The Long Run Quarterly Letter: January 2008
We have spent the past two years making sure that clients avoided investments in financial service companies exposed to problems in the housing and credit markets. We have also worked hard to find new opportunities among companies that were benefiting from the growth in markets outside the United States. It has been a delicate balance, much like the one my two-year-old, Finn, is attempting to achieve with his first forays on the see-saw.
While this somewhat awkward balance has held over the past year, it is now showing some signs of teetering. Growing banking sector problems seem to be spilling over into the broader economy and signals point ominously toward recession. In light of this, we recently have been asked if now is the time to jump off the seesaw before it, uncomfortably, hits the ground.
We would not argue against the suggestion that we might already, in fact, be in a recession – though we would caution against assuming that this holds drastic consequences for all investments. In the past twelve recessions, stock prices have, in fact, risen six times. If valuations were higher, we would be more cautious on equities, but we continue to see enough compelling, long-term opportunities to justify maintaining a balanced investment approach.
As we have emphasized many times, successful investing avoids the herd and seeks out sustainable earnings growth. Our negative view on banks and housing emerged two years ago when these sectors were at the peak of their popularity, not now as stocks have crashed and their long-hidden problems are on daily display. We note that central bankers and foreign investors are now aggressively working together to alleviate the financial crisis. We prefer an environment where problems come to light and constructive medicine is administered. In the very recent past, the supposed watchdogs simply allowed equilibrium to get washed away in the flood of unsustainable, short-term profits.
With investor psychology as negative now as at any time in the past twenty years, our discipline encourages us to stay calm and look for opportunities while others panic.
- We note progress being made on the political front. Evidence has been presented that Iran has abandoned its nuclear weapons efforts, reducing the chances of a foolish U.S. military intervention. Progress is being made in Iraq, raising the likelihood of some troop withdrawal this year.
- Amidst calls for a U.S. recession, we still see signs that global growth will continue. Lower interest rates and energy prices should support a modest rebound in our economy later this year.
- There continue to be sectors of sustainable growth. We believe healthcare, green manufacturing, agriculture, alternative energy, and the growth of consumers in emerging markets are all important trends that should have many years of growth ahead of them. Corporate leadership and innovation have also spurred new opportunities as large companies are marshalling their significant resources to redefine industries – as Apple has in the music business and Wal Mart and CVS are beginning to in affordable health care.
Accounts are also in good position. Our fundamental discipline pushes us to trim some of our successful holdings when they become too popular as we did with some of our conventional and renewable energy investments this past year. And so we enter 2008 with ample cash. Our investment approach also keeps us looking for new names before others recognize their value. During the past year, we purchased stock in Sims, the leading company in the rather mundane business of recycling scrap steel and computers. Solidly profitable with rising margins and a high dividend yield, the company is finally getting some attention as it was recently profiled in the January 14, 2008 issue of The New Yorker.
While maintaining stability in these uneven times is always a challenge, experience and discipline help. We are pleased that our efforts produced good returns this past year as we avoided the most dangerous sectors of the economy and participated in some of the most positive developments around the globe. We hope to meet your goals in 2008.
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In Reynders, McVeigh news, we are proud to announce the addition of Julie Johnson, CFA, to our firm. She will be part of our account management team and she will be the Managing Director of Fresh Pond Capital (www.freshpondcapital.com), a wholly-owned subsidiary that will further our company’s efforts in the field of socially responsible investing. Through Fresh Pond Capital, we will offer additional advice to clients interested in socially screened portfolios, shareholder resolutions, community investments, and granting. Julie has ten years of experience in the field and has worked previously with both Chat and Patrick. Please let us know if you have any questions, or please feel free to contact Julie at jjohnson@reyndersmcveigh.com.
Also, we are very excited that Grand Canyon Adventure – River at Risk is set to open worldwide in March just before World Water Day. This is the fifth major IMAX film that Chat and clients have been associated with and, we hope, the most important and powerful. It highlights the importance of water conservation and river restoration at a time when clean water is increasingly endangered. We will be holding an event at the premier in New York on March 12 with another to be planned for Boston in mid-April.
