In my last letter, I discussed successful long-term investment as a cycle of Push. Fall. Rise. Repeat. Deeper observations and additional reflection on my part—and recent Brexit volatility—confirm that being a long-term investor means experiencing turbulent events regularly. We can seldom relax in that pleasant valley where everything is just fine and dandy. The headlines of the Fall and the Push parts of the investment cycle are generally louder—and the painful reactions linger longer—than during the Rise part of the cycle for investors.
Where are we now?
Early June 24th, after the fateful Brexit vote, I expected dramatic market downturn and decided not to buy or sell any company we own because of this. That was exactly what happened. I know it is not easy—and the hyperbolic news headlines are very difficult to ignore. But ignoring them is simply the right course of action because as investors (not traders) we have to focus on the companies we own and why we own them. There is not one single company we owned because U.K. was a part of the single European market. As a matter of fact, a few days after Brexit, a great timeshare company we had owned just since April 2016 was bought out for a 30% premium over our purchase price. It is clear to me that although the British voted to leave the European Union, it did not mean they also voted never to go on family vacations around the world.
Where do we go from here?
I anticipate there will be more reverberations from the Brexit political shocker. I anticipate the smarty pants strategists will regale us with even more hyperbolic forecasts for the upcoming election in the US. What does it all mean for us now? We will stay cool and disciplined. The mission has not changed—we are looking for a few good companies without regard to whatever political party is in power. Do cars still need repairs, do people still need to take their prescriptions, and do people still need to eat? In all my years of research—I have yet to find a substitute for food.
On fixed income and alternatives:
Three months ago, I indicated that the Fed might pause a bit in raising rates in 2016. The Brexit vote and the subsequent global uncertainty suggest to us that pause is going to lead to hold for a longer time. I believe lower interest rates will stay with us even longer.
What should we look out for?
I believe investors are not willing to make any bold systemic bets until the outcome of the elections in November. That leaves the markets in the hands of traders looking to react to unexpected shocks for short-term buys and sells. As for us, we would like to identify one or two unique opportunities in the coming months that are not tied to the doldrums. It may be a new IPO or it may be a takeover target or a pharmaceutical company with a spectacular breakthrough.
I don’t know who is going to vote to leave Europe next, or who will be the next president of the United States, or when the next unanticipated but regular market shocker will come, although I know there will be storms and there will be rain. BUT I am 100% certain that there is NO LIMIT to human ingenuity—or to the ever-vigilant entrepreneurs all over this great country ready to pounce and take over superb companies selling at significant discounts to intrinsic value.
Femi T. Shote, MSF, ChFC, CFP®
Accredited Investment Fiduciary®