Y H & C Investments August 2024 Update

Gradually, then, suddenly

(Return figures in this section come from the July 31, 2024, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

Y H & C Investments: Understanding Return Expectations for Equity Markets and Individual Securities Is Important to Prevent Dain Bramage!

In the movie, Willie Wonka and the Chocolate Factory, there is a character named Veruca Salt who is the daughter of a wealthy businessperson (click here for more information on Veruca) She famously sings of “Wanting it now, I want it now.” As an investor in the stock market, returns on your capital is the ultimate goal. You want as high as possible, and you want them as fast as possible. Unfortunately, approaching the stock market like Veruca Salt is a faulty plan. It might be good for creating brain damage, but other than that, it probably only leads to disappointment.

Please don’t misunderstand, I completely empathize with an investor who is looking for high returns as soon as possible. However, as someone who has invested for over 30 years both as a private investor and for clients, I respectfully suggest going the opposite direction. Don’t expect anything for a long while and be pleasantly surprised when your capital is growing nicely. Let’s look at this subject a little closer, shall we?

First, let’s start with a math problem. What would you rather have for your investment, a consistent eight percent return for three consecutive years, or no return for two years and then a fifty percent return in the last year? From a mathematical perspective, we know the answer to the question. However, there is the behavioral psychology dilemma, and this is where investors can have problems. Markets are not linear. You don’t always get a return of x that you can count on. The idea you are going to earn seven or eight percent every year, while nice and comfy, seems pleasant, but it just is not how markets function. Markets are volatile over a short time frame, but over a longer period, think a decade or more, the returns become far more predictable. As for individual security returns, in many cases a stock does not move much for a year or more. It might be two, three, or four years, and then it doubles in a month. In order to realize the one hundred percent return, you have to be able to handle the time frame where nothing happens. More importantly, understanding how the company is growing and working towards a larger and more profitable business and why you need to keep owning the stock is what determines whether you achieve your return or not. The skeptic might say what if the company never achieves the ultimate business objective. It is the risk an investor takes when owning individual securities. Without a comprehensive understanding of who is running the company and how they are working to make it a larger and more profitable business, an investor is going to have a very difficult time earning the returns they want. So, the question becomes, do you have the patience to hang in there and keep the faith owning companies where the stock is doing very little, or don’t you?

Spanning the Globe: Inflation, the Magnificent 7, and Sector Rotation (Return figures in this section come from the July 31, 2024, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

Over the past 6 months, I have written repeatedly about the price differences between the massive winners of the Magnificent 7 and what is offered in nearly every other part of the equity market. A few weeks ago, when an inflation related statistic came in more dormant than expected, investor sentiment changed as the realization the Federal Reserve will probably lower interest rates hit home. Naturally, there was a change in the flow of capital out of the biggest winners and into other areas of the market. All over the investment world, the most prominent question is will this ‘sector rotation’ continue or is it back to the same old of buying the largest indexes and the dominant technology companies and call it a day? Some market commentators are playing down the comparison between the current valuations of the biggest winners and past overvaluation periods like the internet bubble. I would respectfully say the AI bubble is right on par with past bubbles. Yes, these massive companies have great businesses and plenty of advantages. The valuations reflect that and then some. If the billions being spent on AI don’t lead to future growth meeting market expectations, well, history might prove accurate after all.

In terms of the smaller company area, everything is based on the individual company and their specific business characteristics. Many make note of the fact that 40% of the Russell 2000 is not profitable and it is why that index has struggled. What they do not delve further into is what those forty percent are currently doing to become profitable. In two or three years, many of those companies may have grown to the point where they are extremely profitable and have very good long term growth prospects. Investors will know more if the September interest rate cuts actually take place. The consensus is the rest of the market will benefit much more than the Magnificent 7. Investors are waiting to find out how things transpire, and capital flows depend on it. I’ll be watching, and I am sure you will be as well.

Y H & C In July: Industry & Holdings Update: Gradually, Then Suddenly

(Return figures in this section come from the July 31, 2024, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

In looking across the reported quarterly results of publicly traded companies, the most noteworthy point is large consumer related entities continue to report of pressure on the mid to lower end consumer. You see this with reduced guidance and results which are on the bottom end of the range across the quick service food and restaurant area, the value segment of the hospitality sector, and some of the entertainment companies. Real estate is a very broad area, so it is sector specific as to the quality of the assets and their results, but the same observation still holds.

With regards to our holdings, one experience to draw on is the idea that companies are constantly investing to improve their businesses. Typically, these investments take a few years to show results. It is not like going to a casino and playing a hand of blackjack and getting an outcome. In business, things take time, think months and years, not seconds and minutes. So, gradually, over many months, one portfolio company has been building out some of their platform and during the last quarter, the results showed up suddenly with revenues growing over 30%. The stock has done very little over the last two years, but management has been buying it back at far lower prices. Investors in the equity were rewarded for their persistence and patience, and these investments will continue to contribute to a broader range of offerings which help diversify and strengthen the revenue base. In another situation, a very large multi-national consumer packaged goods company has been working on streamlining the supply chain and putting more resources behind its top brands. Volume and sales growth materialized and low and behold, investors were rewarded. Again, you have to be willing to let the company execute their plan and have the stock not perform to eventually benefit from these improvements.

On the smaller company front, many of the earnings reports are coming in the next few weeks. The same point is applicable in that all of the smaller entities are investing in the business to improve them. It may take much more time for the results to materialize and that is why it is called investing. One other observation I have is during my time spent with my family traveling across California, New York, and Florida, the travel sector seems to be quite strong. Planes and hotels are full, and international travelers were certainly very noticeable, especially in the Big Apple. In August, I will be here in Las Vegas with plenty to pay attention to as earnings season is in full swing and there are a few investment conferences which have merit.

I very much appreciate your interest and if you have any questions or comments, please say hello at information@y-hc.com.  Thanks for your continued support!

Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)