Second quarter results were very good for both our stock and bond funds. Performance over the past three months continued the momentum of a good first quarter, resulting in stock funds that are up year-to-date and bond funds that are solidly in the black despite a very tough environment. We encourage you to read the portfolio managers' commentaries as well as Tom and Nolan's Fixed Income Insights for more details on each of our funds.
The U.S. economy is recovering, and some parts of it are booming. Our companies are doing well, and their business values are growing. Stock prices in general have also been doing very well — in some cases getting a little ahead of themselves and borrowing some returns from the future. When stocks are already selling at our estimate of “full” valuation levels, the odds of earning high returns in the short run are low, but we are optimistic that by betting on the right businesses (and management teams!) and taking advantage of periods of volatility, we can protect our investors' capital and help make it grow over the years.
In our combined 70+ years of investing, there's a lesson about investing that seems to repeat itself time and time again. Charlie Munger (Trades, Portfolio) sums it up quite frankly, saying “It's not supposed to be easy. Anyone who finds it easy is stupid.” While we are not in the business of making forecasts, the road ahead surely contains some “not easy” moments. It always does. But we are confident that we have the right (stock and bond) raw materials for investment success, and we also have the intangible ingredients — patience, price discipline and conviction — which are just as important.
Seinfeld fans may remember the “worlds collide” episode (excerpts available on YouTube) in which Jerry and Elaine invite George's girlfriend to spend some time with them. George and Kramer immediately recognize the danger of letting his two separate social “worlds” come into contact with each other. Sure enough, unfortunate consequences ensue. Somehow, this expression of worlds colliding comes to mind when we try to reconcile the competing ideas that the economy is booming yet still needs extraordinary government support.
We have been writing for a long time now about our concern that a world of near-zero interest rates and extremely generous deficit spending is not sustainable. It seems reasonable to look ahead to a more familiar world in which interest rates reflect supply and demand for credit, and in which government policies reflect a modicum of fiscal responsibility. In our opinion, such a transition is inevitable and would be positive for the economy.
However, the stock and bond markets seem to dread this kind of policy change. In the fourth quarter of 2018, the first tentative steps in this direction by the Fed triggered a quick 20% drop in the S&P 500. The Fed quickly reversed course and has been “promising” that it would wait for several years before allowing rates to begin rising. That is, before it would allow the artificial world of “free money” to collide with the harsher world in which market forces determine interest rates and securities prices.
We cannot predict the timing of this investment climate change, but we would just as soon get it over with. Fed pronouncements like it is “time to think about thinking about tapering” quantitative easing ($120 billion in monthly bond purchases) as a prelude to raising interest rates in a year or two (or three), must make Paul Volker (former Fed Chair who tamed the inflation of the 1970s by raising short-term interest rates to 20%) spin in his grave. A return to “normal” will probably be a little rocky for investors and dangerous for speculators using borrowed money, but we would welcome it.
In the Meantime...
As previously mentioned, our companies are doing well. Their valuations reflect the positive environment of low interest rates and investor enthusiasm, but their prices are reasonable enough to allow for healthy appreciation as their business values grow. As investor attention has bounced back and forth between “shutdown” and “reopen” beneficiaries, we have been able to add a few great businesses to our portfolios and generally to position them to cope with, and take advantage of, future market volatility.
Many of our favorite holdings are familiar to long-time clients and shareholders. Broadband providers Charter (CHTR, Financial) (owned outright and indirectly via Liberty Broadband (LBRDA, Financial)) and Liberty Global (LBTYK, Financial) have thrived during the pandemic and are very well positioned for future growth. Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) and Markel (MKL, Financial) continue to generate excess cash flow that can be reinvested in additional productive assets. Mission-critical software companies like Black Knight (BKI, Financial) (mortgage origination and servicing), Guidewire (GWRE, Financial) (insurance) and Intelligent Systems (INS, Financial) (payments processing) should continue to grow regardless of economic conditions. Visa (V, Financial) and Mastercard (MA, Financial) receive payments based on the volume of transactions (inflation beneficiary) and Schwab (SCHW, Financial) earns interest on customer credit balances and margin loans (higher interest rates are good). The list goes on and on, but the common denominator is that each of our companies has the business model, competitive position and financial strength to do just fine when the financial world reverts to a more free market.
The domestic and global economies are endlessly complicated, and each business we own is a discrete organism striving to earn profits for its owners. The complexity and uncertainty make investing a fascinating pursuit but also produce anxiety among investors. The financial press offers information, insights and opinions that are ostensibly designed to “help” investors, but in fact, press coverage often exacerbates investors' fears.
Back to Charlie Munger (Trades, Portfolio)'s sentiment, investing is not supposed to be easy. The trick for investors is to stay focused on the 5-10 year investment horizon and avoid short-circuiting the compounding process by reacting to near-term market noise and commotion.
The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through the publication date, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.
Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. All investments involve risks, including possible loss of principal. Please visit weitzinvestments.com for the most recent month-end performance and additional information.