What matters most

CryptoPunk #5822 is a piece of collectible digital artwork (not pictured).* It is a pixelated human head with a bluish hue, and either blue hair, or a blue bandanna, it’s difficult to tell which. In February 2023 it sold through an online marketplace for over $23 million. Before you think that must be a typo, trust me, it’s not—and it’s not even the most expensive Non-Fungible Token (NFT) to sell. That prize goes to a piece of digital artwork called The Merge, and it sold for a whopping $91 million.

NFTs like CryptoPunk #5822 and The Merge are the products of the world of cryptocurrency. And the marketplace for expensive pieces of collectible digital art is dominated by people who have made fortunes in that industry, often as early investors, or as executives who have created and developed the technology. By all accounts, this group of highly technical executives/developers/investors is relatively small, and when I hear stories like this—a piece of digital artwork selling for millions of dollars—I wonder if these people are spending a bit too much time buried in their work.

It’s easy to judge that which we do not understand. I don’t understand NFTs. But I can appreciate that other people who understand that market better than I do, see value and opportunity where I don’t. I can look at the digitized head of a monkey selling on an NFT exchange for thousands of dollars and think, “why bother?” But in the same way, I can spend hours studying a company to determine if it’s a good investment, and someone else might ask me the same question.

We all have our areas of expertise. Each of us tries to create or deliver value in our own unique ways. My guess is the blockchain developer working in the world of cryptocurrency and NFTs would say their work is important. Perhaps it is. I can’t say for sure. But I can say with certainty that even though we might occasionally dig too far into the minutia of an investment, focusing on details that may not always be of much consequence, the work we do is very important because it brings value to our clients.

The good news is you don’t have to worry about the investment details. That’s what we’re here for. We pay attention to the Fed, interest rates, the economy, election cycles, the markets and all the individual companies we own, so you don’t have to. That also means that especially this week, as we look ahead to Easter weekend, you can focus on the things that matter most—faith, family and community.

Blessings to you this Easter, and in the weeks ahead.

~ Travis Raish, CFA

* NFTs are privately owned so we didn’t post images, but if you’d like to see what tens of millions of dollars can buy in the world of digital art, search for them online.

Managing risk

I have lived through Black Monday, the Tech Bubble, the Great Recession, the Credit Crisis, a COVID pandemic that shut down the world’s economies, and several other choppy markets along the way. The reality is these bumps in the road create short term problems for investors, but they have less impact over longer periods of time. Still, volatility is hard to ignore. This is especially true when we are within a few years of retirement and we feel there is little room in our plan for a 20-30% decline in the markets, even if it might be short lived.

We all approach challenges differently. For me, I like to know what my choices are. At a restaurant, I ask what the waitress recommends, because I want to hear her ideas. Usually I order something else, and it may seem like I wasted her time, but I often feel better about my choice when I know what my options are. Investing is similar. If we have a worry that our account might lose more than we are comfortable with, we have to know what our options are for managing that risk.

One solution I offer to clients is to use options to generate extra income or protect against losses. I have been using these strategies for over 20 years. Even so, I don’t know it all, but I know enough to be careful. Options are not for everyone and it takes time for clients to learn how options work and what to expect. And for this reason, I often start working with new clients on a smaller scale, if they express and interest in having me generate income, or offer protection from market risk. The result is that some clients may find greater comfort, especially if they have a higher allocation to stocks—often a more volatile type of investment—in their account.

There are several challenges on the horizon, including fears of recession, continued inflation, conflict in Ukraine and the Middle East, China’s and Russia’s relationships with the rest of the world, and the upcoming Presidential election. Like so many other challenges, these may also prove to have little impact on the markets. We expect our investment decisions will be fruitful and having the proper asset allocation will provide us with a smoother journey. And we will continue to buy high quality companies, expecting them to weather difficult times, and thrive when times are good. But if your concerns get the best of you, please let us know. There is no bad time to review your portfolio, and to make sure we are doing what we can to make the journey better for you.

