Investment Climate April 2021: The Challenge Ahead
Market activity in the first quarter of 2021 can be best described as “wild.” Volatility, now a staple of the modern market, has taken on a whole new meaning - and we would use the phrase “wild volatility” in order to describe what we have been witnessing on a day-to-day, hour-to-hour, and even second-to-second basis! While we have experienced outsized performance in recent years, quarters and months, we have been warning that a correction was due. About mid-quarter, we began to see the correction take form. The excuse was a “rotation” from growth-type stocks to cyclical or “value” stocks, but the reason is irrelevant; it was simply time to “ring the bell” for a correction.
That said, we have come off a period of very strong stock price performance for our portfolio companies, largely because of very strong business activity in those companies. Despite the aforementioned correction in recent weeks, strong performance overall resulted in outperformance for our growth portfolios versus most major stock market averages again in the first quarter of 2021.
Recall that our strategy stays fully invested through market and economic cycles. We don't try to predict the market or economy; we try to predict businesses and let the stock prices take care of themselves. We believe that if we predict the businesses properly, prices will follow over time.
Nonetheless, we are very early in the lifecycles for many of the businesses we currently own. We have spent the last few years exiting some very successful companies that had grown to be quite large and had matured enough to where they no longer were meeting our criteria for future growth. As such, we have spent those years positioning the portfolio in many younger, high-potential companies that we believe have exceptional growth still in front of them. We believe these innovative companies are the best defense against what is shaping up to be a less-than-favorable economic environment.
While the economy is currently rebounding from the “self-induced” recession created by governments around the world forcing draconian “lockdowns” on citizens and businesses in their crusade against the COVID-19 virus, we believe that the attempts to offset the COVID-19 fiasco by those same governments the world over will ultimately result in a slowing of economic growth. Private industry capital will be “crowded out” by massive government spending, and the likely tax increases that will be government’s response to “pay” for its own largesse will result in much lower production from businesses. Generally, those two factors together have historically resulted in inflation. In years past, what appeared to be “inflating” by the world’s central banks turned out to be meeting an insatiable desire on the part of the world for cash, exacerbated by the ‘08-’09 financial crisis. Technological innovations, and the ensuing productivity enhancements that resulted, served to limit price increases as productivity boomed.
It will be harder for that to be the case in the face of higher tax rates. However, it is precisely in times like those, which we appear to be entering, that real innovators succeed and even thrive -- thus, the importance of maintaining focus on finding and owning the best up-and-coming companies in the world. That is our charge, and we are ready for the challenge!
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