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David Winters' 2013 Letter to Wintergreen Fund Shareholders
Posted by: Grass Hopper (IP Logged)
Date: March 5, 2014 05:29PM
2013 seemed to be the year when the quality, valuations, and risks of businesses ceased to matter to most stock market participants. The Standard & Poor’s 500 Composite Index (“S&P 500”) remarkable rise for the year was its best return since 1997 during the run-up of the technology bubble. The ten best performing names in the S&P 500 had extremely high returns, while carrying an average price-to-earnings multiple of 58. Among these top performers were a struggling retailer (Best Buy Co., Inc.), a recently bankrupt airline (Delta Air Lines, Inc.), a brokerage still digging itself out from the financial crisis (E*TRADE Financial Corp.), a biotechnology company (Celgene Corp.), and two poster children of a potential new internet bubble (Netflix Inc. and Facebook Inc.). We believe the extraordinary returns on securities we view as highly speculative names are a microcosm of the broader market in 2013 — market participants moving down the quality spectrum in search of returns, without regard for and understanding of risks and valuations. We believe overseas securities languished and emerging markets became the scapegoat of popular opinion.
The widespread appetite for risk has been fueled in part by years of artificially low interest rates in most developed markets around the world. When safe high-quality assets yield a fraction of one percent, it isn’t surprising to see many investors flock to high-risk, high-reward investments, be it junk bonds or speculative equities. This is exemplified by high-yield bond spreads approaching historical lows, sub-prime mortgages being bid up 17% in the past year, and speculative equities posting triple-digit gains. Classic fundamental analysis of business values, a keystone in true investing, was replaced with an insatiable desire for returns at any cost and often a failure to acknowledge the inherent risk of many investment vehicles.
There is a popular Wall Street notion that momentum trading (i.e., buying stocks that have recently risen in price solely because they have recently risen in price) allows someone to hop from trend to trend as if they are a surfer riding the crest of a wave, and that this will enable one to trade their way to wealth. This “quick and easy” approach to speculating, which has been sold to investors in a relentless media blitz accompanying the latest bull market, is seldom successful in the long-run. More often, people don’t get just wet, but financially soaked.
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