~ Steve Davenport, CFA

What the new year brings

What will the new year bring?

It’s a good question. Perhaps my favorite answer is from the late Louis Rukeyser, the host of Wall Street Week, a popular financial news program many years ago. To paraphrase Mr. Rukeyser, “May the new year bring us exactly what we deserve, plus twenty percent.”

We got more than that last year. The U.S. stock market had a strong rally in 2023, notching a 26% return for investors. As we look to 2024, is it too much to ask for more of the same? By the numbers, it’s certainly possible.

Interest rates have stabilized at levels that are both reasonable and still good from a historical perspective. And while borrowers can’t get mortgages for free the way they nearly did a couple of years ago, the interest payments on a mortgage still aren’t likely to break the bank for most American homeowners.

Economic growth is also reasonable. The Christmas shopping metrics are not in just yet, but signs point to the fact that Americans spent money the way they typically do. And American businesses were happy to oblige, ramping production of everything to ensure the shortages that plagued prior holidays didn’t affect this one.

How about the job market? Virtually anybody who wants a job can get one. This may not be true for the recent college graduate, shedding tears because they can’t find an employer willing to pay a six-figure salary to someone with zero experience. But for those seeking employment, there is work to be had.

And what about inflation? Many goods cost 50% more than what they did just two years ago. We all feel that pinch every time we go out to dinner or shop for groceries. But signs point to the fact that inflationary pressures have diminished lately, and prices seem to be a bit more stable.

Reasonable economic growth. Jobs aplenty. Inflation under control. The ability to borrow at reasonable rates. These factors provide all the fuel we need to keep the good times rolling. So why is it, according to a recent Pew Research Center study, that the average American is not so optimistic about 2024 and beyond? Two words … Presidential election.

Election cycles make investors jittery. The uncertainty of not knowing who will be in the White House in the following year often causes investors to trade their stocks like they do players on their fantasy football teams and treat the markets like an offshore sports book. But even beyond the naturally elevated anxiety felt by Americans during an election year, there are other political factors that are exacerbating the problem.

The appearance of impropriety at many levels of government and law enforcement has caused Americans to question whether the U.S. is any less corrupt than many Third World countries. In 2021, three Federal Reserve branch bank presidents resigned over allegations they may have profited personally by the actions they were taking to stabilize markets during the Covid crisis. Hundreds of congressmen and dozens of senators have reportedly enriched themselves, or their campaigns, by accepting Big Checks from Big Pharma, Big Tech, and Big Bank. Even the justice system resembles a circus side show when we see how easily it is manipulated by politicians who are intent on furthering their own careers or destroying the careers of others. In all this, we scratch our heads, wondering how these behaviors are possible in the United States—mankind’s crowning achievement of civilization.

Put simply, Americans’ unease about what the future holds is a simple reflection of how we view the character of those in charge. We want to believe that our elected and appointed officials are not just following the rule of law—certainly not a given today—but are also adhering to a moral law, and hopefully one even higher than we hold ourselves to. As parents, when our children make mistakes, we waggle our finger and say, “you should have known better.” It may be frustrating, but it’s also part of the job and we expect it. But it’s especially disheartening when we have to say the same thing about someone we expected to represent the best in us, who, by our choice and our vote, is responsible for the welfare of others.

The good news is character flaws in our leaders do not necessarily jeopardize the American Dream for all of us. They contribute to uncertainty, however. Still, I am an optimist by nature. I want Lewis Rukeyser’s new year toast to be prescient today. I want 2024 to bring us another 20%, deservedly or not. But we also must respect that with investing, while things often work out better than we expect, few things work out exactly the way we think they will, and this year may be bumpier than the last.

~ Travis Raish, CFA

The Reason for the Season

Christmas is coming. The tree is lit. The stockings are hung over the fireplace. And we are looking forward to celebrating with family and friends. But even as we anticipate the joyous holiday ahead, the end of one year and the beginning of another, we like to take a moment to reflect on the year we had.

