December 2022

To Our Business Partners


As we write this, the stock market is going through another period of volatilty which has become all-too familiar over the last year or so. Often this activity has centered around one primary factor:  interest rates.  There still seems to be a significant segment of investors who believe rates will return to the near-zero levels of the recent past.  While, admittedly, it’s an overly simplistic observation, whenever economic data have come out suggesting either higher or lower interest rates, the stock market has had a signficant reaction to it.

Like a drug addict, positive moves in financial markets have become dependent on a low interest rate environment, always waiting for the next fix – a drop in rates.  But we are skeptical of that environment returning anytime soon.  While rates have moved up and down over the years, the primary trend of interest rates had been on a decline for nearly FORTY YEARS.  (Interest rates peaked in September 1981 and troughed in August 2020.)

The rate decline has been an enormous tailwind for the economy and the stock market.  Unfortunately, it is highly unlikely there’ll be such a stimulus going forward.  Given that (1) steep increases in the prices of goods and services – “inflation” – is still a major problem, and (2) that “real” rates of return (interest rates minus the inflation rate) are negative, we don’t see that stimulus happening for quite some time.  In other words, don’t expect the U.S. economy or financial markets to have a sustained move upward any time soon.

So what does this mean for our investment process and the way we invest?  In reality, it doesn’t mean too much.  Unlike most others, our business valuation process does not depend on the level of interest rates. We have never thought it appropriate to reduce our required return hurdle rate to match changes in interest rates. This probably put us at a disadvantage when interest rates were headed toward zero.  The reason is that, when valuing business cash flows, falling interest rates lead to higher intrinsic values.  To our – your – benefit, not messing with the required rate of return in our analysis also served as some protection against the sloppiness and carelessness that typically develop in the investment community in such an ebullient environment (see last month’s Portfolio Notes).

We ALWAYS insist on a reasonable rate of return on our stock investments to compensate for the risk of loss and the likelihood we will make some mistakes – the MARGIN OF SAFETY.  Moving the required rate of return around in response to changing interest rates doesn’t seem appropriate in striving to achieve satisfactory long-term results.


We just finished a complete overhaul of estimated intrinsic values of our group* of widely held companies. Price-to-value of the whole group of 20 stocks stands at a still-high 85%.  This implies an annualized 3-5% upside potential over a five-year timeframe.  Ideally, our goal is to deliver 10% or more a year, on average, which comes from (1) stock prices rising toward estimated business values, and (2) rising business values.  (VALUE and GROWTH go hand-in-hand!)  We WILL get there, through a combination of adding new undervalued stocks, selling long-held overvalued stocks, and declines in stock prices generally.  Today there are several stocks selling at or below two-thirds of value which we bought or are buying, with more to come.


Stock market indexes continued to advance in November following the rebound in October.  Gains were generally 4-6%, with smaller cap indexes lagging (again). Despite the two months of advancing prices, stock returns are still negative for the year to date, with the Dow Jones Industrials showing the smallest decline at 4.8%, and the NASDAQ Composite down 26%.  It seems like ancient history, as the NASDAQ peaked on November 19, 2021, the Dow Industrials peaked on January 5th this year, and the S&P 500 peaked on January 3rd this year.  We’re happy to report that the value of our group* of portfolio stocks is up so far in 2022, continuing to perform much better than the popular indexes.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*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.