‘Education is not the learning of facts, but the training of the mind to think.’ Albert Einstein
December is usually a very interesting time in the market as investors turn for home and get ready for a new year. You see, in the money management world, the start of a fresh 365 day period puts an end to the prior year for good. It means the performance is in the books, for better or for worse, and if it was good, especially relative to a benchmark, then marketing materials are prepared to announce the triumph. If it was not so wonderful, it can be put behind you so as to prepare for a better outcome in the following periods. In most portfolios, businesses have their own growth initiatives which are planned months and years in advance. Many of these projects should be approaching a start or completion so the efforts can be reported to investors. Each situation is unique, as is each year, so monitoring how things evolve is part of growing as an investor. In the meantime, I thought it would be good to discuss how things went for us and what learning took place to apply going into 2021.
As far as 2020 is concerned, from an investment standpoint, the vast majority of our companies performed well. I will get to the one caveat in a second, as you know there is always one. Many of our holdings are dominant businesses and responded nicely to the challenges of the economic shutdown in March. During this period, investors reflected the uncertainty in the economy and we took advantage of the selloff. When you have been investing as long as I have, you know when you have opportunities and what do do when you get them. In terms of the area where the Covid crisis has been the most painful, personally it is in the energy area. Our energy holdings are dominant companies, and yet in nearly all cases, even today, anything energy related has been the runt of the litter. In terms of performance, for the last decade energy has been the worst returning sector, and the opportunity costs of those positions is striking. Many of them pay large dividends, even today with oil prices down significantly from the start of 2020. Of course, investing is always about the future, not the past. Evaluating energy at the end of a once in a century pandemic does a disservice to those entities. A year from now it will be interesting to see where they trade. Two years from now it will be even more revealing. Still, if you want to improve as an investor, you have to be honest about evaluating your results. Make no mistake, energy exposure was a mistake the last decade, but that may not be the situation for the rest of this one.
In the markets last week, Tesla joined the S&P 500 on Friday and the Federal Reserve let the largest banks and systematically important financial institutions they were allowed to keep paying dividends and buying back stock (they just couldn’t increase either for the first quarter of 2021). On the earnings front, it was a rather light week as Lennar, FedEx, Rite Aid, and Nike were the headline performers. In our little neck of the woods, the annual LD Micro Winter event took place virtually, and it was a good experience, even though we could not attend in person. Much of the work needs to be done before the event, and there are plenty of interesting entities to take a look at. Still, with capital always scarce, you are looking for the best companies you can, and we already have positions in quite a few small entities which remain promising. We investigate as many as we can, and quite a few are just starting out or fresh off of raising capital. The micro-cap area is tough because so many entities are raising capital, or just raised it, and profitability and cash flow remains a distant dream. It is why there is a chance at dramatic results, both phenomenally good and bad. No, it is not for the faint of heart, that is for sure.
Politically, it seems both in the US and in Europe, the habit of putting things off until the last minute is common as another Cares deal, funding the US government for next year, and trying to wrap up a Brexit agreement still have not been accomplished by the public servants (leeches) on both sides of the pond. Covid vaccines started getting administered and let’s hope it goes well all over the globe. Looking ahead to next year, a key consideration to ponder is whether inflation begins to enter the economy. Energy prices and wage inflation are the two most important to monitor, so keep that in mind as we enter 2021.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.