Third Quarter 2020 Update

The S&P 500 continued its rally in the third quarter, adding another 9% in total returns, making the last six months the best period of performance the market has seen in over twenty years. And we are pleased to report that our GCI Select Equity strategy comfortably outperformed the broader market over this period.

Of course, Globescan Capital was founded on the principle that investing in high-quality companies at attractive prices is the best and most consistent strategy to achieve long-run, risk-adjusted returns. As such, we do not overly concern ourselves with any short-term performance, whether positive or negative. Instead, we maintain a disciplined focus on what our returns will look like over the next 3, 5, and 10 years plus. We believe that taking this longer-term view when the market is increasingly taking a shorter-term view, has been the source of much of our recent outperformance and will continue to be so into the future.

For an example of what we are talking about, just consider how many market commentators have spent much of this past year focused on the ‘dislocation’ between the stock market and the real economy. This is an exercise we view as a waste of time since after all, the ‘market ’is in no way representative of the economy. Consider that the S&P 500 is weighted roughly 40% to technology companies – many of which have not only weathered 2020 relatively unscathed, but actually benefited from much of the lockdowns. It troubles us that market commentators continue to spend so much time on these broad, largely meaningless index measures rather than doing the hard work of figuring out which individual companies will actually do best in the future.

The Futility of Market Timing & Forecasting

Looking forward we face a U.S. presidential election in just a few weeks. Markets are often volatile around these elections, and so it makes sense that investors and commentators can be jittery at the moment. When it comes to elections, we as a firm take a very active and firm stance- we avoid any sort of specific portfolio shifts or strategy for two simple reasons:

1. It is impossible to predict the outcome of these elections with any level of certainty.
2. It is equally impossible to predict the market’s reaction to those outcomes.

When it comes to predicting the outcome of an election, all the commentators, pollsters, journalists, and strategists have, throughout history (both far and recent), proved a consistent inability to predict outcomes. Just consider how many ‘surprise’ results we have experienced in recent years – whether it be Donald Trump wining the last U.S. election, or the UK voting for Brexit. There simply does not exist a reliable guide to forecast the outcome of an election.

And even if we could predict the outcome of an election with near certainty, we still would not be able to  predict the market reaction to that outcome. Here, the track record of forecasters and strategists is even worse. Despite what many strategists claim (due to highly selective memories), the consensus in 2016 was that a Trump victory would be a huge negative for equity markets. What occurred instead was that markets set off on an excellent run in the following two years. All those who sold when they heard Trump won the election (on the advice of most financial commentators) would have lost out on significant returns.

The events of this year and COVID 19 have brought this reality into even sharper focus. Reuters recently conducted an analysis of the accuracy of the most high-profile market strategists at the largest Wall Street Wealth Management firms. The results were damning – showing that, in reality, they know no more than anyone else when it comes to predicting short-term market movements. In all cases this year the strategists and large firms were across the board spectacularly inaccurate in their predictions. We have written previously about the short-term nature of the industry, and how most analysis consists of ‘what is currently happening will continue happening’. This thinking leads to reactionary movements, and results in forecasts and predications typically just following the market up and down but lagging in both cases. We are left with prices being cut after markets fall and being lifted after markets rise (as we saw this year). Here are their recent track records:

• Bank of America Merrill Lynch: cut their S&P target twice as the market fell during Q1, then began raising it once the market rallied.
• JP Morgan: maintained their S&P target during the crash, then raised it in September after the market had rallied 16%.
• Morgan Stanley: cut their S&P target on the lowest day of the year (March 23^rd), then began raising the target in April after the market had rallied 30%.
• Goldman Sachs: cut their S&P price target twice as the market fell during February and March. This target was then raised in August, once the market had rallied 45%.

It is worth noting that when questioned by Reuters, every one of those firms refused to comment on the efficacy of their own predictions. We pick on these strategists and firms not because we think we could do better, but because we think the whole exercise is entirely futile. Even worse than wasting time, billions of dollars of client money held with these firms is invested and moved around according to these inherently useless predictions so as always, it is the end client who pays the price.

In contrast, if you look back at our writings throughout the panic of early 2020, you will see that our message remained consistent in that at no point did we attempt to predict where the market was going in the next few months, nor how long Covid-19 would last- instead we focused on the long-term earnings power that the companies in our portfolio could generate even in a worst case scenario. It was that understanding of the individual businesses and confidence in our earnings projections that gave us the confidence to buy more shares at depressed prices, when most around us were panicking and selling.

The key takeaway here is that we should never try to predict market movements in the short-term, and we should ignore anybody who tries to do so. Instead, we should try to allocate risk in areas where we can be very confident in the long-term outcome despite whatever happens in the short-term. This means investing in businesses that will do well no matter who the president is next year and no matter how long Covid-19 lingers on for.

One such company we added to the portfolio during the quarter (our 4^th new position this year) was Crown Castle, a company squarely at the center of an inexorable long-term trend that we believe is insulated from the election, the pandemic, and most other geopolitical events that could play out in the coming years. In other words, if Crown Castle sells off due to the election, we will happily buy more.

We thought it would be helpful to walk through the thought process (in abridged form) that led us to initiate our position in Crown Castle. For those so inclined, we hope the case study (click this link to find it) will give you deeper insight into how we invest and allocate capital.

As always, please feel free to reach out to us with any questions you may have, and we hope everyone is staying safe and healthy during these times.