By all accounts, 2023 shouldn’t have been a great year for the markets. To start the year, interest rates were higher, inflation was not under control, and the stability and health of the economy was questionable. But Americans are resilient, as are many of the world-class companies that are based in this country. And we saw unprecedented growth from some of the biggest and most recognizable. The Magnificent Seven, as the media has dubbed them, are a group of companies that have returned an average of 70% year to date. This group includes Amazon, Apple, Alphabet, NVIDIA, Meta, Microsoft and Tesla. Of course, there are other companies that have had a great year as well, and the growth in the market has been broad, touching virtually every sector of the economy.

Good companies have a tendency to find success, regardless of the environment or economic headwinds they face. And even though we will always find reasons to be concerned about the future, especially with the ongoing conflict in Ukraine and Israel, we must remember that we control only the present. So let’s take some time this Christmas to bring more peace in our lives, thanking God for the blessings He has given us. After all, Jesus is the reason for the season, and He is the Prince of Peace.

We appreciate the trust you have placed in us, and we look forward to serving you in 2024. Blessings to you and your family this Christmas and in the new year ahead.

~ Steve Davenport, CFA

A simple life

My first job out of college was at a mutual fund company. I had worked my way up to the portfolio accounting group, which meant I did a lot of number crunching and used a lot of spreadsheets. After a while, I realized that there were a lot of inefficiencies in the work that we did. So, I figured out how to do things faster and more efficiently. Eventually, I was able to complete eight hours’ worth of work in four. How was I rewarded for this workplace improvement? I got to do two peoples’ worth of work every day.

Regrettably, our world seems to gravitate toward complexity. I’m hard-pressed to think of any industry that has gotten simpler over time. Politicians make laws more complicated. The tax code grows in complexity every year. The number and kinds of financial products that are offered by banks, brokers, and insurance companies is impossible to track. Even our efforts to simplify our lives seem to backfire. Artificial Intelligence offers us the promise of making our day-to-day lives easier with self-driving cars and smart homes. Then our legal system struggles to adapt when AI runs amok, using copyrighted material without permission, plagiarizing works of others, and even making discriminatory decisions when corporations use AI to filter incoming calls.

Though it may be difficult, trying to simplify our lives is still worthwhile. This is especially true when it comes to investments. There are countless investments we can buy—mutual funds, exchange traded funds, unit investment trusts, annuities, and others—and endless variations in different packages for each of these. But inside almost all of them are the basic building blocks of all portfolios—stocks and bonds. The packaging makes the products salable, but most of the time, the packaging also makes them complex. That’s why we avoid as much of that as we can. We buy individual stocks for growth, for most clients and accounts, and we use bond funds—the cheap and transparent kind—when clients need income.

Many of the companies we own are also simple. Ecolab (ECL) makes disinfectants, cleansers, and soaps. Cheniere (LNG) transports natural gas. Chipotle (CMG) makes burritos. And even the companies that are racing to play in the AI space have a simple core to their business that allows them to invest heavily in projects like this. Microsoft (MSFT) sells software to support their AI push. Google (GOOG) sells advertising. And Amazon (AMZN) sells … well, Amazon sells everything else.

A paraphrased quote attributed to Albert Einstein says, “make things as simple as possible, but not simpler.” This is great advice, and it’s a philosophy we take to heart in the way we manage money for our clients.

Here’s hoping you are able to enjoy the simplicity of a beautiful and peaceful Thanksgiving and Christmas season.

~ Travis Raish, CFA

Considering the unexpected

Our weekend started out with beautiful fall weather; cooling temperatures and leaves turning colors. Then came the news of violence in the Middle East. I don’t think anyone expected what happened. Especially for those of us living in the US, it can be hard for us to relate to this level of hatred. Didn’t the New Testament, Renaissance philosophy, or the examples set by Mahatma Gandhi, Mother Teresa and John Paul II serve as guidelines for how we ought to treat each other?

