Grey Owl Capital Management

There is not much new to say since we last wrote to you on April 30, 2020. This might seem odd given the significant amount of changed patterns and uncertainty in our daily lives.

We are cautious today. This is a unique period of Knightian uncertainty. In a world of unbounded unknowns, protecting capital is paramount. However, the environment is in a state of flux and new information is developing at a rapid pace.

It is probably hard to remember after a week or so of coronavirus fears, but during Q4 2019, “risk” assets once again outperformed “haven” assets. This was after two quarters of “haven” asset outperformance.

During Q3 2019, “haven” assets were strongest among the primary asset classes. This followed a similar pattern from the second quarter.

For the most part, the second quarter saw a continuation of the first quarter’s positive performance across many asset classes. This furthered a reversal of the dismal 2018 when every primary asset class was negative.

What a difference three months make. For the full year 2018, every primary asset class was negative: the S&P 500 lost 4.6%, commodities were down 13.9%, long-dated US Treasury bonds were down 1.6%, and gold gave up 1.9%. Contrast that with the first quarter of 2019 – every one of those assets was up!

The fourth quarter of 2018 proved to be one of the most negative quarters for financial risk assets since the current bull market began in March of 2009. The S&P 500 finished down 13.5% and commodities were down an even worse 22.6%. As one might expect, safe haven assets performed well.

October brought a significant increase in market volatility and a broad equity sell-off to match the late-January through early-February move lower.

Despite another interest rate hike in June by the Federal Reserve that raised the target federal funds range to 1.75-2.00%, along with plenty of increased tariff talk and (some) implementation by the Trump administration, the investment world was relatively calm in the second quarter of 2018.

Two of our largest individual equity holdings announced game-changing transactions at the end of the first and beginning of the second quarter of 2018.

The end of 2016 through the beginning of 2018 had been one of the least volatile periods in recorded stock market history. It was THE least volatile by one measure – for the 404 trading days through the beginning of February, the market never had a five percent correction – the longest streak on record.

Value investing is under attack. The US equity market is at its most expensive level in history and has spent most of the past six years in the top quintile of expensive. In addition, value equities have underperformed the broad market and more widely growth equities for over ten years.

In our last quarterly letter, we discussed seven transactions from early 2017: two buys and five sells. We also provided an update on our then largest position, Express Scripts. There was zero analysis of the economy, asset classes, and central banks. We have been relatively quiet on the transaction front since then.

During the first four months of 2017, we were relatively active on the buying and selling front. With a reasonable amount of information to report on individual positions, we will dispense with any broad economic and asset class commentary and dig right into each of the transactions that occurred between January and April.

As we enter 2017 and the beginning of the Trump presidency, the US equity bull market is almost eight years old. In fact, the eight years since the “great recession” has been a bull market not just in domestic equities, but in almost every global financial asset class.