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Investment Climate October 2016

The stock market recovered nicely in the third quarter after the “panic” over the Brexit vote subsided and the focus turned to the slow but consistent growth in the economy that has prevailed for a number of years now. Markets in general, as well as our Core Growth Strategy, ended the third quarter with a year-to-date return in the mid-single digits.

While some would marvel over the market’s move upward since the 2008-9 debacle, we believe that viewing market performance with a start date of March 9, 2009 (the day the market bottomed in the wake of the crisis) is a big mistake. While we are pleased, and frankly, not surprised that the market has recovered from the depths of its decline in 2009, we are dismayed at the significantly below- average growth in the economy, and in the price of the average stock over the course of the last 15+ years. Although during that period we have witnessed outperformance in our Core Growth Strategy versus the market in general, we have not seen the kind of growth we would have expected considering the massive technological advancements that have benefitted the world over that same period of time.

We will begin by emphasizing that we are more confident than ever that the types of companies we focus on in our strategy are poised for significant success which we believe will be reflected in their stock prices in the years to come. But why has it been such a slow slog forward?

Simply put, the “investment climate” of the last 15 years has not been ideal, and particularly it has not been well-suited towards entrepreneurial activity and capital investment. The reasons for this are plentiful, and have been discussed before, but to recap what we believe to be the primary culprits: government intrusion into the affairs of free enterprises has been, at best, meddlesome and, at worst, stultifying. With all good intentions, and in the wake of scandals like Enron and Worldcom in the late 1990s, and the mortgage/housing/ financial crisis in 2008-9, the politicians “acted” by giving us regulatory regimes like Sarbannes-Oxley and Dodd-Frank (with its offspring, the Consumer Finance Protection Board) that has made it increasingly difficult for businesses (especially smaller ones) to navigate the already complex web of regulations. If there is need of evidence of this problem, to us -- professional investors who seek out growing businesses for a living -- one need look no further than the dearth of initial public offerings (IPOs) of common stock in the last 15 years.

This drought has become an epidemic, in our view. While there have been fits and starts in the IPO market over the last few years, the general trend has been abysmal for so long that it has considerably limited our ability to find new growing companies in the public markets. This is, in our view, the single most important issue facing the investor today!

Fortunately, we believe we have such a formidable group of opportunities in our strategies for growth investing in both public and private companies that we don’t fear this situation, yet. As previously mentioned, we have never been more confident in the positions we have taken in both public and private holdings. However, it does concern us for the future, and particularly future generations of investors, that this drought in new business formation has run for so long. As we have said for years, echoing our mentor Richard C. Taylor: “we get by in spite”. When Dick spoke those words he meant to describe the errors of the ways of those who have over-intruded into the private affairs of businesses, just as we have witnessed in the last 15 years.

While we acknowledge the challenges that such intrusions place on businesses, we are optimistic that the remarkable business men and women who run the companies we own will shine regardless of what unintended hurdles are foisted upon them. Doug Waggoner from Echo Global Logistics, Eyal Waldman from Mellanox Technologies, Colin Reed from Ryman Hospitality Properties, Arkadiy Dobkin from EPAM Systems, Anat Cohen-Dayag from Compugen, Jules Urbach and Alissa Grainger from OTOY, just to name a few, are examples of the brilliant and committed stewards of our companies who, with their entrepreneurial spirit and innovative products and services, are impacting our world. Fortunately, we can benefit as we standby and watch them do their work!

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