“Predicting rain doesn’t count, building an ark does.” Warren Buffett
When you are a student, as you get older you realize tests are just a verification of how well you know, or don’t know, the assigned material. When I was in college, I got some advice from a visiting adjunct professor who advised if you read the material once you would get a C, twice you would get a B, and if you read it three times, you would wind up with an A. Human resource departments look at the educational and work experience of candidates as a way to evaluate whether or not a potential employee is prepared to help their business. In today’s Covid stricken society, if an employee is paid X, they better be able to bring in multiples of X in terms of revenue, or reduce costs in multiples of X, as a way to justify their salary. The ability to prepare applies to the investment world as well, so let’s take a look at the upcoming year to see what might be done when thinking about 2021.
The dominant consideration for next year remains the question of Covid and how quickly the US can start to see progress in reducing the number of infections, hospitalizations, and deaths. A major part of this involves vaccinating a majority of the population safely. In combination with the number of people who already have been infected, the vaccine roll out and the progress the medical community has made on treating the virus provides hope that at some point in 2021, society will start to move towards less Covid and hopefully a more normal environment. How long will this take? Maybe four months, maybe six months, maybe 9 months, maybe a year, it’s anybody’s guess. Regardless, as investors see improvement on the Covid front, market sentiment will change. The stay at home and closed economy beneficiaries will have more competition from everything which benefits from a more normal society. We could see quite a bit of change on the interest rate front, and potentially with inflation. In that event, bond yields will become more volatile, especially at the long end of the curve. Bond volatility will bring heightened equity movement as well. How does one prepare their portfolio for these kinds of circumstances? If you have a well diversified structure, which means a variety of industries and companies, your ark will handle the rain quite well. If you are relying on what has worked for the last year, or maybe the last decade, you might think about where you have a lot of exposure. Markets change, and it can happen quickly. What worked the last ten years may not do so well the next decade. Build your ark accordingly.
I thought I would mention the change in the IPO market which allows for companies to sell directly without necessarily using investment banks to price their offerings. The biggest challenge with IP-O’s is companies, in consultation with investment banks, limit the number of shares sold in the IP-O’s, along with creating lockup periods for those who already own those shares. Venture capitalists, like Bill Curley of Benchmark, are excited about the new change and believe it will take a great deal of power out of the investment banks hands. It certainly will affect the IPO market, but I believe the attractiveness of going public through a Goldman Sachs, Morgan Stanley, or JP Morgan brings strong ancillary benefits for companies which thirst for the stamp of approval from the white shoe companies the world is most familiar with. Their syndicates, buying networks, and ability to provide follow up financing’s and merger and acquisition advice are part of a comprehensive relationship that the best companies in the world value. Venture capitalists believe their hammer is always the solution, and technology often provides huge changes to markets that need them. Will this be the case for the IPO market? Time will tell, but I wouldn’t write off the investment banks so quickly.
On the news and earnings front, it was a light week in the markets. Weekly jobless claims came in better than predicted at 803k (888k expected), while the biggest names to report included Cintas, Carmax, and Paychex, which all beat expectations. Across the pond, the UK and EU came to a Brexit agreement after a year of working at a resolution. The final sticking point was fishing rights, and a concerted effort by many people pushed the agreement across the finish line. There are still plenty of Brexit issues which have investors concerned, especially in the financial industry (reciprocity), but it certainly takes what could have been a major global economic problem off the table.
Turning to our procrastinators here at home, President Trump still hasn’t signed the next version of the Cares act, a 900 billion dollar monstrosity that the vast majority of Congress hasn’t even taken the time to read. Rand Paul took to the floor of the US Senate and made a nice effort to discuss the various problems with the current circumstances. I haven’t been a big fan of Senator Paul, but his analysis on the overreach of the dictator Governors is spot on. Moreover, even if the next version of a Cares stimulus is implemented, it is not a long term solution for the country’s economic issues. Getting the economy back towards a more normal state is the solution, not repeated spending to temporarily prop up a terrible situation. In the meant time, the continuing problem of reacting to problems versus building an ark renders our government completely broken, which has been the case for the almost 15 years. On that lovely note, I hope you have a healthy and Happy New Year and the same sentiment applies for 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.