This is obviously a difficult letter to write for a number of reasons, the most important being the amount of other people’s money “lost” in the shortest time period of your portfolio manager’s 36-year career. I put quotes on “lost” because there is a world of difference between “we have been marked-to-market to a world class panicked market” and “we have permanently lost your capital.” Timing aside, most of what we are staring dumbly at represents the former and not the latter. But it doesn’t feel any less painful or embarrassing as of this writing.

I am only going to use the word “unprecedented” once because it is trotted out at every market inflection point, and after a few decades of seeing new and unprecedented things, you begin to once again appreciate the old bag of a saying, “the future will always be uncertain.” Asset markets in general were expensive prior to the advent of COVID-19, and expensive markets tend to get knocked off their pedestal by something “unprecedented.” What aggravates and disappoints the investment team here at Cove Street is that what was expensive in many cases has stayed expensive and what was inexpensive—small cap value and what we owned—became even cheaper. Cash and gold were the only real sources of shelter and neither are long-term holdings for us.

We are going to skip the “top 5 and bottom 5” analysis we usually do because in general the shellacking was thorough and broad enough to make the exercise useless in explaining the past. We owned small cap stocks and in the short-run they went down. Aggravating factors in the short-term—dynamics that are actually positive factors in the long-term—include: the disappearance of the sell-side in both coverage and market making capability; the mass movement in recent years into passive vehicles which crushes “curation” in both up and now down markets; and the consolidation of firms on our side of the table, a state of the world that has the effect of nudging “small cap” investment up the capitalization spectrum. Great points for starting an investment today—much less so 6 weeks ago. Instead our focus will be on 5 things we think are important for our investors—and we will tell you how our decision making is working and what we have actually done in the portfolio.

1. The first item is that Cove Street Capital is 100% in business and working well in a dispersed fashion. Maybe a little too well. Your portfolio manager lives close to the office and is in every day…alone…which seems to be doing wonders for a marriage about to turn 30. Our firm inherited and built upon an operational and compliance infrastructure that punches WELL above our asset level. It is tested annually firm-wide, and I am proud to say on behalf of non-investment team Cove Street, we haven’t missed a beat.