Chairman’s Letter Q2 2019

Taking a long-game approach to the market is always the best approach.




July 1, 2019

The scare from the spectacular 2018 stock market sell-off has completely dissipated and investors are a happier lot—at least those who stuck to their long-term plan. The worry about rising interest rates has turned toward worry about when interest rates will fall. As we predicted, the trade war with China has taken a turn towards trying to achieve some type of mutual détente. All of the fears that ended the year seem to have faded, at least for now. We continue to think the most likely outcome for the trade dispute is resolution, but just because the leaders are talking doesn’t mean they will agree in short order to a deal. We continue to expect posturing on both sides to satisfy their ‘subjects’. 

Politicians continue to find reasons to be critical of Facebook, Google, and, but for the most part investors continue to bet that the remedies applied (mostly higher taxes disguised as fines and regulatory costs) are manageable. We agree. The political noise will only grow as the U.S. election draws near. No major decisions will likely be forthcoming prior to the election and even then, it will take years of bickering to figure out what to do. If we could invest in a lobbying firm, we would. 

Banks continue to benefit from strong consumer loan demand. Everyone seems to have a job, and that makes banks happy to lend money. Happy banks make for good consumer spending and a strong economy (the consumer drives about 70% of the U.S. economy). We see little that will upset the apple cart of consumer spending unless Mr. Trump raises the price of everything via more tariffs. 

Not all is sunny, unfortunately, and that has us looking at opportunities and weighing risks. Businesses must make long-term investments and given all of the political havoc wreaked upon the global supply chains over these trade tensions, business investment is in recession. Many good companies that make non-software ‘stuff’ have seen sharp reductions in orders. Boeing, which is a huge contributor to the American economy, has a problem with its planes and this is impacting its suppliers. Many leading industrial companies are down 30% from their highs.

Farmers are having a heck of a time planting their crops because of bad weather and this is impacting the whole industry. A devastating swine infection is expected to kill at least half of the pig population in China (estimates are that 300 million pigs will be destroyed). China may say they are halting U.S. purchases of soybeans in retaliation to Trump, but the fact is there are a lot fewer pigs to feed. Food prices are being impacted by disease and weather, so expect more price increases at your grocery store this year. Insurance companies are struggling to correctly price property and casualty insurance as claims soar, not just from farmers, but anyone who owns an asset that can be damaged by extreme weather. 

For every short-term loser there is often a long-term winner. The global tumult continues to cause dislocations in the market and we will continue to search for good long-term assets that may come up for sale at bargain prices. We have the cash to do so. 

We are often asked what the market will deliver over the next 12 months to which we honestly answer that we do not know; we may have a sense, but we do not know the timing. We always stick to the boring yet truthful belief that exercising patience and thinking long-term will be rewarding in the end.

Most of the important things that happen in the markets can primarily be attributed to changes in psychology—not fundamentals—and psychology cannot be predicted and certainly cannot be timed. Investor psychology right now seems fairly balanced, but like the unfathomable weather forecast, it can bring heavy downpours similar to what happened late last year. Given the strong fundamentals of the businesses you own and the reasonable valuations they are valued at today, we would advocate for a steady-as-she-goes strategy. 

If you feel the least bit uncomfortable, please do not hesitate to reach out to us. We are here to support you in the building of your financial future.