The military clashes between Hamas and Israel could eventually include Iran and Hezbollah in Lebanon. And while the humanitarian component of the conflicts is top of mind for everyone, it’s impossible to look at these conflicts and not also wonder about the economic impact they could have. As violence persists, the likelihood for disruption of the oil supply from all Middle East countries grows, making higher energy prices and lower supply probable. Of course, increased prices benefit the exporters of energy and it’ll be interesting to see how the US responds if we see rising oil prices in the future.

For exposure to energy companies, most of our clients own Chevron (CVX) and Cheniere (LNG) in their portfolios. Both companies have sustainable competitive advantages in their markets and trade at a very reasonable Price/Earnings (PE) of 11.5X and 11.8X, respectively, while the overall market is trading at a much higher PE of 18X. Chevron has built in a price of $70/barrel to earnings projections, and with oil currently around $85/barrel the company looks well positioned going into this uncertain period. And when we look across the portfolios to see which other companies might be affected by higher oil prices, like companies in transportation, heavy equipment manufacturing and construction, we feel the companies we own have done what they can to mitigate the unique risks they may have.

We cannot know how long the conflicts in the Middle East will last, and we cannot know what the outcome will be. But we will continue to hope and pray for a swift and peaceful resolution.

~ Steve Davenport, CFA

Faith-based investing

In the 1990s, Abercrombie & Fitch was one of the biggest clothing retailers in the US. Teens and twenty-somethings couldn’t get enough of their products, and the company had storefronts in shopping malls across the country. The stock was incredibly popular with investment managers too, and it was one of the few publicly traded retailers everyone wanted to own. But toward the end of the decade, the company published a catalog full of models showing more skin than clothes. It was so revealing, in fact, the company only offered it to patrons who came into the stores and presented an ID to show they were over 18. For a company marketing their products to teens, they had crossed a line, and everyone knew it.

Having a faith-based approach as an investor used to be simple. All we had to do was avoid certain industries like alcohol, tobacco, gambling and adult entertainment, and we were good. And fortunately for me, most of those companies never met my standards for quality anyway, so avoiding them was easy to explain in a secular context too. Occasionally, a company like Abercrombie would make a mistake, and it was easy enough to add them to the do-not-buy list. But in the universe of high-quality companies, those problems seemed few. We could count on executives to do what was right for the shareholders first. And if the corporations gave to charities and causes, they always asked if their decisions were likely to alienate some of their customers; if the answer was “yes,” they’d donate to something that didn’t put their reputation at risk.

Investing is more complicated today. Executives are far more likely to approve donations to charities and causes that operate in direct violation of the beliefs of some of their customers and shareholders. And for the person of faith, owning shares of these companies can be troubling. This is especially true if the company repeatedly offends that investor’s beliefs. After all, businesses are made of people, and people make mistakes. Most of us know this and we are often willing to extend our favorite businesses a bit of grace if they blunder—it’s when the blunders become habitual that we get discouraged.

Of course, there is little agreement even among people of faith about what is and what is not acceptable. Even so, for those of our investors who would like to put their faith first, we have crafted a new portfolio. We start with the same methodology that we use for all our portfolios. We still look for companies that we believe have a sustainable competitive advantage, that are the best or the only companies that do what they do, that are trading at a reasonable price given what we think the company is worth, that have good prospects for growth, that are profitable and that are financially healthy. We also balance those companies across sectors and industries such that the same forces that drive the US economy also drive the portfolio. But to this list, we also look for companies that show, through their corporate and community actions, a desire for:

  1. Protecting Human Life
  2. Promoting Human Dignity
  3. Enhancing the Common Good
  4. Pursuing Economic Justice
  5. Preserving Our Global Common Home

If this portfolio interests you, then you might want to know these things as well.

