Chairman’s Letter Q3 2020

We suspect economic growth following the US election this year.




October 1, 2020

The U.S. election is soon to be past tense. The betting odds have Biden as President and a substantial change of control of the Senate in favour of the Democrats. A year ago, this would have been seen as a market negative outcome. Investors have shifted their attitude towards a Democratic sweep becoming more favourable as investors expect more massive spending to support the economy. The offset is the potential for higher corporate taxes. Mr. Market, presently the optimist, views that heavy spending will offset, to a considerable extent, higher taxes under Biden. We think this is a reasonable view if the projections pan out. Betting on election outcomes has been a fool’s game of late and we think has little practical value for our long-term investing discipline. In any case, Republicans and Democrats have had little difficulty spending recently, so we really don’t see a Democratic controlled outcome changing much. Spending has been huge since COVID-19. Deficit spending is not a one-Party habit. Why tax when you can borrow money for free? 

We are often asked, “why is the market so buoyant?” We think the most compelling argument for the surge from the lows of March is that governments around the world have bailed out everyone affected by COVID-19 (and even those not so much affected). Massive spending and zero interest rates with the promise that interest rates will remain low for years and spending will persist until the pain stops, has encouraged investors to look over the valley of death we all contemplated in the spring. Furthermore, some companies like the FAANGs (Facebook, Apple,, Netflix and Google) have seen their stock prices surge well more than the average stock price, lifting the averages while hiding the pain underneath the surface. One can argue these FAANGs are incredible enterprises, bringing joy and value to employed and unemployed alike, and that would be an accurate statement. It is equally true, as we have repeatedly warned, that governments are increasingly casting a jaundiced eye towards these super spreaders of wealth. We expect more headline grabbing threats of “Break Them Up!” but little progress in the threat for years. 

More importantly, we feel investors will soon start to focus on those companies continuously adapting and advancing their business plans. Health care providers are adapting technology, at ever increasing rates, to develop, test, and serve their customers more rapidly. Thermo Fisher Scientific, Stryker, and United Health Group (to name a few) have recouped all their losses. FedEx has advanced to an 81% return year-to-date as its logistics business continues to surge. The Home Depot continues to set records as consumers stay at home and fix their stuff. McDonald’s trades at record highs as their profits roll along despite hardship, proving that strong brand names and good management are key investment attributes. Cintas continues to climb to new heights as investors appreciate the staying power of its sanitary and safety products and the opportunity to continue to consolidate a very fragmented industry. Rockwell Automation continues to see growth and hit records as industrial companies recognize the importance of becoming more efficient via automation and buy Rockwell’s industry-leading solutions. Even Disney is getting increasing respect from investors as they acknowledge the power of the brand mixed with fearless management execution as it steps out of traditional distribution models (cinemas) and signs up record numbers to their Disney+ channel. 

We feel confident that those companies that have not yet recovered (banks, mostly) will continue paying their dividends and reserving conservatively for the inevitable loan losses. Banks, on average, are paying ~4% dividends which is about 4 times what you earn lending the government money for 10 years. We trust the government but prefer to be an owner that lends at higher rates. 

We remain optimistic that the general cadence of economic growth will be supported by government support, low interest rates, and a continued path toward finding solutions to mitigate, if not cure, the COVID-19 pandemic. Our outlook is clouded only by the fickleness of investor attention, patience, imagination, and general mood swings. All these variables are impossible to forecast with accuracy. What we do know is that these variables change frequently and often without warning. We also know that great companies advance their business interests regardless of investor moods and that is the ultimate reward for investors. All the companies in your portfolio are making good progress in advancing their interests. Some are in the investor fan club right now and some are not. Companies and industries go in and out of ‘stardom’ but all we can do is ensure that the companies you own provide valuable goods and/or services that are used daily and are run by competent managers. They will create the value and ultimately deliver the results.