Second Quarter 2019 Update

Quarterly Update

Dear Clients,

Q2 2019 has been very positive for us in both absolute and relative terms, with all our models performing ahead of their respective benchmarks.

We often comment on the unpredictability of markets in the short term, and these past few months have been no exception, reminding us of how easily and quickly the market can change as a result of irrelevant news flow.

Unless you’ve been living under a rock, or just wisely filtering it out, you’ve probably heard about the seemingly never ending US/ China trade talks. For months now, this issue has dominated the headlines and been credited for both up and down days in the market. Even just following a single, respected news source such as The Wall Street Journal, we would have struggled not to be exhausted by the relentless oscillations in good trade news vs bad trade news from day to day.

That is not to say that the impact of substantial and lasting trade tariffs between the US and China are not a serious thing. They will indeed affect many companies, some very substantially. It is true that some companies may benefit but for the majority, trade barriers are likely to be a net negative. We do not take this situation lightly, and we have been very conscious to consider the implications for the businesses that we own.

However, the reason we find the relentless back and forth news commentary so unhelpful is twofold:

The news flow is based on opinion and speculation rather than facts or actual long-term policy changes. Despite thousands of mentions of the trade war in the press, in reality very little has changed since the beginning of this year.
Nobody commentating on this issue has any legitimate ability to reliably predict the eventual outcome, nor how the markets will react to that outcome.

That second point is crucial- no commentator, economist, strategist nor politician has any way of predicting what the outcome will be, regardless of how confidently they might profess to do so.

All investing involves taking risks- taking a view on uncertain outcomes. More things can always happen than will. Where investors tend to make mistakes is when they forget this fundamental principle and instead make bold claims about certain futures and payoffs. Where investors tend to succeed is when they understand this and rather than fight it, seek to simply get the odds in their favor. Or avoid some situations altogether.

For us, when we are evaluating how and where to take risk we want to be sure that we can:

Quantify the risk.
Be confident we can take a view on the risk.
Take big positions when things are in our favor, and limit the downside when things go against us.

As such, we have a preference for investments where we don’t have to get a lot of predictions right in order to have a good outcome. Take American Tower (AMT) as an example- which is one of our biggest positions. AMT is one of the largest owners of cellphone towers in the world. When we model AMT’s earnings over the next decade, we will without doubt get some elements wrong, but it is almost a 100% certainty that the end market demand for their services will increase for many years to come. As a result, we are given a substantial cushion for error.

There are many examples of companies that are the opposite, which require a myriad of accurate predictions in order to value them- inputs such as commodity prices, regulatory decisions, natural disasters, political pressure, etc. We aim to firstly minimize the number of inputs we must predict, and secondly to make predictions where the cushion is so wide, that we can simply be right in direction and wrong in magnitude and still do well.

It is this fundamental focus which allows us to look past noise such as the trade talks and rather focus on the underlying economics of the businesses we invest in- their competitive defensibility, and long-term earnings growth.

In closing, as part of our continued goal of sharing more of our research with you, please find linked some background on a new position- Pershing Square Holdings (PSH). This a slightly unusual position for us as it is an investment in another investment manager, something that we only do on rare occasion when presented with a substantial opportunity. In this case, we are able to acquire a portfolio of high-quality US listed stocks for a significant discount to their market value.

As always, please get in touch with any questions that you may have.

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Second Quarter 2019 Update

Second Quarter 2019 Update

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