R.I.P 2022 | CROUCH CONNECTION | JANUARY 2023 "ADV"
JANUARY 8, 2023
Pat yourselves on the back! 2022 has been an especially frustrating year for investors (and advisors), but clients at Aspen Grove Asset Management have been exceptionally courageous and have “hung in there” with their investment portfolios. We believe that your patience will be rewarded any day now.
BEWARE OF “CONVENTIONAL WISDOM”
In 2022 we have witnessed an epic battle between the Fed and the inflation produced by the unprecedented stimulus packages passed by our brilliant leaders in Washington and exacerbated by Vladimir Putin and his war on Ukraine. Wall Street and their horde of economists and pundits have fanned the flames predicting that the Fed will have to put the brakes on our economy so severely that a recession may be right around the corner. But wait a minute!
I have repeatedly warned anyone who will listen to me that the “Wall Street Consensus” is rarely correct. We have charts and graphs which document that often you are better off ignoring the “consensus”. Unfortunately, one of my most respected market strategists, Scott Minerd, passed away just before Christmas at age 63. Minerd was never afraid to speak out even when his view differed from the crowd. He said:
“As an asset manager, I’ve come to view conventional wisdom as the surest path to investment underperformance.”
Even though the crowd continues to warn of a dreadful recession, there are currently a few strategists that are not falling in line with the crowd, believing that the worst may be behind us. That is not what the media would have you to believe…they rarely let reality get in the way of a good story…they prefer to generate hysteria when they can. We attempt to read enough so that we also understand the other side of the story.
“THE FEVER APPEARS TO BE BREAKING”
Jonathan Golub, Credit Suisse chief U.S. Equity Strategist has been predicting that inflation may “collapse” much sooner than is widely believed. In a report on September 12th he concluded that:
“the Fed will have to pause interest rate hikes sooner than is widely expected due to tumbling inflation, launching a powerful market breakout.”
His latest weekly report was titled:
“WAGES UP + INFLATION DOWN + LOTSA JOBS = STRONG CONSUMER = NO RECESSION”
His view is that the CPI will be at 2.6% by the end of the year..
Tom Lee at research firm Fundstrat, citing data from the recent CPI reports, sees “signs that inflation is set to massively slow during the coming months “. Even Goldman Sachs chief economist Jan Hatzius said recently that “he’s more optimistic than most experts about the economy’s ability to sidestep a recession.”
TAKE THE LONG-TERM VIEW
Warren Buffet credits Charlie Munger, his 99-year-old partner and Vice Chairman, with much of the success enjoyed by Berkshire Hathaway’s shareholders. An opinionated and sometimes blunt commentator, Munger has been quoted almost as much as Buffett. One of my favorites is:
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success”
Again, our AGAM clients have shown excellent control of their emotions in 2022, sometimes with a little encouragement from us, and that’s okay…that’s one of our most important jobs. We plan on all of our clients living to age 99 like Munger, just in case you do! Taking a view that long means that we must do our best to ignore the inevitable downturns like we have recently experienced. Carefully researched and chosen equities have historically been the best performing investments over the long term.
A BUFFETT RULE REVISITED
Warren Buffett has always said that the most important rule of investing is to only buy companies with a “wide moat”, or a huge competitive advantage. In fact, he prefers a monopoly. Buffett says “pricing power is the single most important factor in evaluating a business”. Our experience has confirmed that principle and has been a cornerstone principle that we have followed since the founding of Aspen Grove Asset Management.
Another article in this week’s Barron’s underscored the importance of “pricing power” or buying companies with a significant competitive advantage. Henry McVey, the head of global macro and asset allocation for KKR, one of Wall Street’s largest private equity firms, offered what he called a mega-theme for a challenging recovery: “Focus on Pricing Power”:
“This type of environment heavily favors companies with pricing power. The haves – price makers- should succeed. Those without it – price takers -are going to be challenged.”
Daniel Peris, Senior Portfolio Manager and Federated Investors recently put it this way:
“Are dividend stocks well-positioned for a higher inflation, strong growth environment? It really depends on a company’s pricing power. Investors will want to keep a keen interest in the ability of their companies to take what’s called pricing (price increases) to manage their input cost increases.”
So, how can you really identify businesses that have that big competitive advantage? In a nutshell, look at the competition. If a company is in a competitive industry (think groceries, automobiles, restaurants), unless it has something special that makes it stand out from the crowd, it probably is not a great investment. Like Buffett, we prefer monopolies. Outside the utility industry, monopolies are not available, but we believe we have identified several companies that stand above the crowd.
I can assure you that if you ask about any company in our portfolios, we believe that we understand the business, and we believe they have a durable competitive advantage that we can explain to you. Please call us anytime for more details. This is our passion, and we enjoy our conversations with our clients!
Come to see us!
Dave Crouch Registered Principal
Kim Blackburn Branch Operations Manager
Kay O’Connell Portfolio Manager
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Dave Crouch and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Aspen Grove Asset Management is not a registered broker/dealer and is independent of Raymond James Financial Services.