Category: Missives

Most people tend to see what’s right in front of them, especially when it comes to housing affordability. Consider that most of the media organizations in the U.S. reside in the expensive coastal cities. These cities are suffering a decline in home values and contributing to a discussion on what higher home prices and higher interest rates could do to the number of new homes built nationwide. An examination of the laws of supply and demand are essential to this discussion, as well as a review of human behavior in markets based on affordability. We remind ourselves that coastal cities—like our own Seattle—are the exception, not the norm.

In 1720, the South Sea Bubble arose from what seemed to be good intentions. The South Sea Company was given an exclusive monopoly on the Spanish Americas in exchange for assuming a large part of England’s debt. The debt holders received preferred shares in the South Sea Company that paid 6% interest. The business operators of the South Sea Company seized on their de-facto government backing to continue offering shares to pay off all the country’s debt.

We have written profusely about the investment myopia of today which has focused on “growth at any price companies” without regard to profits or free cash-flow. We do this because we know success in investing requires a healthy degree of discomfort for it to be profitable, and we know how much comfort today’s investor has found by owning what has worked.

The U.S. government must determine how to deal with the negative consequences of some of the last decade’s most successful internet-based businesses. Google, Facebook and Amazon grew up as strangers and have developed monopolies in search, social media and in e-commerce. The stock market has been very excited about the control over people they have attained and the “big data” they use in advertising and e-commerce. In many ways, these tech behemoths are “three identical strangers.”

It is no secret that the U.S. stock market has been completely addicted to discounting the future success of the most popular technology stocks. Momentum-based growth investing has had many bouts of success in the past, but this is the first episode in an era where indexed mutual funds and exchange traded funds (ETFs) were the largest aggregate owners of the largest capitalization companies. In comparison, as recently as 20 years ago, individual and institutional investors were the biggest aggregate owners of the nation’s largest companies through direct ownership. It is almost like the old-time owners of individual stocks were smoking cigarettes and today’s owners are vaping.

The word encore is a French word, meaning ‘again, some more’. We typically think of it as coming after a concert is over, where the band returns from backstage to play some of the most crowd-pleasing hits. As the stage temporarily goes dark, the band is encouraged by the masses to reemerge through their loud applause, cheering and chanting. When new to the American scene, the spontaneity of this phenomena would often result in multiple encores for an unrelenting crowd.

We believe the math of common stock investing is pretty simple. When you buy a stock without leverage, you can only lose your original investment. Your gains can be unlimited over the longest term (long duration). Most of the benefit (90%) of diversification is reached by owning a twelve-to-eighteen stock portfolio, if the owners are willing to put up with the relatively random way returns are handed out over time. Valuation matters dearly to portfolio results. Stocks purchased at depressed prices (as a group) outperform those which are more expensive over longer-run time periods.

What will the next ten years look like in the U.S. stock market? As we often do, we refer you to one of our favorite songs, “I Can Only Imagine,” and a book by George Friedman, The Next 100 Years. We believe the best performing securities of the next ten years will be very different from the securities and the sectors which currently capture the “popular imagination” of investors.

Elon Musk is possibly the most interesting man in the world, in our opinion. His nobility comes from his past as a founder of PayPal, but his popularity only grows in this era as he seeks to tackle big projects that include the car business, space, mass transit and other subjects. Rarely in an era does one person rise to this height of importance attributed to them by the society and time they live in. As an example, his cameo on the CBS show “The Big Bang Theory” crowned his popularity in 2015. What we’d like to do is look at the rhymes of history to ascertain where we are as the pendulum swings and if there are other symptoms today that are needed to guard our independent thinking as investors. Let’s look back in time at an analogous period of global history.

Printable Version “The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.” — Warren Buffett Dear fellow investors, During the season opening baseball game for