  • First, a company doesn’t have to support these virtues, but it cannot actively work against them to qualify as a company we might consider.
  • Second, the portfolio will not look like the market and is unlikely to perform like the market. Secular investors do not value the same things faith-based investors do. So many of the largest companies in the US may not be included in this portfolio. For this reason, an investor with a faith-based mindset cannot invest with the goal of “beating the market.” It must be more about supporting companies that share your views about faith, life, family, community, virtue and stewardship; it cannot be about returns.
  • Third, you may be surprised to see which companies make the cut and which ones don’t. You also may not be in complete agreement with us about the decisions we make. But like all things where your money is concerned, you can know that we have given each company a great deal of thought, and we have made the best judgement we feel we can, especially given the subjectivity of some principles.

If you have questions about this new portfolio, or have questions about any of our others, please contact us.

~ Travis Raish, CFA

Giving back

We spend a lot of time thinking about the business side of the companies we own. Some have factories and inventory and manufacture products we use every day. Others provide services, or technologies that make our lives easier or our work more productive. All these businesses have the greatest asset a company could hope for—talented people. We know the companies we own are desirable. But I was recently reminded of another reason many of the companies we own are some of the best in the world. DBS, a Singaporean bank we own in some portfolios, announced that they are donating over $700 million to communities where they do business. I was struck by how hopeful and grateful the members of these communities were at hearing the news. DBS wasn’t just giving back, they were making an investment in their community, and people loved them for it.

I decided to do some homework on the other companies we own and I was pleasantly surprised with the results. Not only are the companies successful with their businesses, but many also have a positive impact on their community. Of the top ten companies for corporate contributions in America for 2021, we own seven (company name and charitable contributions shown).

Pfizer ….. $3.2 billion
Merck ….. $1.8 billion
Walmart ….. $1.4 billion
Google ….. $1.2 billion
Microsoft ….. $1.1 billion
Eli Lilly ….. $600 million
Cisco ….. $300 million

Collectively, they gave over $9.4 billion to their communities. Of course, companies need to watch costs and spend wisely on new projects. But there is also a need to help others. Individually, many of us are fortunate to have the resources to positively impact our communities. But it is also nice to see companies working to make a difference. I am continually impressed when I see these activities going on, especially given the global challenges they must deal with.

Total giving in 2021 by corporations was $21 billion, up 23% from the prior year. Company stock appreciation and an increase in corporate earnings positively impacted the results. When companies win, the communities around them also benefit. Pfizer has made considerable contributions, sending much needed vaccines to emerging markets. Walmart is actively giving food to food pantries. Microsoft donates technology to non-profits. These and other companies we own also give in many other ways, including supporting impoverished communities around the world and those affected by natural disasters. The commitment they have to helping people is admirable, and it adds to our view that they are leaders in their respective industries.

We think often about the economy, inflation and interest rates, how local and foreign policy will affect the future, and whether current issues like student loan repayments and forgiveness could have an impact. And beyond the macro issues, there are always a lot of important things happening with the businesses we own. But I am thrilled by the fact these companies also make investing in their communities a priority.

~ Steve Davenport, CFA

Not every price is nice

In 1994, I started working at Founders Funds, a Denver-based mutual fund company. We were across the street from Janus Funds, and a few blocks away from Burger Funds. There were other investment companies in the area too, but we all managed money the same way. We were all attracted to the same companies; namely those in the technology and communication sectors, because they had the highest prospects for growth. And in the late 1990s, we were there to witness and benefit from the Internet and Dot-com boom.

By the end of the 90s, we had some funds that were delivering returns of 100% per year to investors. The companies we bought inside those funds that performed the best were the ones that were the least connected to reality. In fact, there was a running joke among portfolio managers that at the first signs a tech company might turn a profit, it was time to sell and run for the hills. Investors much preferred the dream of something great to the reality of something potentially less exciting. These were the companies that started as scribblings on the back of napkins and were later funded by Bay Area venture capital. The people running these businesses had big ideas and bigger egos. That’s what investors wanted, so that’s what we gave them.

