To Our Business Partners

MARKET MAYHEM?

As we write this, stocks and bonds have become extremely volatile, mostly to the downside, largely due to concerns over the perceived effects of the proposed tariffs between U.S. and foreign trading partners.  The effects on the U.S. economy are unknowable and nearly impossible to predict.  We don’t pretend to know the answer to those concerns and how they might affect the markets.  What we DO know, and have been concerned about for months, is that the market and most stocks, by several measures, have been priced at valuation extremes seen near previous market peaks – 2020, 2007, 2000, 1968, 1929, to name a few.  As we have said repeatedly, when investors buy at extreme levels of valuation, future or expected investment returns are, at best, below average.  The more you pay for the cash that’s produced by any asset – like a business – the lower your investment returns will be. 
 
Historically, when financial assets are priced close to perfection, an event or series of events come along, out of the blue, that alter(s) investor perception, creates more uncertainty, and prompts an immediate emotional response.  While this can happen at any time, it usually has a substantially greater impact when markets are significantly overvalued.  This time around, it could be that the tariff controversy is the pin that finally pricked the economic and market bubble.  
 
The way we respond to these conditions over time is NOT to predict what might happen to the worldwide economy or even anticipate what “the market” might do.  NOBODY CAN.  Instead, we work from the bottom-up by analyzing individual company economics and valuations and reduce exposure to stocks on a case-by-case basis when we perceive the estimated future returns to be inadequate.  By focusing intently on our investment process and valuation, we remain rational, unemotional, disciplined, and patient.  While navigating through these periods is never easy, we strive to take advantage of prices, as opposed to being a victim of them, which we believe improves our chances for higher prospective returns.  We’ll sell when Mr. Market wants to buy stocks at insane prices and buy from Mr. Market when stocks make him sick to his stomach.  

PORTFOLIO VALUATION 

The recent tariff-induced setback has not corrected the valuation extremes in the marketplace – far from it.  In the group of stocks we own or follow closely, a few more bargains are popping up, and we’re putting some cash to work.  But, for the most part, we need lower prices compared to underlying values to become more aggressive buyers. 

RECENT RESULTS

All the popular stock market indexes were down in March, anywhere from 3-8%, led downward by indexes heavily weighted toward technology companies.  After two consecutive months of decline, the indexes are now down for the year to date.  Over the last 12 months, the market has been mixed, with large-company stock indexes still positive, while small-company indexes have gotten clobbered.  (To us value buyers, smaller companies have become somewhat more interesting than the household names.)  Quite happily, our group* of portfolio stocks has produced positive returns in all three periods, which has been somewhat better than the broader market. 

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.