“The world is full of foolish gamblers, and they will not do as well as the patient investor.”
- Charlie Munger, Co-Founder, Vice-Chairman, Berkshire Hathaway
Happy Wednesday,
February was a mild correction month with the S&P 500 declining 2.6% to 3,970. This was a reaction to the wild upswings we saw in January. At the same time, many S&P 500 company Q4 ’22 earnings have been coming in lower than expected.
On a YTD basis, there has been a clear mismatch between value investing and emotional/meme investing. The trailing PE ratio of the S&P 500 is currently 21.2, and it is projected to increase to the mid-20’s as earnings fall short of expectations this year. This is far higher than the historical S&P 500 average of 14.9, which would logically point to a 20%+/- correction coming sometime in 2023.
This is all a by-product of stubborn inflation that has driven the Federal Reserve to continue to increase interest rates more than expected in 2023. In addition, we now project a longer “pause period” where rates will stay higher for a longer period of time than first envisioned, before beginning a slow gradual reduction of rates in 2024/2025.
We are also taking our queue from the Bond markets where rates have increased significantly in early 2023 (6-month T-Bills now yield 5.1% with no state income tax burden). As fixed rates go higher, more investors will move capital allocation in that direction to reduce equity market risk.
Here at PointFour Capital, we are adept at seeing the big picture since we have been at this for many decades, thus we largely avoided the 2022 meltdown and the January 2023 “head fake”. In February, the value of our public portfolio increased by 0.2% as we moved to reduce risk and wait for better entry points in the future, but more importantly, we beat the S&P 500 return by 2.8%.
We accomplished this by acknowledging early on what the market had been signaling for many months. That is, the 10-year “growth at any cost” movement was about to end — and we would be ushering in a return to value-based investing. That all came to pass in 2022 and we are investing accordingly in 2023 using long/short/macro bets to stay one step ahead of the market and that includes taking advantage of the increased T-Bill rates.
We are investing for the long term and making a profit and avoiding the latest fads means something to us. Our perspective is that we will mind our own business in 2023/2024 and get ready to shift capital allocation at some point as interest rates begin to ease and other opportunities present themselves.
Remember that every significant market shift usually involves an over-correction, and we expect that this will happen here, so we will look to take advantage of the coming over-correction and set ourselves up for a great 2023/2024 and beyond!
Thanks again for your consideration and ideas. Have a great 2023!
Best regards,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC