Happy New Year as we at T&T Capital Management are immensely excited to start 2023. While 2022 was a nightmarish market for both equities and bonds, largely due to out of control inflationary pressure, and the disastrous war in Ukraine, I feel we are in a great position going into 2023.
One Warren Buffett quote that always stuck with me was, “I would consider a year in which we declined 15% and the market declined 30% to be much superior to a year when both we and the Average advanced 20%. Over periods of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur.”
Bear markets are an inevitability. What we saw in 2022 was an epic bubble in just about every asset class being deflated. I must have written 20 newsletters discussing the tens of trillions in negative-yielding debt globally, which was something we’ve never seen in financial markets before. I don’t believe there is any negative-yielding debt anymore, so the losses are simply immense for those buying into that bubble. Crypto Ponzi schemes and unprofitable glamour stocks crashed down to earth finally. The amount of stocks that declined by 60% or more is abundant. Many of these stocks will never come close to reaching their highs again, while others offer exceptional opportunity as we move forward.
Value investing has started its comeback, which is long overdue. I think the trend could last the next few years if what we saw in the early 2000s is any indication, when despite a 3-year bear market that saw the Nasdaq drop 80%, many value funds generated phenomenal gains as companies that actually were profitable gained favor once again. There is a reason that value investing has been the best performing investment strategy over the last century by a large margin. It is the most rational and businesslike. Buying profitable and durable companies at discounts to intrinsic value is the name of the game. Right now the investment opportunity set is as exciting as I’ve seen since 2009. We have quality investment grade bonds yielding 6-7%, and high-yield bonds yielding close to 10%. We have banks yielding 4-5%, with the ability to double in share price over the next 3 years or less. We can buy real estate companies with trophy assets that dominate the New York skyline at a fraction of net asset value, and nearly double-digit dividend yields. Fear has created fantastic options pricing, creating a great opportunity for our strategy. Often we are selling puts deeply out of the money, while targeting double-digit returns, with an extremely low-risk relative to purely buying stocks outright. Other times, the upside is too immense and it makes sense just to buy the stocks.
The Federal Reserve has been hellbent on stomping inflation. The signs of inflation weakening are nearly everywhere, which ultimately will cause the Fed to stop hiking, and depending on if or how deep of a recession we see, they may need to start cutting rates again. This would be very good for most asset classes including bonds, which we’ve started to accumulate after the massive drop in 2022. To the pessimists I ask, what if the war in Ukraine ends? That would be massively beneficial to the global economy and reduce the Armageddon risk premium that I believe has started to develop in financial markets. It seems like a stalemate is very likely and at some point, the pressure will ramp up to negotiate peace. Obviously there is always the potential things can get worse, but I’m cautiously optimistic.
I think over the next 5 years, we have a chance to build substantial wealth through investing. In the history of TTCM since October 2011, we’ve never had the chance to invest in a high-yield environment. This is really exciting for us as it has greatly enhanced the amount of securities we can find value in. For those of you retired or close to retirement, higher rates can be a major benefit as finally you can get paid on your hard-earned savings without only being exposed to equity risk. For those of you that are still in the wealth creation phase, the big money is made through having courage in bear markets/recessions. The returns that came after 2008 were simply sensational on a variety of different asset classes, and I’d expect to see some similar opportunities coming out of this. Companies and assets that were once valued so richly, are now trading as though they offer little value, despite generating robust cash flows. Building a portfolio of these assets is likely to produce double-digit per annum returns over the next 5-10 years and that is what we intend to do for those that have the risk tolerance to stomach a bit of volatility, as is necessary.
Below are our three most recent research reports on Bank of America and Capital One Financial for you to review at your leisure.
Thank you very much and please let us know if you need anything at all!