Quarterly Reports

During these wild market swings, we’ve seen a marked change in the type of companies that investors favor. Former growth darlings are being sold to free up funds to purchase shares of economically-sensitive businesses. Investors want beneficiaries of economic reopening and reflation driven by vaccine deployment and continued fiscal and monetary stimulus. As a result, value stocks have begun to materially outperform growth stocks.

The most important job for our investment team is to identify situations where embedded expectations are unreasonably low while avoiding stocks that are cheap for good reason (aka value traps). Cheap stocks can stay cheap unless fundamentals turn out to be better than expected. In contrast, the “great” company that merely ends up being “good” often generates disappointing results for its shareholders - just like so many New Year’s Eves.

While investors seem to be increasingly addicted to free money, I’m becoming ever more worried about the unintended long-term consequences of low rates, especially given the Fed’s new ultra-dovish policy targeting higher inflation. As former Fed Chair Martin said: “What’s good for the United States is good for the New York Stock Exchange. But what’s good for the New York Stock Exchange might not be good for the United States.”

I've been thinking about this lately as I've watched the Federal Reserve try to rekindle our economic fire amid the COVID-19 pandemic. In campfire cookery terms, the virus has been like a once in a hundred year downpour that soaked the woodpile -- wet wood doesn’t burn well. Fortunately, the Fed has trillions of dollars of industrial strength lighter fluid. When combined with the dry kindling that is the U.S. Congress’s fiscal stimulus, the economy could soon be cooking again. With our portfolio trading at less than 14x depressed 2020 estimated earnings, we feel very well positioned for recovery.

I’ve been investing for almost 40 years now, so I’ve lived through many booms and busts, however, I’ve never seen anything quite like the COVID Crash. It took just 20 days for the S&P 500 to fall the 20% required to put us in a bear market. For the first time since 1997, stock market circuit breakers, designed to slow selloffs, were triggered three times in six days. We’ve experienced unprecedented day-to-day volatility: in March, the S&P 500 moved up or down by at least 4% in eight consecutive sessions, eclipsing the old record of six days in 1929. The pace of change is unprecedented.