Issue 12

January 2020

Every financial professional tells potential investors, “Past results are not indicative of future returns.” If you invest in a largely static portfolio, like the S&P 500, that is certainly going to be the case. With a static portfolio of companies, returns will be driven by earnings and multiple. When the market goes up more than earnings, as was the case in 2019, it means you are paying a higher multiple for future earnings. A portion of future returns have been realized today. You should reduce your expectations for future returns accordingly. Warren Buffett highlighted this dynamic about Apple at the 2018 Annual Meeting.

Now what if you don’t want to lower your future return expectations?

Considering this is my newsletter and I run an investment company, please prepare for my sales pitch.

You could invest in an active strategy!

As a reminder, my goal at Spring City Partners is to build a concentrated portfolio of businesses that I believe can generate a double-digit return over a 5-7 year horizon. I look for high quality businesses that I believe possess a meaningful competitive advantage and a long-term opportunity to increase earnings. Sounds simple. It is. Sounds easy. It’s not.

Executing this strategy requires comfort with two factors most investors abhor: Volatility and Longevity. The chart below represents the return for the S&P 500 over various time horizons. Extend your investment horizon far enough and you had a 100% chance of realizing a positive return. Simple.

Easy. Definitely not. 1960s saw Civil Rights protests and the Vietnam War. 1970s had stagflation and the oil embargo. 1980s was the height of the Cold War. 1990s began with the Gulf War. 2000s saw the malaise following the Dot com bubble. 2010s were about the housing hangover. 2020s we already have Trade Wars, Tech backlash, and Inequality.

Look back at any period in time and you can find elements of risk, uncertainty, and fear. Investors attempt to quantify these risks using volatility, which measures the movement of a stock. Stocks that price vary by a wider range are deemed riskier than stocks that price vary by a narrow range. Makes sense. Contemplating this premise, I am reminded of the quote by William Bruce Cameron:

“Not everything that can be counted counts. Not everything that counts can be counted.”

For me risk is defined as the permanent loss of capital. In laymen’s terms, losing money on an investment is risk. Defining risk in this manner means I don’t have to own a larger number of holdings in the portfolio to reduce volatility. I am comfortable knowing the portfolio will fluctuate by a wider range than the market. In exchange for this elevated level of volatility, the portfolio can concentrate in my highest conviction ideas. Over the long-term, I believe this allows my investments to generate higher returns.

Which gets to second factor, longevity. Everyone talks about being a long-term investor. However, everyone also talks about investing in Bitcoin, Beyond Meat, Beanie Babies, and tons of other fads. Spring City Partners launched in October 2018. I can’t point to an illustrious track record where I have owned a stock for ten or twenty years. Maybe one day. However, I can say >75% of the portfolio is invested in positions I purchased in 2018.

As we saw in the chart above, the longer I can hold investments, the greater the probability of realizing a positive return. By concentrating in my highest ideas, I attempt to increase those returns.

As you think about your assets and how to best position them for the future, I hope you think of me.

Bill