By Brian Nelson, CFA
Earlier this week, I received an email from a colleague and valued member of our services. I wanted to share it here for others to read. I haven’t included his name, but if he wants me to, I can add it in. It is filled with wisdom, experience and kindness. And it really made my year to read his words. The Valuentum community, I believe, is the best community of investors out there. Sir, if you do happen to read your own email on our site, we very much have appreciated your feedback, and we hope to continue to live up to your praises. We are dedicated, and our team has been rejuvenated by your words. We’re honored to have you as a member.
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Brian, it’s been a while since I’ve checked in with you but your recent newsletter reminded me to shoot you a note. I offer a couple of thoughts for your future writings that come from having a few more years on you.
1 Your investment approach is as good as I’ve seen them. Good companies at a value price while trying to avoid buying too early and tying up dead money will, over time, yield the best and least volatile results.
2 Nobody bats 1000. Don’t waste a second being disappointed.
3 Everyone is a bull market genius. Those that avoid promoting their returns in bull markets don’t have to apologize or feel disappointed when they underperform which everyone does at certain points in their investment careers. The Oracle was on the cover of every magazine during the tech boom for his vast underperformance. Trust me, people know your returns without you writing about them in every newsletter.
4 Avoid discussing winners other than when making portfolio changes or when discussing your views on the operating performance of a business and its prospects as if you own the entire business. You often do that and it’s wonderful. No need to highlight paper gains and losses on individual businesses you own.
5 Your early years’ communications on your goals of achieving strong returns in good and bad markets separates you from the pack, which only looks at their relative valuation to indexes. Never be satisfied that you own businesses that are losing money but losing less than the overall market. Your focus on buying good businesses at attractive valuations (at hopefully more opportune times) is what you do great and is all that matters both short and long term. Discussing relative performance dilutes that message in my view. I personally believe that you should communicate to your subscribers the opposite of over/under performance. That you don’t care what the market is saying on a given day about the value of your businesses but that you watch the market to take advantage of deals on both the buy and sell side that Mr. Market is offering.
It has been my experience that these values will stand the test of time. You have a great product, great valuation models grounded in reality and offered up with some very nice entry and exit signals. In my view any self-promotion is unnecessary especially with respect to any unrealized gains and losses.
Currently, I think your concern about a market that is somewhat frothy on a historical basis is the right concern. Combine that with the coming rising interest rates and massive liquidity that will need to be mopped up (de-levering of the Fed will be way more painful than the de-levering of the consumer and private commercial sector that began in 2008). I have not figured out an effective long-term hedge for a meaningful portion of my portfolio.
I don’t like assets that you cannot value (you can’t run a DCF on gold), put options are inherently short term and have always expired on me too early, cash will be worth less in an inflationary environment or the current environment of printing money and debasing currency, fixed income can only go down from here and selling great businesses and triggering substantial taxes at the new higher rates is not very appealing. I have considered selling calls at prices I would be willing to exit (strike prices above my fair value and slightly out of the money) at a price that would pay the taxes if they were to be exercised and soften the blow if the market pulls substantially back. I’m all ears if you come up with a more effective hedge since you seem to have the same trepidation about current valuations.
In summary, I want to emphasize, just how much I believe in your thinking, your DCF modeling (your results are usually very close to my own models) and other buy and sell signals you have combined with it. In other words I think you have a great product. I hope you accept the above comments in the spirit in which they are offered.
Best regards,
xxx (name omitted)
Tickerized for Dow Jones Industrial Average constituents.