Below is Tom Bradley's letter to clients from our Quarterly Report.
When looking back at my writing and counsel to clients this last quarter, it was clear that I’ve become a real downer. “The easy part is behind us, and we’ll need to grind it out for a while.” “It’s a dangerous time ... when growth companies mature.” “We’re in a highly speculative, risk-complacent market.”
My wife and I have a philosophy around downhill skiing – take what the mountain gives us. With investing (and writing), I have a similar approach – take what the market gives me. Don’t force it. Go where the opportunities are. And if they’re sparse, bide my time.
It’s the opposite of a private equity manager I read about over the holidays. He wasn’t winning any deals because valuations were high, so he adjusted his risk tolerance. “There’s a lot of competitive pressure,” he said. “We decided we had to be in the market.” He had money to spend and had to take the price being offered.
Right now, our analysis and experience suggest that risk is higher than usual and expected returns are lower. This isn’t based on a macro prediction, but rather a reflection of the prices we’re required to pay for assets and the prevalence of speculative behaviours.
But my cautious counsel shouldn’t obscure the strong returns our clients have experienced. 2021 was a banner year for investors. Nor should it hide the many positive aspects of today’s investment landscape which provide a solid foundation for future returns.
Interest rates are low and will remain highly stimulative, even if they move up.
It’s a big growing world out there and the middle class is expanding exponentially, particularly in India and China.
There’s an abundance of well-run companies that are making or doing things that society needs. An increasing number of them are doing it responsibly.
Technology is penetrating all aspects of the economy. Innovation and digitization are driving operating efficiencies at the companies we own, as well as in government sponsored activities (where it’s desperately needed). It’s particularly exciting to see in healthcare and power generation. Vaccines are just one of many areas where there have been major breakthroughs, and it’s great that we now have increasing options for powering our planet sustainably.
The employment outlook is outstanding. There’s an abundance of jobs (we need to address the skills mismatch).
The savings rate in North America has been high during COVID and families have considerably more equity in their home than they did a year ago. The U.S. household debt service ratio has never been lower.
The cost of investing is coming down led by firms like ours (regular reductions are built into our fee schedule).
And most important, nobody has repealed the law of compounding. I see it in the statements of our long-standing clients. They’ve not only earned money on their invested capital, but also on the previous earnings from that capital. It’s a beautiful thing.
All this to say, we go into 2022 with our eyes wide open, having no idea how Mr. Market will balance the positive and negative factors. There’s one trend we’re certain of though: investment returns go up and to the right over time. Indeed, at Steadyhand our balanced clients have earned positive returns for 12 of our 14 calendar years.
We encourage you to read the rest of our Q4 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.
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