WHAT WE VALUE
This time last year, I was enjoying a few bluebird days at Bandon Dunes Golf Resort with some dear friends. Little did I realize what would soon ensue. The past 12 months have brought us a global pandemic, wildfires throughout the west, mass unemployment, an upended business environment, huge government financial intervention, social unrest, and a quickly changing landscape on nearly all fronts from healthcare to education to shopping.
With the election behind us, many are wondering what’s next in a year that has proven to be a very volatile market. As such, I thought it would be helpful to review what we own and some recent performance. In our last letter I mentioned that we were in a stock market bubble. Why weren’t we reducing our exposure to stocks then? Recall I described a Jekyll and Hyde type scenario where large tech-oriented companies were approaching record over valuation, while other industries and broad asset classes were very reasonably valued.
Election day is finally here. And regardless of outcome, today feels like one of the final chapters in what has proven to be one of the crazier years in modern history. To say we are living through strange times is a gross understatement. Wildfires throughout the west. Global pandemic. Mass unemployment and an upended business environment. Huge government financial intervention. Social unrest. Quickly changing landscape on nearly all fronts from healthcare to education to shopping. 2020 has at times been exhausting, polarizing and can feel like we have lost control.
Investing is very similar to golf: both are ultimately a test of patience. The greats practice their craft religiously. And the best are defined not by how good their best shots are, but by how good their bad shots were. The game is ultimately played over 18 holes and rewards consistency and not heroics. Here we see Jason’s oldest son, Christopher, teeing off…and learning that a round of golf is more than just one shot.
As the year unfolds, evidence is mounting that the economy is slowing, with multiple factors at play. The Federal Reserve reversed course quite suddenly at the end of December from raising rates to a more neutral, and even accommodative, stance. Some have begun to question whether we may see recession in 2020.
We have written extensively about risk, volatility, and valuations over the last several years. From our perspective, it’s important to continually talk about the fundamental values that drive our decision making.
Along those lines, we wanted to share a bit more about the process of evaluating a company and the decision to invest. This quarter, our portfolio manager Nick Fisher walks through his in-depth analysis of Peyto Exploration and Development and why he recently decided to add it to portfolios. Meanwhile, Alex Bridgeman, our newest employee, highlights why a modest allocation to a company like Peyto is a good idea that not every investor is able to make.
We love investing in companies that offer clear paths for growth at cheap prices today with great management teams. It’s how our minds are wired, and we are always on the hunt for new, undiscovered opportunities.
We have recently increased our focus on looking for smaller, undiscovered, and cheap companies to add to portfolios. The “small” part is the newest edition to our process, and we believe there is a ton of value to be found in companies that are below Wall Street’s investment radar, companies they can’t invest in.
2018 had a little bit of everything. The beginning of the year got off to a roaring start with the fresh excitement of the new tax law and corporate tax cuts. But the party was short lived and concern creeped in around both trade and monetary policy. By the end of the year, 90% of global assets had a negative return.
It used to be so simple and straight-forward: republicans believed in free trade; Trump and the Clintons were friends; my car took regular gasoline; and the market always went up.
Now the republicans sound like democrats. The democrats sound like republicans. The Clintons won’t ever be invited to another Trump wedding. My next car will plug into the wall. And evidently markets go up AND down. Next thing you know, dogs and cats will be living together.
Not a lot changed in the 2nd quarter since our Q1 letter. What has changed is the market’s perception of global trade. This has undoubtedly impacted the trading narrative around the US Dollar and consequently commodities and emerging market stocks, the very assets we are most excited about. The fickle nature of “Mr. Market” often allows us the opportunity to buy when prices are down, as we maintain our value discipline. As Warren Buffett says, when prices go down we should get excited (and buy more), but we often do the opposite. We view this current downturn in emerging market stocks as a major boon to prospective 10-year returns.
As summer is upon us, many of us including myself are trying to figure out what to do with the kids. By now, most of the major activities/camps are scheduled, but what about the rest of the time? I am sure video games, basketball or other activities are at the top of their list, but what else could we be encouraging our kids to do? The research is pretty compelling: they should start a business!
We share some thoughts about what we believe on our Pilot’s Log and Navigating Markets including words of wisdom inspired by the greats, periodic updates about current markets and timely seasonal reflections.
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Portland, Oregon 97213
Office: 503-847-9723
