“Someone is always winning or getting richer than you. It is a fact of life, not a tragedy.”
“Determine value apart from price, progress apart from activity, wealth apart from size.”
Dear Friends and Interested Parties,
It has been a challenging quarter in the world of asset prices. We have been talking about a transition in the markets for quite some time, but watching it unfold on our screens doesn't get easier. We are in the business of first protecting your assets and then growing them over time. And although we have been in many bear markets during our careers, it is never easy when the tide runs against you. It is so much simpler to swim with the tide in our backs.
We lean on optimists' strong shoulders and know times will improve; they always do. History rhymes, and we have a lot of confirmational data showing the pendulum of the markets is constant: there is no race to the bottom that lasts forever. We also know how to evaluate opportunity costs; we are constantly weighing the next best alternative against the current ones in our portfolios.
Opportunity costs are difficult to measure: is cash a good option while inflation deflates its purchasing power? Probably not, but lately, if we had invested our cash in bonds or in the equity market, we would have had worse returns. We increased some of our holdings and think of this move as buying the same items at a discount, and we now own an embedded long-term option on the future value of our companies.
We think the transition currently underway in the markets will last a while, with rising interest rates and inflation eating into our purchasing power, which will result in less spending and consequently slower economic activity. It is part of the economic cycle, and no expert of any central bank can change this reality.
Value is determined by productivity; only when companies increase productivity, which means producing more services and products that are consumed, will the value of a company increase over time.
Prices, not value, are determined by interest rates and investor sentiment.
Psychology plays a large part in the pendulum of prices in asset markets, and it makes a lot of sense to self-check our thoughts and refocus on the process of long-term investing. It is a process that requires being able to withstand:
- Short-term price volatility.
- The urge to act while no action may be the best option.
- The urge to count our assets daily and compare them with our friends.
We know it is hard, but we urge ourselves to look beyond the cycle and concentrate on companies that will produce meaningful value over time. Eventually, time will even everything out, and your Return on Investment should come close to the average of the company's rate of return after taxes. That is what we are aiming for. It takes much patience and courage, especially in the current environment.
Although there are many exciting companies worldwide, we keep focusing on the world's largest economies, the USA and China, simply because of the ease of selling products and services in a large market. The Chinese consumer market is about four times as big as the American one, something you cannot ignore. Alibaba surpassed one billion customers in China alone, which is impossible to beat in all other countries except India.
A quick reminder about our Quantitative Strategy, an Artificial Intelligence (AI)-driven strategy: our Quantitative Strategy switched to 60%-70% cash, allowing us to avert a large part of the correction this quarter. It is agnostic to sectors, growth, or value styles. It is immune to human biases like panic-selling or fear-of-missing-out buying. When equity valuations become too high, or the perceived market risk is too significant, our model will refrain from buying and automatically increase our cash positions. Our Quantitative Strategy works very well, and it gives us comfort for the short-term fluctuations because we all know the long-term does not happen today, and today is where we live. Therefore, we need to be conservative.
As always, we thank you for your trust in us. It is a great responsibility, and we will try our best not to disappoint you. Be safe, be patient, salute our heroes, read good books, and be optimistic: it pays!
Thank you for your trust