Y H & C Investments September 2024 Update
Two Kinds of Businesses-
(Return figures in this section come from the August 30, 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: Two Kinds of Businesses
One of the most inspirational movies ever made was a story set in the Appalachian coal mining area. A very small high school football player who finished his last game was walking off the field after giving it his all during his playing days. Receiving no attention, he was undaunted and wanted to continue playing. His alternative was to work in the coal mines, with the knowledge that many men spend the next fifty years of their lives working in a difficult job. It is his persistence, determination, and ability to overcome challenges pursuing his athletic and academic career which makes the story so moving. He was not a good high school student and had to enroll in a junior college close to the larger university. While there, he proved his academic merit. Once admitted, he walked on to the team and competed against many others for a few selected spots. His prize for success was to be smashed into smithereens every day by players one foot taller and one hundred pounds bigger. Sign me up coach! His ultimate goal was to ‘dress’, meaning suit up and get to run out on the field for an actual game, something very few walk- on’s ever do. He ultimately succeeds because the rest of the players believed he deserved it. The film ends with him running out on the field, actually making a tackle during the game, and being carried off the field by his teammates. Why is this pertinent to investing in markets?
There is an old famous saying in investing- there are two kinds of businesses. Those that have problems, and those that are going to have problems. It could be the most highly valued magnificent seven company, or a startup. Every business has situations which are challenging. Most businesses aren’t firing on all cylinders, no matter what the CEO’s say during the conference call or what is on the investor presentation. If you actually work in a business, you know what I am referring to. Maybe there is one client who is persistently a challenge to sell to. It could be the human resources department does a poor job filling open positions. The financial director is too cheap to spend money on deserving projects. The CEO is constantly looking for acquisitions which make no sense versus focusing on organic growth. Every business has specific problems and as an investor it is important to analyze and recognize what they are. Probably more important is assessing whether or not the company is moving towards its ultimate goal. Will they be able to dress, in the case of the football player? My experience is in the vast majority of cases, with unrelenting persistence, the ultimate destination is achieved. Clearly, what has to be part of your analysis is the question of whether the vision is worthy of your time and capital?
Spanning the Globe: A Typically Volatile August! (Return figures in this section come from the August 30, 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)
August is a notoriously light volume month in the financial markets, and this year is proving no different. Low trading numbers mean stocks make larger moves in both directions, but some of that depends on the specifics of the holding. The beginning of the month was impacted by a weak July jobs number on a Friday, followed up by the reversing of the yen carry trade in the currency markets the subsequent Monday. The currency markets are very important to overall market conditions because it is where massive amounts of leverage are used. If an entity has one dollar of equity, they can borrow up to one hundred dollars to make a trade, so they control much more capital than what they put up. It is a good news, bad news situation. If you are correct, you make much more, but if you are wrong, uh, you can be wiped out quickly. A hedge fund with 10 million dollars of equity can control a billion dollars of capital to invest. By borrowing in Yen, where the interest rates are near zero percent, and then investing in one of the magnificent seven, or the S&P 500 index, or say the Mexican peso or index (currently a near 4% dividend yield), many investors had positive returns and paid very little borrowing costs. Ahh, but there is always a rub, and in this case, it is the foreign exchange fluctuation. When the Japanese government raised interest rates, the value of the yen rose nearly 10% in one day, so selling the yen (shorting it) results in a big loss. The S&P 500, and the Mexican index and peso also took heavy losses, and investors using this funding tactic lost both on the currency and the equity (around a 20% loss in a day). In these predicaments, every asset class gets affected, so sellers search for what is most liquid. You sell what you have to, not what you want to. Leverage is always the killer, and 100 to one is the root cause.
After the harrowing Monday, markets have recovered nicely with the economic news showing strength in employment throughout the rest of the month. The one caveat was the rest of the year was revised downward so prior job gains were lower by nearly 820k. Friday, September 6 will be the August jobs report. It is one the investment community will be focused on as the Fed’s September interest rate cut decision will be impacted. The thinking is if it is weak, the Fed may cut fifty basis points, but most likely the Fed moves by twenty-five basis points (bips). Obviously, markets are going to be laser focused on the presidential election between the two sterling candidates, Special K and Mr. T. The debates are coming and I’m sure you can’t wait for the nominees to share their visions with the servants, oops, constituents.
Y H & C In August- Industry & Holdings Update: CSR Shocker, and Building a Holding on Weakness!
(Return figures in this section come from the August 30, 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)
August was a good month for the portfolio as the positive results for the broader indexes helped returns for nearly all asset classes, but especially in the real estate area, where we have good exposure. In the quick service restaurant space, the dramatic replacement of a CEO with someone who had huge success at another high-profile company made an immediate impact on a position. It is not often you see hundred-billion-dollar enterprises make major moves in one day, but low and behold anything happens in financial markets. It speaks to the fact that sometimes, the perception of leadership impacts investors actions towards a company stock. In this case, both entities have been massive winners over the last few decades. One has lagged over the last few years, the other was a five-bagger over the management tenure. It is probably premature for the market to come to the conclusion the CEO change will have a similar impact, and time will ultimately reveal whether similar results will be achieved.
In the small company domain, a few companies reported results with one specific holding having a good quarter which was overshadowed by a loan loss on a large credit. It is a business I am confident about and took the opportunity to add to the position as invariably, investors sell first and flee on any kind of news which as seen as problematic. Credit situations typically take a long time to work out, which means there are probably more issues coming. It also means you really have to have a good understanding of the company and the situation to own the equity. Clearly, I think I do and I’m prepared for the journey. In the daily practice of investing, there are always a combination of investments which are performing better than expected, consistent with expectation, or worse, just like any profession. Believing everything is going to work well in all parts of a portfolio means you probably are not diversified as optimally as you should be. It also puts too much pressure on an investor psychologically, which might be the most important area of investing. Rationally handling situations which the market does not reward you is part of the investment challenge.
Elsewhere, it is pretty much standard operations as companies continue investing in their businesses to grow revenues, improve margins, look for acquisitions, and buy back stock if the price is attractive. September and October are notoriously challenging months for the market, with the caveat being it often turns out much better than many make out.
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)