Tactically speaking, it’s time to look higher, not lower.
On October 4, I wrote a column in my daily journal on Real Money Pro titled “Why I Became More Bullish“.
In this missive, I wrote that “2022 has been one of the most difficult stock markets to navigate in history.” And that is always a challenge!
My lengthy column and analysis was adapted from a letter I had previously sent to sponsors of my hedge fund, Seabreeze Capital Partners LP, and included some of my comments made in a I Bloombergninterview I had with Tom Keene and Paul Sweeney.
The following is another adaptation of an email I sent to my investors at Seabreeze last weekend, which continues to underscore my more bullish market view in the capital markets.
The proverbial saying, “Silence is golden,is often used in circumstances where it is thought better to say nothing than to speak. Unfortunately, silence is too often the domain of the hedge fund industry.
Silence and opacity are not condoned at Seabreeze – we strive to be transparent in our outlook as well as in the composition and positioning of our portfolio. Sometimes we exaggerate, as we did in last month’s 22-page commentary — but you can always go to the summary!
I take my responsibility to manage a portion of my limited partners’ hard-earned capital seriously and believe that they are “from” full explanations of our views and the arrangement of Seabreeze’s investments – whatever the time of the month.
I am convinced that more transparency is better, especially in the recent regime of heightened market volatility and given the unprecedented declines in stocks and bonds this year.
With that in mind, I sent out a few more comments to my investors over the weekend – but this time I kept my comments short and to the point.
For starters, despite the market carnage and surprising daily volatility, Seabreeze’s investment returns are marginally positive for the year – compared to the average New York Stock Exchange share price decline of about – 30%, the drop in the S&P index of -25% and the drop of -35% in the Nasdaq index. (Past performance is not indicative of future results.)
There are several things that I am more certain of that influence my current investment strategy. I shared them with my investors on Saturday and now I share them with our subscribers in my journal today:
* Falling stock prices are the friend of the rational buyer. They offer better medium-term upside rewards relative to downside risk and sow the seeds of superior investment performance when stocks resume an upward trajectory.
* Warren Buffett professed that “Investors should be afraid when others are greedy and greedy when others are afraid.” Fear is mankind’s oldest and strongest emotion. But it is the logic of argument and analysis – not fear or greed (the two emotions that drive markets) – that should guide our investment process. Although times like this are difficult, being emotionless when others lose their minds remains an integral part of my investing methodology.
* I am of the opinion that the historic fall in stock prices has provided an opportunity to buy large companies at good prices, but not yet large companies at good prices.
*While there are currently growing concerns about financial stress, particularly in Europe, I believe these concerns are overblown as most financial stress indices place too much weight on US dollar appreciation than real world considerations. of the balance sheet. On this last point, I don’t see excessive conditions – similar to previous cycles such as in mortgages and financials – that suggest a systemic breakdown.
The banking sector is in great shape, with strong and well-reserved capital for losses – just look at this week’s strong results – balance sheets of private and public companies are healthy and the consumer has excess savings and is out of debt for nearly two decades. In addition, many individuals and businesses have refinanced at very low rates. While the current economic recovery is running out of steam, credit problems have been piling up for a short time.
*While equities are becoming more attractive, as noted in my journal commentary over the past two months, there are headwinds:
- Goods inflation and the prices of durable goods, autos and housing are moderating rapidly, but wage inflation is likely to remain sticky.
- An overly strong US dollar and rising interest rates (“all roads lead to interest rates!“) remain our primary investment concerns. A high risk-free rate of return is of particular concern. is an important part of the calculation used in valuing stocks in a dividend discount model (DDM is a quantitative method used to predict the price of a company’s stock based on the theory that its current price is worth the sum of all of its future dividend payments when discounted to their present value. As such, higher interest rates lower the value of stocks, especially high-growth ones, the Nasdaq names.
- Warren Buffett also once said “It’s only when the tide goes out that you find out who swam naked.” On the economic front, the shift from too easy monetary conditions to much more restrictive monetary conditions was a downward tide, which revealed the incompetence and lack of quality leadership of our budgetary and monetary authorities. The money tide, in particular, was “steered” by a group of academics (armed with 400 PhDs) from the Federal Reserve who erroneously determined, through ex ante analysis, that inflation would be transitory – marking the most big mistake by the Fed. 109 years of history. The Fed is now pursuing another mistake, based on ex post analysis, by tightening too aggressively.
- As traders and investors remain in a quagmire of uncertainty with many economic and market outcomes, some of them unfavorable – I reminded my investors that bull markets result from bad news (March 2009, December 2018 and April 2020) – while bear markets are supported by good news (late 1999/early 2000, September 2007 and December 2021).
- There is no doubt that the shift in market structure from active to passive investing – which gave a false sense of diversification – has contributed to the pace of the market’s recent decline. Quantitative commodities and strategies, which generally worship the altar of price momentum, know everything about price and very little about value. As such, they are, like falling stock prices, our allies because their role in distorting stock prices and markets provides us with attractive entry points.
A few years ago, I was invited by Warren Buffett to sit on the dais with him and his partner Charlie Munger at the Berkshire Hathaway (BRK.A) (BRK.B) annual meeting in Omaha, Nebraska in front of 40,000 Berkshire worshipers. Warren had grown weary of the same old questions year after year. I was chosen by the Oracle of Omaha to be the “Identification Bear” and my charge was to ask hard-hitting questions.
The experience was one of the thrills of my life, especially since I was accompanied by my son, Dr. Noah Kass.
At the time, Berkshire Hathaway had an unusually large cash position — much like my hedge fund had for most of 2022.
During lunch, I sat between Microsoft’s Bill Gates (MSFT) and Charlie Munger. While munching on a cheeseburger and sipping on a cherry coke, Charlie confidentially told us that “it takes character to sit with all that money and do nothing. I didn’t get to the top where I am by looking for mediocre opportunities.”
For the reasons listed in my diary and in my regular monthly comments to my sponsors, I felt the same – and, taking Charlie’s lead, Seabreeze managed our money this year.
My current cash reserves allow me to opportunistically take advantage of expanding investment opportunities that may be developing now, just as Berkshire Hathaway recently increased the size of its stock holdings and reduced its huge cash reserve.
(This review originally appeared on Real Money Pro on October 18. Click here to learn more about this dynamic market intelligence service for active traders and to receive the opinion of Doug Kass Daily diary and the columns of Paul Price, Bret Jensen and others.)
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