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Different investment styles and stress

Back in 2011, Valor made a considerable amount of money for clients buying dollar for 50c investments.

As the markets rose to silly levels over the decade, this style of investing has become more and more difficult.

At higher market valuations, our portfolios have naturally transitioned to higher quality companies. We think that it is extremely important for investors to know where they are in the cycle.

This is not March 2009!

In March 2009 and for a few years after the crash, you could buy beaten up companies at fantastically low prices and the risk was low. In June 2021, these bargains simply don't exist in any meaningful number.

Buying average or below average businesses is very risky with no margin of safety. When the tide goes out on a resilient high margin company, it is usually less painful than the market on average and more temporary.

What we didn't expect was the significant reduction in stress levels once we upgraded the quality of the portfolio. We also noted that clients were far less worried about their portfolios which was another added benefit. As we run completely transparent portfolios, clients can see every position and it is not uncommon for clients to query our smallest positions. Having a dozen or so positions less than 1% and some of them mathematically guaranteed to be losing positions always created talking points during client meetings. Clients have never questioned our Berkshire, Alphabet, Facebook, Amazon or Microsoft positions (despite Berkshire being our largest drag on performance in the 3 years from January 2018 until its recent surge).

It is simply more comfortable and enjoyable knowing that we own the world's best businesses managed by outstanding people.

The better businesses attract higher grade people. It is like owning a gift that keeps giving when a great manager continually adds to your wonderful business. Jeff Bezos adding AWS and advertising to the Amazon mix is the perfect example of continual improvements from the best.

The opposite to this is the cheap 'repeat offenders'. Those that have the wrong people, who then attract and hire the wrong people and continually disappoint. AMP is a perfect example of a repeat offender company.

We have made a lot of money buying good companies when they were beaten up, however the after tax returns when mixed with our mistakes have been less than we would have made it we simply stuck to owning the best and holding for the long-term.

We have owned Alphabet (Google) for nearly a decade. We have owned Facebook for many years. It would have been far easier and more profitable to own more companies of this ilk, rather than the moderate (less than most) portfolio activity that we created buying cheaper companies with what appeared more short-term upside.

Valor saw the Covid19 crash coming around 6 weeks before most and we positioned the portfolio very cautiously. This realised a meaningful amount of capital gains. We made a huge mistake in trimming Alphabet and Facebook at $1460 and $232 thinking it was prudent to reduce risk. The current prices for these stocks proved our caution was not correct.

We did make nearly 50% gains on buying Unibail and Scentregroup during the bust, however this portfolio activity was less effective than simply holding Alphabet and Facebook. Unibail and Scentregroup were both significantly undervalued when we purchased them, however this style of investing is difficult and does not necessarily provide superior after tax long-term returns.

We may again buy a dollar for a lot less than a dollar, however we will likely demand a larger discount to make up for the friction this type of activity creates. This larger margin of safety makes it less likely we will find such bargains. We are also well aware of the current market conditions and attempting to push on a string to find these bargains can be very risky.

Sitting on cash waiting for opportunities at zero rates is not fun when inflation is a few percentage points above your return. Central banks appear to want to cause pain for savers longer than you can remain patient.

Fortunately, we are continuously reducing our stupidity. Our portfolio return of 22.9% this financial year is acceptable and considering our outperformance is usually during the down periods, we are pleased to be performing well in the up period.

We do expect the tide to go out at some point. When this occurs, we are very comfortable our exceptionally high quality companies will display their resilience. Those that own capital dependent cyclical companies may outperform us in the short-term, however we sleep very well at night knowing we are mostly avoiding these lesser businesses with lower grade people.


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