As we prepare the 2nd quarter’s reports and I study the financial markets, I’m reminded yet again that intelligent persistence is a core virtue of successful investing. My son Eric, who is on our board of directors, recently sent me this link, and I think it’s very relevant. Press on regardless.
Early thoughts on BREXIT: first, the vote last week was a non-binding referendum, which means that it was simply an opinion poll. Second, everybody seems intent on stalling any implementation. Third, the central banks are lining up to throw money supply at the problem. So this could be a big deal…or not. What happens next is literally unpredictable but probably we’ll all muddle by as we so often manage to do. Despite the rhetoric, we may discover that this was a good event, a bad event, or a non-event. Nobody really knows. So far it’s essentially been a non-event. Stay diversified. We are following this closely.
As the attached article explains, Sequoia Fund (symbol SEQUX) has always been an investment we have been proud to own. Over the decades it has delivered above-market results which have been unusually durable. The management of this mutual fund has delivered superb, consistent, even admirable management.
That may not entirely be the case now, as documented by the attached article. A few months ago, this mutual fund began to fade as its over-allocation to one failing stock, Valeant, dragged it down to a very unusual underperformance. At this point, we are analyzing this mutual fund to determine whether or not to stay, to sell, or even to buy more. Meanwhile, it’s a classic story of how a great mutual fund can go wrong.
There are several conclusions to be drawn from this.
- Even the great mutual fund managers occasionally step on a land mine. This situation, however, is a self-inflicted wound because it resulted from violating the basic rules of investing. They owned too much Valeant, and at too high a valuation. Even the financial wizards need to pay attention to the rules.
- The stock which laid them low was morally questionable anyway. Good investing, long term, is ethical investing.
- Thank goodness we keep our allocations close to 5% for each fund. We haven’t been badly damaged by this because we are diversified.
- Morningstar now ranks this mutual fund as three stars, which means “OK”. All Morningstar rankings are look-back numbers.
- Good investing is painful investing. The truly outsized returns are garnered by people who are willing to set fear aside.
- The two members of the board of directors who resigned performed their jobs superbly. Independent members of the board of directors are supposed to think independently, and that’s what they did.
This is an ongoing story. I’m harvesting all the information before making a decision.
Global stock markets in steep decline
If our portfolios are diversified, then today’s declining stock prices represent the beginning of an opportunity. We will take advantage of the coming days to examine the performance of our mutual funds and “weed the garden” of mutual funds which appear to be faltering. If the market decline continues, we’ll begin buying. Patience…we’ve been waiting for this.
Quote from a mutual fund manager speaking today; “A large part of investment management is the act of omission: the decision to NOT own the 90% of available investments which aren’t going to succeed.”
I’m watching the China exchange traded fund, symbol PEK, which is up about 16% in one day, having fallen close to 40% in one month. I’m also looking at valuation statistics for the United States stock markets. The Value Line P/E is 19.1%, which is historically modestly overvalued. The median yield is 2.1%, again modestly overvalued. The Value Line Median Appreciation Potential is 35%, which is historically profoundly overvalued. These statistics can stay in the “overvalued” zone for years. My perception is that they have stayed high for so long due to artificially low interest rates. They continue to suggest, however, that the possibility of an eventual downturn, perhaps years in the future, is out there. Most of our portfolios are diversified and relatively cautious. At the moment, we’ll continue to stay conservative. We don’t know what will really happen in the short run. Eventually, if and when bargains emerge, we’ll do some buying.
This article is a fascinating analysis of the global economy by the managers of the Forester Value Fund. I’m watching events unfold in Greece and at this point it seems that we cannot really predict what will happen. It is possible that the euro, as a currency, may be redefined. Even more attention getting was the Chinese government’s very overt support of their own crashing stock market. Our portfolios are diversified so we have the relative luxury of watching all of this unfold from a distance. If markets decline, we will be hunting for bargains wherever they reveal themselves.
Here are some notes from a conference call with Jeff Auxier of the Auxier Fund.
Auxier Fund has a long term track record which compares decently with the S&P 500. It also lags for YEARS when the market is hot. Historically the fund has less risk than the S&P 500 too. I feel that Jeff Auxier is one of the mutual fund managers with deep insight into what is happening in the financial markets.
Europe currently has some bargains, which are now “hopelessly out of favor”. Long term, these are great opportunities.
The decline of oil prices is a $125 billion annual stimulus to the U.S. economy, a “major game changer”. We are “awash in energy globally”. We are also facing the potential of “massive deflation”. We should be careful that we don’t invest for oil bargains too early because these oil gluts can go on for years. My observation: in fact oil has a history of extreme volatility, and market forces tend to help bring oil prices down.