1

Feb 18, 2014

2013 Annual Partnership Letter

Dear Partner,
2013 was an eventful and exciting year for our Firm on many levels. We ended on a high note,
generating a 17.1% return for Q4 and a 7.9% return for the full-year 2013. This pales when compared
with the charging S&P 500, which increased 10.5% in Q4 and 32% for the year, but was respectable
given our low net exposure of around 30%. In Q4 we also:
Made significant business-building and performance strides at InfuSystem under the leadership
CEO Eric Steen, who started less than a year ago. By years end the Market also took notice,
pushing the shares up to two-year highs.
Announced our first inverse-activist campaign: shorting the stock and exposing the truth about
Odyssey Marine Exploration. Our efforts clearly demonstrated the appalling lack of
transparency by which the Board and management continues to run the Companys affairs. A
now far more well-informed investor base essentially forced the company to back away from an
ill-promised capital raise. The stock has declined over 30%.
Decreased operating expenses by 40% at Lucas Energy year over year and completed the first
on-budget well in the companys history. Though Lucas has proved Eagle Ford oil reserves over
3X the market capitalization, the challenging capital markets for micro-cap oil and gas
companies (the sub-index declined 25% in 2013) has made it prudent for us to seek increased
scale. We have engaged a financial advisor to investigate opportunities.
I am also pleased to note that I joined the board of Sevcon, Inc. in December, following Mario Gabellis
nomination and recommendation of my candidacy. This stock has doubled in the two months since
for which I do not claim credit but it does highlight the power of our activist approach to investing.
2013 was also a year of change. Specifically, this letter marks the end of my solo career as the only fund
manager for Meson Capital. Effective Jan 1, 2014 Aron English, an accomplished researcher and
investor, joined the Firm as my Partner and Director of Research. Together we have a highly
differentiated, far more integrated approach to investing. For five years, Aron worked alongside Richard
Fullerton at RBF Capital, one of the best long/short, small-cap investors in the world. Aron served first
as an analyst and then as Director of Research for the last 3 years.
It has been a remarkable five years since February 2009 when I founded Meson Capital Partners with
your strong and ever loyal support. We faced far more improbable situations both virtuous and
painful than one could have expected. I finish my solo track record with a net return of 194% vs. 165%
for the S&P. And yes, we had a few setbacks and far more volatility along the way that neither Aron nor
I intend to re-live.
2

More important, this past year marked a shift in momentum for us after a challenging last several years
which have accelerated the development of the future direction I delve into below.
We recently finished version 1.0 of a new investment research platform that I had been developing for
nearly two years. Between myself and my contracted software developers, we have invested more than
10,000 man-hours to create a data-driven platform that can map out all the people, companies,
industries, and funds in the ecosystem that is the equity market.
Think of it this way: investment checklist meets newly possible big data technology. Our combined
efforts will allow us to budget our time far more efficiently when sourcing and researching investment
ideas. At the same time, it will help reduce blind spots and avoid the endemic adverse selection biases
attendant with traditional investment sourcing techniques. By combining our operational activist toolkit
with superior investment sourcing, we intertwine multiple competitive advantages, each with
tremendously high barriers to entry.
The remainder of this letter reflects on how we got here and describes our process.

Value Investing is Dead, Long Live Value Investing!
But first, a metaphor
An individual has been described by a neighbor as follows:
Steve is very shy and withdrawn, invariably helpful but with little interest in people or in the
world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for
detail.
Is Steve more likely to be a librarian or a farmer?
The resemblance of Steves personality to that of a stereotypical librarian strikes everyone
immediately, but equally relevant statistical considerations are almost always ignored. Did it
occur to you that there are more than 20 male farmers for each male librarian in the United
States? Because there are so many more farmers, it is almost certain that more meek and tidy
souls will be found on tractors than at library information desks.
-Thinking, Fast and Slow, Daniel Kahneman
And to bring it closer to home
An investment idea has been described by a colleague as follows:
XYZ is a small public company with promising sounding high-tech computer hardware with a
huge consumer market. They have a big contract with a huge Company and a Nobel Laureate as
their science advisor. If they can just capture 10% of that market, its a 10-bagger stock!
If a random company at this stage has a 50/50 chance of success is XYZ a long or a short?
3

