Y H & C Investments May 2024 Update

History Lessons-

Those Who Fail to Learn from The Past-

Return figures in this section come from the April 30, 2024, 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)

People always remember their favorite teacher from high school. It is a special time of life, one where you grow in a variety of ways: educationally, socially, emotionally, and physically. My favorite teacher from high school was Mr. Nelson, who taught history. He was an ex- Indiana State University basketball player. He was what is called in the hoop’s world, a scrub. A backup. He was also the coach of the high school golf team. Mr. Nelson was about five foot five, with blonde hair, clearly not an overly imposing individual. Quite the opposite. He was the friendliest person and teacher I ever had the pleasure of experiencing. He made the course interesting and fun. Some people find history dry and oh boy, do I hate this word, boring. Later in life, I taught history, and I wasn’t as good a teacher as Mr. Nelson, but I did my best to make it interesting. Let’s turn to the capital markets for a little history, shall we?

During the internet bubble in 2000, technology stocks like Cisco, Microsoft, Apple, Nortel Networks, JDS Uniphase, and others sold at soaring prices. Many investors put their faith in the idea that the internet would become a transforming technology for society. They were right. What they got wrong was paying too high of a price for the stocks they purchased. Stocks are little pieces of paper which represent the performance of a business. A business has a balance sheet, consisting of assets, liabilities, shareholder equity, and as part of the liability section, debt. Business earnings power is reflected on the income statement. If you pay too much for your equity piece, the value of what you buy can go down or remain listless for extended periods of time. Microsoft did nothing for a decade. Today, the price of Cisco remains lower than what it traded for in 2000, yes, twenty-five years later. Investors in JDSU and Nortel lost almost all their money by owning those stocks. Why do I mention this history? Well, look at the stock prices of the leaders in the market, specifically the technology sector. Today it is a different technology, artificial intelligence, or AI. AI has existed for a long time, and many companies have been incorporating it in their operations for 20 years. Jamie Dimon, the CEO of Chase, writes about it in his annual shareholder letter. AI is having a dramatic impact on many companies in terms of efficiency improvements in numerous ways. So yes, AI is important and will advance our society. Every teacher gives a test at the end of their class. In the markets, the test is what you do with your capital. You can either learn from history or ignore decades of evidence. I know what I’m doing for my clients, and I hope you will make a fact-based choice decision as well!

In the financial markets last month, earnings season began, and the largest banks performed pretty well, though Mr. Dimon threw in his usual caveats on interest rates. Last week, first quarter GDP came in soft at 1.5% with inflation running a little hot on the PCE reading. A deluge of earnings will come over the next few weeks so that is something to pay attention to. Another data point is the weakness of the Yen, which now trades at almost 160 to the dollar. Japan is going through an interesting period as the government has a new mandate for corporate governance to raise the book value of Japanese equity prices. Many asset managers and investment banks applaud what is currently taking place in Japan and believe it is long overdue. With the weakness of the Yen, it is not out the realm that Japanese manufacturing will become much more competitive across the globe, especially relative to China. However, currency weakness can become a major issue both in and out of Asia. It could become an example of what can happen with the US dollar, so it is something to keep your eyes on.

Y H & C In April: Plan Your Work, Work Your Plan

April started the earnings season off and as is normally the case, the largest banks reported first. JP Morgan Chase is the largest and most important bank in the country and world, and they will post profits of nearly 50 billion this year (49.6 to be precise). It is double the size of its nearest competitor. Their outlook sets the tone, and they say the consumer is in good shape but there are reasons to be cautious, most related to geopolitics and the lingering view that interest rates will be higher for longer. A crucial point I pay attention to is the level of charge offs by the banks on their card businesses. The real estate investment trust segment also trickled in a few earnings reports and on that front the earnings were solid. One of our holdings, which is Hawaii focused, sold a bit of land and it boosted their profits, which they will now recycle into more commercial or industrial opportunities. More REIT’s will report during this week, and consumer related holdings will also tell their results this week and next. In almost all cases, our holdings are boring. They tell you what they are doing, what they expect, and then their financial reports reflect those expectations. Grow revenues, improve margins, grow cash flow and profits, look for opportunities to buy back stock and/or make acquisitions. They have a plan, and they follow through with it.

We attended the LD Microcap conference in New York City and the overriding mood was one of the enterprising spirit and optimism in the potential of their situation. I met with many companies, some of which we already have positions in, and plenty of candidates for additions. A few fun meetings were with leaders of larger companies and the investment bank which runs the conference. It is always nice to have meetings with people who value your perspective. The LD conference has long been run by Chris Lahiji, and the wonderful themes of treating people well, overriding optimism for the future, and a belief in small companies and their ability to create value for their stakeholders infused the event. Markets have not agreed for a long time, and it just means the rewards will be much sweeter when they eventually come. This week is the Planet Microcap conference here in Las Vegas, long run by Robert Kraft and his family. It should be a great time and I’m fully booked so you’ll learn more about it during the June update.

Y H & C Industry & Holdings Update- Building on Prior Success and Experience! (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)

To have success in the financial markets, it is important to play to one’s strength. First, I stay away from areas where I don’t have an advantage. Second, it means avoiding industries that have a long history of destroying capital. Third, I leverage prior knowledge and success during the last thirty years of investing. As an example, with strong investment returns in an energy investment based in Hawaii, the accumulated knowledge and prior life experience has been used to invest in the real estate area across a number of companies which have assets in, you guessed it, Hawaii. Another example relates to a built-up familiarity with Las Vegas and the West Coast. Again, these are primarily applied to the REIT industry but are also applicable to gaming. If we look at the banking and payments area, the long history of participating in these areas lead to more investments across the space, although currently they are more oriented towards smaller companies. Let’s look at another aspect of this strategy, which is building a pipeline of candidates to monitor for potential inclusion into the current portfolio.

In the pharmaceutical industry, companies are evaluated based on their future drug candidates which they currently own. The industry is plagued by patent cliffs where drug revenues fall once the patent is no longer applicable. Consequently, the drug companies are constantly trying to develop, buy, or gain access to new drugs to replace the ones which are close to expiring. Similarly, it is important to build a roster of companies which are monitored for business progress. These companies can be whatever size you want, and you can either own a little of them or just watch them (put them on your watch list on the phone). By monitoring the pipeline, it builds the knowledge base and prepares an investor to buy those companies which are improving their business, and dropping those which are regressing. By both building on prior success and being prepared with a wide range of candidates, these strategies help give me a better opportunity for success when the market decides that there are more than ten companies worth owning.

Finally, I have been more active by creating some more investing videos and articles so there are links to those if you have an interest.  I appreciate your interest and if you have any questions or comments, please say hello at information@y-hc.com.  Thanks for your continued support!

If you think it is worthy, recommending this edition to a friend or family member would be appreciated.