Y H & C Investments December 2023 Update-

A November to Remember-

Thanksgiving Treat- November Returns Bolstered by Fed!

Return figures in this section come from the November 30, 2023, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. 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 the sport of college football, a famous quote is ‘the games to remember are played in November.’ The month of November 2023 was one to never forget for equity owners as all US indexes moved higher.  The impetus behind the wonderful performance was the Federal Reserve acknowledging progress on the inflation front.  At the very least, the market took it as there will be no more interest rate hikes.  In addition, capital providers realized the economy currently is not in recession, especially with strong consumer spending numbers holding up much better than expected.  Earnings season is mostly complete, and as is usually the case, the majority of companies met their earnings estimates.

The balance of the year will probably be a winners win, losers lose market.  Tax loss selling is the focus, as is protecting gains.  It is also a time where there are situations which provide excellent value.  Each one is distinct and must be researched extensively.  They also have to fit nicely with the existing portfolio holdings.  With geopolitical events providing a daily dose of trouble around the world, it is a very uncertain time.  When you overlay the large annual deficits and huge debt in the United States, it is a time to make sure you know what you own. 

Y H & C In November- Munger’s Influence

I never met Charlie Munger.  He died this week at the age of ninety-nine.  He was Warren Buffett’s partner and helped build Berkshire Hathaway into half a trillion-dollar enterprise.  Mr. Munger had a massive impact on the trajectory of Warren Buffett’s destiny.  Personally, he had a tremendous influence on the way I thought about investing.  First, he changed how Buffett invested by helping him understand the importance of the quality of the business you own.  Much of this is illustrated in a story he tells about investing in a company as a young adult where he visited the company, and all the assets were on the dealership in the form of inventory.  It is the weakness of many businesses that the working capital cycle ties up so much of the available assets, which makes cash flow always a major issue. It is why many companies provide financing and services as it is a way for the business to make money in a much less capital-intensive way. 

Munger also spoke about inverting, which is simply to flip your thesis on its head to see if it holds up.  In the case of Berkshire, the heavy investment in the insurance industry illustrates the idea.  Insurance is completely the opposite of a poor working capital cycle.  Insurance is paid up front, and then the premiums pay for the costs later.  In the meantime, the capital is used to invest in income generating assets, usually bonds.  From a cash flow standpoint, it is a much better situation for a business.  Most insurance companies just try to break even on their insurance operations, and their investments make the majority of the earnings.  From my standpoint, recognizing the cash flow dynamics of a business and the capital intensity comes directly from these learnings, along with years of being in business and investing.

Munger wrote about the psychology of misjudgment, and it is an area to focus on to avoid mistakes.  My biggest mistakes over the last thirty years had to do with taking management teams at their word.  If trust is breached, my experience is things are only going to get worse.  It’s not just an investment lesson, it is a life learning and one to continually practice. 

 Finally, Munger repeatedly talks about concentrating your portfolio in your best names. For most investors, me included, there is only so much capital available.  Excellent opportunities are very scarce.  When you recognize them, you have to be willing to allocate as much capital as available.  Academics believe in rebalancing a portfolio to not be heavily concentrated on one or two large winners.  Much depends on what approach you feel comfortable with.  From a professional standpoint, diversification is what I use for clients.  Still, when there is an excellent investment available, Munger’s method typically winds up being the wisest approach.  Munger was brilliant, wise, and truly one of a kind.  RIP Charlie Munger, RIP. 

Y H & C Industry & Holdings Update-Hot and Cold! (YH & C Investments may have positions in companies mentioned in this newsletter. 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)

November was an excellent month for the market and our holdings participated in the uptrend.  The biggest areas which benefited were real estate related holdings, and global entities based outside the United States.  Selected financials also fared well.  Our smaller sized companies did benefit, but the theme which has evolved over the last decade remains in place, the magnificent seven reap the benefit.  Everything else, well, not so much.  How am I thinking about the next year and beyond?

I think the economy is going to slow down in the first few quarters of next year.  I believe the Fed will begin cutting rates as soon as they are able to, regardless of the protests by Mr. Powell.  Under these conditions, I think real estate and banks are the areas which will benefit.  I think capital will move away from the magnificent seven and mega cap stocks and into far less expensive areas, especially small caps.  The Fed will not want to do much during the back half of the year as the election approaches.  During the rest of this year, beaten down areas of interest include private equity sponsored retailers, real estate related holdings, and our existing microcap positions, along with some conglomerates which are in the process of rebuilding their companies after large acquisitions. I am quite optimistic about the businesses we own and how they will perform over the next decade.  Markets are always changing, and it is what makes the investing field so interesting. 

If you have questions or problems I need to know about, please email me at information@y-hc.com

Thanks for reading the newsletter this month, and if you think it is worthy, recommending it to a friend or family member would be appreciated.   

(Y H & C Investments may have positions in companies mentioned in this newsletter. 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. Past performance is not an indication of future results, and you may lose your principal by investing in stocks.