At T&T Capital Management (TTCM), we define risk as the risk of taking permanent losses of capital. Of course we are going to be susceptible to short-term mark to market selloffs just like anybody else, but we want to be invested in undervalued and profitable businesses that will recover and thrive through downturns. While the market is currently in a severe correction, I feel immensely confident in our positions and I believe that that faith will be rewarded with solid profits being reported over the next several quarters and years really, with a corresponding growth in intrinsic value. Unfortunately, for many market participants including the majority of momentum traders, that might not be the case. The stock market has not been incredibly cheap and there are pockets that have been obvious bubbles. One easy example is biotech. I’ve flagged this many times as the index has traded in excess of 50 times earnings over the last few years. Many of these companies are extremely speculative and have been reliant on debt-fueled acquisition sprees to foster growth. Well, over the last week while the overall market has indeed been weak, the biotech index is down a whopping 14%. Clearly, many of the individual components are down far more than that. That is a serious correction but even after that these stocks aren’t necessarily cheap. This is in stark contrast with our large financial positions which all trade at large discounts to book value and are likely to continue posting higher profits over the next several years.
Since we are now in year 6 and half of this bull market, it is safe to say that there has been an enormous amount of foolishness that has gone on. Market participants have bid up various companies to prices that would require the most optimistic scenario possible to be validated, providing absolutely no margin of safety. That is the type of activity that occurs when one is trying to keep up in a bull market. Fundamentals get thrown out the window and then when stocks correct, these are the same market participants that are the first to panic. That is how you get moves like you’ve seen in the Biotech index this week. In value investing we will surely take losses at times. Areas like energy have been extremely problematic for anyone invested in the sector and most firms have exposure there. The key is not chasing things irrespective of price. That is a commitment we made when we started and we will always maintain that, as we know how hard our clients work for their hard earned capital, and it is our obligation to do everything we can to protect and grow it.
This is why we have absolutely no exposure to biotech at current prices and thankfully have steered clear from that selloff. GDP growth was revised at 3.9% last quarter. Talk about a U.S. recession is quite absurd in my opinion, but everyone tries to come up for an explanation for the market downturn. By sticking to the fundamentals and keeping a cool head when others lose theirs, we will be just fine when the smoke clears. Thank you very much and enjoy your weekend!