This was the investment world I grew up in. The average portfolio manager running hundreds of millions of dollars was in his late 20s. We set aside traditional ways of assessing value, because many of the tools we had learned didn’t work for companies with high growth and no earnings. We argued it was a new era for investing and the times had changed. We willingly changed with them. Our livelihoods were tied to the markets, and our advancement as analysts and portfolio managers was driven by our performance. We couldn’t afford to get left behind. So we bought the companies with the most exciting technologies. It didn’t matter that the economics of the businesses were questionable; we figured the management teams of these businesses would find a way to make a profit in the future, even if it wasn’t obvious how that might happen. It was a great strategy, and it worked well … until it didn’t.

After the Dot-com bubble burst, I learned my first hard-knock lesson about investing; I can’t pay any price for a company. Even when I really like what the company does, I have to determine what a share of the company should be worth and if it’s too expensive, I have to say, “No.” Certainly, this mindset has caused me to miss out on some investments over the years. I did not buy companies like Amazon early, or Tesla lately. But it also means I have avoided making some investment blunders. And I have found the experience of buying stabler businesses is better for investors in the long run; not only does it provide more consistent results, but it produces less anxiety.

Great companies are rarely “cheap.” To paraphrase Warren Buffett, “it’s better to buy a great company at a fair price than a fair company at a great price.” Some companies are cheap for good reason. We try to avoid those. Others, we have to be willing to pay a little more for. Costco (COST) is a good example. It may not be an exciting company, but Costco is a favorite among its patrons, the company’s customer service is great, and the products are terrific. Management of the company also has a sustainable plan for growth and they have delivered growth over time. And because of their membership program, they have good profitability and good cash flows, even through trying times like the 2020 pandemic, where supply chain disruptions and product shortages were the norm. Because Costco is exceptional in many regards, we might be willing to pay a little more for the company. But we can’t forget the lessons of the past; we still must be mindful of value.

~ Travis Raish, CFA

Gratitude

I have been very fortunate in the last few weeks and I have a lot to be grateful for. Gratitude starts with the simplest step of appreciating our being present in our life. My good mood comes from recently celebrating with family and friends the marriage of my second daughter, Erin. Becoming a parent was probably the most exciting time of my life. I have been blessed three times, and each child has gifted me continuously with so much joy. This weekend, I will celebrate Father’s Day, in two weeks I will celebrate 33 years of marriage, Independence Day and my 60th birthday. These comments are the result of trying to recognize the good in life every day. I believe we all can celebrate small and large victories, with the habit of stopping and taking a moment to reflect.

I also believe that we need to understand gratitude on a professional and financial level. I am fortunate to have Travis as my partner because he brings a very calming effect to our strategy discussions. We work in the greatest economy in the world. The U.S.A. has many of the greatest companies, leading the world with exciting technologies in computing, communication and health care. These companies operate thanks to a phenomenal education, legal and financial support system. Our job is made difficult not by our inability to find companies, but because we have too many great ones to choose from.

We are fortunate to have Morningstar as a partner to help us evaluate thousands of securities worldwide while also providing insights on economic, tax and planning ideas that benefit our clients. Using their data and our process for evaluating quality and value, we have acquired many great companies and delivered solid results for our clients.

The markets have been driven by momentum, with ten large companies leading the way. Among those, we have held Apple, Google, Amazon, Nvidia, Microsoft and Facebook in various portfolios. There are several clouds sitting on the horizon with the potential to rain on our parade. There are several macroeconomic factors summarized by the LEI (Leading Economic Indicators) show an economy which is slowing. The increase of interest rates by almost 5% has affected the purchase of goods and services. The higher price of food and energy is causing consumers to think more about what to purchase and to adjust behavior. These challenges are a natural part of the economy and we are watching closely so that the client portfolios will be well prepared. The fixed income portion of our clients’ portfolios is built to take advantage of higher rates and we are preparing for a pivot. As we approach the end of the Fed raising rates, then we may consider becoming a little more aggressive by owning longer dated bonds.

I hope all of us can start our summers with positive feelings after a challenging first half for the economy. We continue our vigilance, and we look forward to meeting and addressing challenges which may occur during the second half. We welcome your comments and we stand ready to help answer any questions. As always, we appreciate your continued trust.

~ Steve Davenport, CFA