2023 Q3 Commentary
By Nick Fisher, Portfolio Manager
From our founding days at Pilot Wealth Management, we have been consistently and unabashedly value investors. We like to buy things that are undervalued by fundamental measures and ideally aligned with principled people who steward their investors capital as if it were their own. With any investment style, there are times when it has “underperformed” and there are times when it has “outperformed” the market averages. The performance of the “60/40” traditional portfolio’s performance has been abysmal of late. This is not the case with the portfolios we have assembled for you. Since the S&P 500 peaked at the end of 2021, our largest holdings have certainly outperformed.
The outperformance can be attributed to two related factors:
Inflation: We have been quite convicted that we are in a new era of higher inflation and therefore we have been oriented toward that end.
Interest Rate Volatility: The businesses we owned have been fairly immune to higher interest rates and in the case of our bond portfolios we have owned short maturities.
A quick chart review of some of our largest holdings shows how we have performed since the S&P 500 topped late in 2021.
Berkshire Hathaway and Markel have been great performers over the years, but especially since the market peaked nearly two years ago now. These two businesses are absolutely phenomenal with great cultures, diversified businesses, fortress like balance sheets and a long history of managing through the best and worst economic conditions. We will continue to own these into the future, and we welcome volatility to accumulate more.
Small cap stocks have not performed particularly well, however Palm Valley Capital has done a fantastic job navigating the market volatility in the small cap space over the last several years. As a side note, Palm Valley Capital was not available to purchase through Charles Schwab, but several of us who knew of Eric Cinnamond and Jayme Wiggins encouraged Charles Schwab to make the fund available to us in 2020, which they did. And we are very grateful, as Eric and Jayme have been masterful with their discipline and willingness to take risk when prices fall and reduce risk when prices rebound.
Commodities have been incredibly under owned by investors. Goehring and Rozenczwag is our largest expression of the resources and commodities trade. The underperformance of this asset class compared to large cap stocks prior to Covid has been nearly unprecedented. As investors who have no problem being occasionally contrarian, this gets us excited as we enter a new long-term phase of inflation above the trend of the last 25 years. With institutional investors ominously under-allocated we like to be in front of those flows over the next decade as investors catchup with the idea of above trend inflation.
Emerging markets are an area that we have been discussing for sometime. And frankly it just hasn’t worked out. The underperformance over the last several years has been unbearable. The culprits are hard to identify exactly, but we speculate that the strong dollar, investors unlimited appetite for US Large Cap technology and the over-indebtedness of many countries is seen as risk by global investors.
From an economic standpoint we are quite aware that an official recession may be something that we are discussing in the near future. How deep or prolonged an economic slow down may be is unknown, but suffice it to say we embrace any volatility that will result and look forward to regaining a more aggressive investment stance.
Long-term, I believe we are in a new era for investments. The last 40 years were dominated by declining interest rates, low inflation and over the last 15 years, low economic growth as well. The foreseeable future will look very different, albeit with fits and starts of volatility. At times it will feel like the “old days” are back, only to smack us in the face with inflation above trend and higher interest rates to follow. Much will be determined by how Congress and the Federal Reserve navigate this potentially volatile period to come. We will navigate this environment with the values and conviction that we have espoused all along. We appreciate your trust in us and look forward to discussing the nuance in more detail as the path becomes more clear.
