First, the good news: The markets did well in the first half of the year, and we are pleased to report that our Tealwood portfolios had favorable results.
So, what could be the bad news? 1) These good results were the product of pockets of unsustainable exuberance; so, a type of pocket correction may await in the future. 2) The persistence of inflation and the fiscal “time bomb” combine to temper our appetite for risk.
An example of a pocket of exuberance are the semiconductor stocks inside the technology sector of the S&P 500 Index. These nineteen companies posted a 97% gain for the six months, with most of the increase attributable to expanding valuations. We believe that there are promising things ahead for this industry. Our concern is that the market is pricing some parts of this sector for perfection; and we are skeptical about perfection.
Then there is the frothy activity on the initial public offering (IPO) front. Space X recently went public without being profitable. Two AI software companies (Anthropic and Open AI) are preparing for public offerings with a comparable profile of promised profitability. Beware the Ides of IPO frenzy.
How do we proceed? It suggests a quote from F. Scott Fitzgerald: “The test of a first-rate intelligence is to hold two opposed ideas in the mind at same time and still retain the ability to function.”
We are net-positive on the future impact of the emerging AI episode, but we do not believe the path will be straight or linear. Critical thinking and effective risk management are essential for navigating the winding road ahead.
Our philosophy resonates with a bottom-up-bullish approach. You do not need to be overly positive about everything at any price. Being selectively positive about specific companies, and about high quality and reasonable price investing, allows for meaningful discernment. It is important to us that our results are directly derived from our differentiated strategy above the unpredictable benefits of a rising tide.
The opportunities in a broader AI infrastructure are interesting to us; primarily in power generation and the updating of the grid. We are also drawn to the prospects found in healthcare. The gravitational pull of the “AI trade” has made for a less efficient market in other sectors.
The second half of the year could be more volatile. The possibility of higher interest rates and very loud political noise could weigh on valuations, even when they will likely have a small effect on earnings.
We look forward to navigating this season together, holding opposing ideas with conviction while staying focused on the long-term opportunities they reveal.