The resemblance of Company XYZ to a rapidly growing startup transforming the enormous
market of consumer electronics strikes investors immediately but equally relevant statistical
considerations are almost always ignored. Did it occur to you that there are 20 private computer
hardware companies at a similar stage of development for every 1 public company? Why is XYZ
public?
Is this a random sample or a biased one? Did XYZ go to the same highly competitive private
sources of capital: Venture Capital, Private Equity, as all the others did? Did they get turned
down because they in fact have no viable technology? Did they then decide to go public via a
reverse merger with little regulatory oversight and raise money from unsophisticated retail
investors rather than the well-connected, technically adept VC investors that turned them down?
Given this strong adverse selection bias: XYZ is almost certainly a short with a near zero chance of
success. Indeed, this as well as challenging industry dynamics in the computer hardware
business have led to a -13% CAGR for the industry over the last three decades.
This is a phenomenon that is making it increasingly difficult for value investors who source their
investments through conventional means: linear value screens (low P/E, low P/Book, etc.), and to a
lesser degree sharing ideas with colleagues. Though these tools were once an excellent source of
ideas, there is now a substantial adverse selection bias as they have become freely available and broadly
utilized. Why is that?
My summary is that there are two ways you see the world: 1) The light coming through your eyes, and
the lesser appreciated: 2) The fact that you were there to see that light. The latter is otherwise known
as statistical considerations (technically: Bayesian Prior Probability), selection bias, or the Lemon
Problem (i.e. why would someone sell you a new car for 50% off? Something must be wrong under the
hood)
The reason these conventional investment search methods no longer work well is because they were
effective in the past and created a large, self-defeating following. In the 1960s a low P/E screen (if you
could even run it as the data was hard to come by) would return lots of perfectly good albeit boring and
neglected companies. Now, a low P/E screen returns almost entirely uninvestible junk: Chinese reverse
merger frauds, rapidly dying businesses, highly levered risky companies, etc. Any legitimately cheap and
good company is always a great investment but when it hits a low P/E screen, it gets rapidly bid up in
price by the many people (and algorithms) constantly following the screens. Shared ideas on online
forums, newsletters, SumZero, etc. also can quickly get crowded and bid up in price though the effect is
less severe. This is all the natural (and desirable) effect of competitive markets: profitable activities that
can be copied, will be. Of course there are exceptions to this rule when everything becomes cheap
during market crashes but we are stock pickers, not market timers.
I am all too familiar with these problems. As a deep value / distressed investor I was in heaven in 2009
when plenty of great assets were falling from the sky babies being thrown out with the bathwater.
There were far more high-quality distressed ideas than capital to rapidly bid them back up to fair value
then and we capitalized accordingly. Then, what I noticed in 2010 and 2011 as the world had recovered,
the quality of the businesses coming out of the deep-value screens that I would source ideas from
4

became more challenged. So I soldiered on and turned over more rocks, looking for the higher quality
assets with what appeared to be more downside protection after in-depth fundamental research and
invested there.
I always have a meteor hits the company risk I imagine for every investment to force me to think what
could be the craziest, most improbable seeming way to lose money, that only has say a 1% chance of
happening. The founder and CEO for 20 years of an oil company where he has all his net worth, could
be lying about the reserves to trained auditors? The board could violate their fiduciary duty and give the
company away to a customer for no consideration? Reputable board members could do nothing while
the CEO does no work and pays himself enormously? These situations all seemed so improbable, like
planning for a 100 year storm and yet they kept happening to me! That is the nature of selection bias at
work: even if you are a champion fisherman, if you are fishing in a pond that has been heavily picked
over for good fish, you are likely to snag some bizarre improbable inedible creature that has been
thrown back numerous times before.

