatility
around results, this does not concern me. My sole goal and focus is to compound your
capital and my own capital at the highest risk adjusted rate of return over a long, multi-year
timeframe. Trying to mitigate volatility or consistently outperform in the interim is likely to
detract from that goal.
The Advantage of Being a Long-Term Investor
If one examines the current landscape of investors, you will find that institutional investors
dominate. This type of investor includes large pools of capital such as insurance companies,
pension funds, and university endowments. The behavior of institutional investors and the
funds with which they allocate money is primarily driven by the economic incentives of the
people running the funds. Having a significantly negative result in a quarter or a given year
can lead to unemployment or a meaningfully negative impact on compensation. While there
is nothing wrong with having a short-term mindset, this approach makes it harder to
maximize long term returns due to competition and taxes. In terms of competition, the past
decade has seen a proliferation in strategies that seek to maximize short-term returns such as
hedge funds with event driven strategies or debt funds that attempt to limit volatility. This
increased competition makes it tougher for short-term funds to deliver performance. In
contrast, there are much smaller sums of money dedicated to permanent / long-term capital
vehicles creating less competitive pressure. Besides competition, short-term investing is
challenging due to the unfavorable tax code. Short term returns (securities held for one year
or less) for taxable investors are taxed at an investor’s marginal tax rate rather than the lower
long term capital gains tax rate. To highlight the impact this difference can have on long
term returns, I give you the following example: $100,000 invested at a 20% rate that incurs

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short term capital gains of 35% each year will result in $13 million in 40 years. Alternatively,
$100,000 invested at 20% that only incurs a long-term capital gains tax of 15% in 40 years
will result in $125 million. A similar short-term capital gain tax penalty applies to some
volatility mitigating mechanisms, such as shorting, which has unfavorable short-term tax
treatment regardless of the length of the holding period. Overall, being a long-term investor
creates a meaningful competitive and tax advantage.
A Mispricing in Today’s Market
There are specific business models that are particularly adept at driving good long-term
equity returns that I believe are currently underappreciated by market participants.
Specifically, I’ve spoken with many market participants that are averse to companies with
leverage. The economic downturn in 2008 with the coincident freezing of credit markets
severely penalized equity investors in highly leveraged companies that were cyclically or
secularly challenged, had refinancing maturities, or broke their covenants. This left a mark
on many investors leading them to avoid companies with high or even a modest degree of
leverage. While this avoidance of leverage can be prudent in many cases, there are cases in
which leverage can be enormously beneficial to equity investors with limited additional risk.
One such case is a business that displays monotonically increasing cash flows. In this
scenario, the growing business naturally delevers without having to pay down debt and the
utility like nature of the cash flow minimizes default risk during economic recessions. One
industry that displays such characteristics is the cable industry: it has a subscription-based
cash flow stream that is secularly growing as broadband penetration increases around the
world. Competitive dynamics are relatively benign, especially with broadband, given that it
tends to be a monopoly on high speed internet.
One cable company that I think offers an exceptional risk-reward today is Liberty Global.
Liberty Global is the largest European cable company with a presence primarily in the strong
Northwestern European economies. Liberty Global’s current pre-tax cost of debt is a mid
single digit yield driven by low interest rates as well as low spreads driven by investor
preferences for low volatile, fixed interest securities. The company’s equity is priced at a low
double digit yield. The company’s growth is driven by increased penetration as well as
pricing power. On the cable TV side, the business has been increasingly differentiating itself
from competitors through innovation including its advanced Horizon TV platform, which
offers viewers the opportunity to watch their shows any time, on any device. On the
broadband side, Liberty Global has a decisive advantage vs. its main competitor DSL. DSL
can only get to 40-50 Mbps speeds even with upgraded VDSL infrastructure whereas cable
can currently get to 250 Mbps. The future looks to increase the advantage that cable
companies have as Liberty Global can substantially increase its speeds with limited additional
capital expenditures. On the other hand, rival telecommunication companies have to spend a
substantial amount of capital to invest in a competitive fiber to the home (FTTH) product.
Thus far, these big investments have led to poor returns on capital making telcos generally
loath to increase their FTTH footprint. Given increasing consumption of over the top video

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(e.g. Netflix, Amazon Instant Video), there is increasing demand for the high speeds that
cable and FTTH can provide.
The management team at Liberty Global is extremely strong and is led by Chairman John
Malone, who has a 40 year track record of creating outstanding value for shareholders. He
has been particularly successful at utilizing leverage to maximize equity returns. Given the
spread between debt yields and equity yields at Liberty Global, Malone is essentially
exploiting debt investors who are investing at very low interest rates and short-term equity
investors, who are willing to sell stock at current prices. Indeed, much of the free cash flow
from the business has been used to repurchase shares over the last decade and management
has signaled that they will continue to aggressively repurchase shares. Liberty Global is
extremely adept at limiting risk posed by its leverage which usually fluctuates between 4x –
5x Debt / EBITDA. It limits leverage risk by terming out maturities (the vast majority of
debt is due beyond 2020), having primarily fixed interest rate debt to guard from interest
rate risk, hedging currencies so there isn’t a mismatch between debt owed and cash flows
generated, and structuring debt at the operating company level that is non-recourse to the
parent and other operating level entities to guard from cross-default risk. This prudent use of
leverage has dramatically increased equity returns in the past and will continue to do so in
the future. From this point forward, Liberty Global likely has the prospect of compounding
its share price at an upper teens to 20% rate over the next 3-5 years resulting in potentially
significant above average market returns for an extended duration.
Given that it’s the beginning of the New Year, please be on the lookout for your tax
statements that you will be receiving directly from the custodian. I want to thank you for
your business and entrusting me with your capital. I welcome referrals to any potential
investors you think may be interested in our product. Please contact me if you are interested
in our managed account services.
Sincerely,
Faisal Ahmad
Portfolio Manager
Crystal Cove Capital Management, LLC
949.355.3034
faisal@crystalcovecapital.com
http://www.crystalcovecapital.com
Opinions are current as of the date of this commentary but are subject to change. All information provided is for information purposes only and should not be considered as investment
advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representations or warranty is made concerning
the accuracy of any data presented.
Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so
investors may lose money. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the Form ADV,
which can be obtained from Crystal Cove Capital Management, LLC (faisal@ccovecap.com) and should be read carefully before investing. Investments are not FDIC insured, nor are
they deposits of or guaranteed by a bank or any other entity, so they may lose value. Crystal Cove Capital Management, LLC performance is computed on a before-tax time weighted
return basis for managed accounts and is net of all paid management fees and brokerage costs and is inclusive of reinvestment of dividends and earnings. Performance reflects investment
performance of accounts managed by Crystal Cove Capital from the time at which cash and securities from clients were fully invested in cash and securities chosen by Crystal Cove
Capital Management, LLC. Performance figures are unaudited. Performance of individual accounts may vary depending on the timing of their investment, allocation to different
securities, the effect of additions, and the impact of withdrawals from the account. Market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an
index. The S&P 500 index reflects reinvestment of dividends. Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as
more fully described in the Form ADV. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. Performance data is not
annualized.