Investment Policy 2018-2019
By Julien B. Booth
October 30, 2018
I hope this note finds you well and enjoying the Fall weather.
I believe we have effectively communicated our “avoid excess risk” stance for the 2018-2019 period. Now that risk has manifested in quite bold terms I wanted to clarify, in brief, our macro positions:
1. We prefer structural protection in the capital structure;
2. We avoid leaving the U.S.;
3. We prefer differentiated, less correlated (to pure stock market) assets;
4. We like to get paid. Dividends and interest payments prove out management; and
5. We prefer the durability of underlying value.
The U.S. is in relatively good shape economically and we do not expect a recession in any short order; however, we do believe the rate of change of growth is shifting from momentum driven to value driven=its slowing. The Trump tax cuts were the effective exclamation point on a 9+ year, post “Great Recession” bull market.
In plain-speak this just means leadership is changing from the Internet 2.0 companies (Facebook, Apple, Amazon, Netflix, Google) to other companies with far more reasonable valuations. In the chart page from our Q4 2018 letter the valuations were epic. We could belabor the macro “whys and wherefores”, but primarily the recent valuation bubbles stem from the 0% interest rate policies of the Federal Reserve.
The media pontification will continue, but net, net the Federal Reserve is now taking $$$ out of the system (see chart 1). If QE gooses asset prices, should we not expect QT (quantitative tightening) to have an equal and opposite effect?
Now that capital is being better respected vis a vis positive real interest rates, the chase for growth (at any price) is being RE-priced.
Once volatility begins it generally must run its course. We cherish volatility as indiscriminate and/or forced selling exposes quality assets at Blue-Light Special pricing. Time will reveal it.
We were very active this week purchasing closed end funds trading at 10%, and larger, discounts to NAV. Thank goodness for the brokerage firms we say (they create this complexity to pull client commissions). Remember – NEVER buy closed ends in the new issue brokerage market, only in the secondary market.
Thank you for your interest in Forest Capital and Sixty Guilders Research.