Patient Capital Management On Frothy MarketsVW Staff
It finally happened.
After thirteen years we sold a position at a loss in our High Net Worth Portfolios. This summer we sold our investment in Nokia Corp. below cost. We came to the conclusion that the intrinsic value of our investment had been permanently impaired because of the company’s increasingly weak competitive position and deteriorating finances.
While one loss in more than thirteen years might be considered an excellent track record we take this mistake very seriously and have spent considerable time understanding why the investment was not successful and learning from the decision. Throughout my career, I have thought more about the investments that didn’t meet my expectations far more than those that did extremely well. Not only is this excercie an excellent learning process it tends to keep one humble!
Animal spirits have returned to the financial markets. Driven by interest rates at near zero levels and relentless monetary stimulus by central bankers around the world, investors looking for return and yield have stampeded into all sorts of financial instruments. Prices across almost all asset classes have been bid up to unsustainable levels. Based on long term historical valuations we are quite comfortable stating that the potential return across virtually every asset class over the next five years will be very disappointing from today’s prices and in many cases likely to be negative. Most investment managers have no place to hide because they are forced to follow very narrow mandates. When the day of reckoning arrives there will be very large capital losses.
We have navigated similar investment environments in the past and protected your capital because you have given us a very unique mandate; to essentially hold as much cash as we deem appropriate. Today our cash balances are again nearing record levels because we can’t find opportunities that meet our criteria.