Attempting to De-Bias the Investment Universe
How can we solve this selection bias problem that plagues conventional sourcing techniques? I have
observed most people do so by searching for larger, higher-quality companies. This is the easy way to
deal with the problem: avoid it! By not wandering out to the edge of the market: the cheapest stocks
that appear to have the most potential upside and looking a bit closer to the middle of the pack, the bias
effect is reduced considerably but it also blunts potential upside and increases correlation with the
market.
Not being one satisfied with merely avoiding problems, I took a first attempt at solving the problem with
activism. By first observing that the most frequent cause of the meteor attacks was due to poor or
corrupt management, we addressed the problem directly by replacing management and rebuilding
companies. There are now three companies that would almost certainly have been zeros today if not
for our efforts (HearUSA, InfuSystem, Lucas Energy). This is a highly promising set of tools we have built
but there is still a selection bias here that most activist are unaware of.
Activists (myself included) typically source ideas from incoming calls from disgruntled shareholders
complaining about the quality of the companys performance. This introduces a selection bias of
problem companies that are akin to a call to the fire station. First the activist needs to put out the
fires, then dry out the soggy wall paper and carpet, and then finally after this generally thankless job is
finished, can he get to building the business again where shareholders get excited (see: INFU stock
chart: April 2012 Feb 2014). So while this selection bias is less of a problem than the stock screen
bias, it still gives us an unwanted headwind, but we are aware of it now...


5

Solving the Bias Problem: There are No Shortcuts
So how do we solve these bias problems once and for all? The short answer is that as long as you are
searching for investment characteristics that many other people are looking for, you cant its endemic
to that search process. However, if you could invest in things that many other people are ABOUT to be
screening for, you could harness the bias and put it on your side. Dont screen for low P/E screen for
something that is about to have a low P/E
Aside from Ray Dalio at Bridgewater, who does this at a global macro-scale, I have not heard any
investor even conceive it possible to map out the entire machine that is the ecosystem of the stock
market. Most investors have a niche that they focus on and look for opportunities within that set of
perhaps several hundred stocks out of the universe of 10,000+ stocks in the US and Canada that a small
fund could invest in and move the needle.
So perhaps it might make sense that, just as Moores Law made the enabling computing technology low
cost, some problem solving software entrepreneur turned investor and corporate insider would develop
the tools to map it all out and then partner with a former Director of Research of the best small cap
stock picker ever, to figure out what types of things to look for. If the whole set of companies with their
quantitative and qualitative features of interest were mapped out and searchable directly, there would
be no selection bias. You could look for things that few others could search for directly: like Buffett back
in the 1960s hand-flipping through Moodys stock manual before anyone else had a computerized P/E
screen to compete with him.
As I mentioned, I have been working on a software project for the last couple years and have done just
this.
By mapping out all of the People (220,000 executives and directors back to 1996), Companies (33,000 in
the US back to 1991), Industries, and Sectors with their past performances and connections, we can
eliminate biasing effects by having the whole context available when sourcing ideas. The platform also
enables much more in depth searching as all attributes can be cross-referenced.
If the problem with obvious screens like low P/E is selection bias, the problem with subtle searches (ex.
History of Losses, CEO with litigation history with SEC, or Has Offshore Subsidiaries) is that there
are so many results for each because they are by definition, weak signals. Our database technology
allows us to cross-reference all these weak signals and just look for where they overlap: which indicates
that there is a strong signal of something interesting to spend our scarce research time on. i.e. any one
of the prior 3 examples might be innocuous and would return 1500 results, only 20 Companies have all 3
simultaneously: CEO with SEC litigation history, losing money nonstop, using offshore subsidiaries not
a guaranteed short but definitely a strong selection bias in our favor to look there.
We have so far mapped out about 100 value + catalyst concepts, composed of 400 weak signals that
indicate real change is occurring and a company will likely hit a conventional value screen in the next 1-3
years and be recognized by the market and bid up (or down on the short side). We are almost done
rebuilding our portfolio using these new tools.
6

