"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." Warren Buffett.
Happy Monday!
I spent the past four weeks in Atlanta following up on several private M&A diligence efforts and observing a public market that really got constrained by basic financial fundamentals – the market was simply “overbought” as evidenced by high valuation multiples in the S&P, Dow and Nasdaq. Consequently, the Coronavirus scare, which threatens to reduce earnings in the short-term, caused a flight to safety.
In the second half of February market forces and financial fundamentals drove the market back to reality with the S&P closing down 8.4% for the month. In many quarters the discussion is all about the economic impact of the Coronavirus and how that tanked the market. I, on the other hand, blame the market downturn on good old financial fundamentals. When valuations get too high, there will inevitably be a correction. It is only a matter of time and volume, but it will occur. The Coronavirus, in my opinion, is only the symptom and not the ultimate cause.
I have stated many times in the past that investors should take a long-term perspective to investing, and the performance of the public stock markets since the year 2000 supports this view. Cumulative performance from 2000 through December 2019 reflects the benefits of having a diversified portfolio that targets areas of the market with higher expected returns, such as small, mid-sized and value stocks. And it underscores the principle that longer time frames increase the likelihood of having a good investment experience.
No one knows what the next 10 months will bring, much less the next 10 years. But I believe that maintaining patience and discipline through the bad times and the good, puts investors in a position to increase the likelihood of long-term success.
In February, the S&P 500 closed at 2,954 and ended the month down 8.4%. The Dow closed at 25,409 and ended the month down 10.1%. Nasdaq closed at 8,567 and ended the month down 6.4%. The Russell 2000 closed at 1,476 and ended the month down 8.6%.
In March, we believe the public markets will stabilize as the correction takes hold and valuations will slowly start to come back. The political environment with 2020 campaigns in full swing is certainly a wild card. The market likes certainty and this election outcome is anything but certain. We read the market’s reaction to these events as being cautiously optimistic that things will work themselves out.
So, we remain currently at 30% cash in our public investments, but expect to begin selectively putting some of that back into the market in quality investments at superior values over the next month or so. We will also certainly be on the lookout for internal forces like a possible Fed cut prior to, or at, the next Fed meeting or a potential middle-class income tax cut announcement. Either of these events could move the market in a positive direction.
Thanks again for your consideration & for sharing your thoughts and ideas with us.
Have a wonderful March and 2020 ahead!
Best regards,
Vinnie
Vincent M. Oddo
Managing Partner
PointFour Capital, LLC
vincent.oddo@pointfourcapital.com