With the third quarter complete and over a year into “The Shift,” * we start with several thoughts:
- There is a serious economic issue to confront inflation. The market narrative says, “look what the Fed is doing to the market.” The Fed needs to focus on the economy. When we have lower inflation and growing earnings, the market will do just fine. Serious policy for a serious issue is the order of our day. We must get through this take-our-medicine moment.
- Corrections such as this are painful, and we understand the hurt.
- This correction is correcting for excess. **
- This is an episode. The longstanding precedent is extended periods of expansion and shorter periods of disruption. The blended result of enduring both is very constructive. Our strategy is to selectively focus on better businesses for better results in the long game.
- Investment discipline matters.
- Equities: Our portfolios are down less than their asset class peers. We believe better risk management is proactive as opposed to the “market narratives” advice about reacting tactically. We are down less in equities because our Reasonable Price discipline kept us out of the froth and into fairly priced business, and our emphasis on Quality kept us out of higher-risk business models.
- Bonds: our discipline around short maturities, good credits and a defense that defends has performed well in a distressed bond market this year.
- Think opportunistically. The correction is repricing nearly everything and we are alert to the prospect of allocating to great companies that were previously priced at premium prices reentering the Reasonable Price window. Compelling values for better opportunities happen episodically. That is our important take away and bottom line.
*, ** “The Shift” is our handle for the change in fiscal and monetary policy away from stimulation and into constraint (at least for the Fed). There was a short-term policy-induced sugar high and now the market is paying the price for it. Instead of low and suppressed interest rates creating asset price appreciation, higher rates cause an offsetting revaluation. Instead of Covid checks and PPP loans, taxpayers and businesses shift back to living within their means. Less external stimulus translates to slower internal growth. Speculations that only recently flew high, now correct course when the law of gravity pulls on asset valuation in a regression to the mean. This is healthy as hyper-stimulation is unsustainable and ill-advised on any long-term basis.
We understand the positive connection between better businesses and better results as well as the benefits of focusing on the long game of taking a strategic approach over a tactical one. In times of market stress, we strive to emphasize these core insights and to conduct ourselves as Rational Investors.