Moving Forward with a First Principles Approach to Investing
I believe that most investing is done with a reasoning by analogy approach where people repeat a
pattern that has been profitable in the past. For example: focus on value screens (low P/E, low P/B,
etc.); buy stocks that are going up on the chart; buy companies with products you like. This is not a
criticism, as these patterns might even perform for a long time and represent the best simple solution to
solving the tremendously complex problem of investing. The drawback with this approach is that it is
hard to build a consistent and cumulative framework. If one pattern stops working (ex. Buy tech stocks
in the 1990s), its hard to know exactly why since digging to the root cause was never the goal to begin
with.
As an illustration, 10 years ago one could have bought GM stock because they liked their cars and
Boeing because they like their planes and yet one case was a Zero and the other a 5X. Similar businesses
in many ways but the key economic drivers below were understanding GMs pension burden on one
hand and Boeings global duopoly in the opposite direction both nonobvious key driving forces.
Since the start, we have adopted a different, first principles based approach more similar to the way
physics is taught, looking for the most fundamental drivers and building them up piece by piece.
Through many trials and pain, we have embraced this unavoidable complexity and torn apart the
components of investing, the markets, and capitalism one by one. We will never be finished but we now
finally have the key pieces in place to run a repeatable, continuously improving process while avoiding a
lot of the blind spots.
I think the timing is fortuitous, the market run up has left few, if any, easy dollars remaining for a
typical value investor. If the market becomes so competitive that it demands that investors create real
economic value to earn more than a nominal bond-like return, we would be content and well prepared
to outperform with our honed company-building activist toolkit and trouble-avoiding comprehensive
sourcing platform.
We have been very lucky to develop these tools for such a patient and well aligned early investor base
and thank you for your support. We spent considerable effort to describe this new integrated approach
in a visual presentation format if you are interested to learn more as well. Please email me at
rmorris@mesoncapital.com or call at 607-279-5382 if you have any questions. As always, thank you for
reading.

Sincerely,


Ryan J. Morris
President
Meson Capital LLC
Aron English
Director of Research
Meson Capital LLC



7

Performance Figures: Inception (Feb 24, 2009) through December 31, 2013





$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013
V
a
u
l
e

o
f

$
1

o
n

F
e
b

2
4
,

2
0
0
9

(
i
n
c
e
p
t
i
o
n
)
Date - Valuations at end of each month
Meson Capital Partners Performance Net to LPs
LP NAV
S&P 500 TR
Notes: (1) LP Returns = Gross returns, net of performance fee of 25% of profits above 6% annualized, calculated monthly in 2009, annually afterwards.
(2) S&P 500 Return is Total Return index Gross of any withholding tax on dividends
8

Disclosure:
The information contained in this document is confidential and is being provided for information
purposes only to a limited number of financially sophisticated persons who have expressed an interest
in the matters described herein.
This is not an offering or the solicitation of an offer to purchase an interest in Meson Capital Partners LP
(the Fund) or any affiliate thereof. Any such offer or solicitation will only be made to qualified
investors by means of a confidential private placement memorandum and only in those jurisdictions
where permitted by law.
The views, opinions, and assumptions expressed in this presentation are as of the date printed on the
first page, are subject to change without notice, may not come to pass and do not represent a
recommendation or offer of any particular security, strategy or investment.
An investment in the fund is speculative and involves a high degree of risk. Opportunities for
withdrawal, redemption and transferability of interests are restricted, so investors may not have access
to capital when it is needed. There is no secondary market for the interests and none are expected to
develop. The fees and expenses charged in connection with this investment may be higher than the fees
and expenses of other investment alternatives and may offset profits. No assurance can be given that
the investment objective will be achieved or that an investor will receive a return of all or part of his or
her investment. Investment results may vary substantially over any given time period.
Results are compared to the performance of the S&P 500 Index for informational purposes only. The
Funds investment program does not mirror the S&P 500 Index and the volatility of the Funds
investment program may be materially different. The performance figures include the reinvestment of
any dividends and other earnings, unless otherwise noted. Past performance is not necessarily indicative
of future results. The holdings identified in this letter do not represent all of the securities purchased or
sold in the Fund.
Performance results for individual investors will be different from the performance results of Meson
Capital Partners LP depending on their timing of capital contributions and withdrawals. Meson Capital
Partners, LLC or affiliated entities (Meson) is not responsible for any liabilities resulting from errors
contained in this communication. Meson will not notify you of any errors that it identifies at a later date.