Sometimes price doesn’t tell you everything you need to know

Market Insights from Outside the Office

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• Market Lessons outside the office

• Sometimes price doesn’t tell you everything you need to know

• With a decade of low interest rates, real prices have been distorted

• Market Declines Create Opportunities

• Portfolio Updates

• Final Word

Market Lessons outside the office

This week my most valuable market insights came from outside the office.

I was invited to the Hedge Fund Association Symposium and the CFA Society Orange County Wealth Management Conference.

I got to rub shoulders with incredible people and placed in rooms I wouldn’t dream of.

I had lunch with a NFL super bowl champion, discussed volatility overlay strategies with a $1B hedge fund manager, and riff web 3.0 concepts with a venture fund managing partner.

We valued the diversity of viewpoints from some of the best in the business.

Here’s what I learned:

Sometimes price doesn’t tell you everything you need to know

The price of an asset might seem like all there is to know, but sometimes that's not true.

American Strategic Capital, Inc. Credit: Charles Rother, CFA

Let me explain:

It’s my job as an investor to find the right balance between real assets (like real estate) and financial assets (like stocks) with the highest potential return given a certain level of security.

Getting that mix right is crucial to grow and preserve wealth.

Until assets are sold at a certain price- gain’s are unrealized and only reflect paper wealth, rather than cash wealth.

In the time before you sell, the price of assets should reflect the tradeoff in value it provides given the cost of holding that asset.

Economic Factors, Inflation/Deflation, Monetary Factors, Valuation Metrics, Political Factors and Market Psychology are changing at a rapid pace with new information.

We are now in a bear market for stocks and long-term bonds.

With a decade of low interest rates, real prices have been distorted

The cost of holding assets has been low for a long time, so prices went to obscene levels. The foundational base of price supporting factors for a decade has been holding up.

But supporting factors are now strained. As costs are beginning to increase at a rapid pace, people are waking up and looking at selling assets where the price doesn’t reflect the true costs of holding an asset.

Cash generating assets are king right now.

With uncertainty, go to the top of the balance sheet and look at cash to determine value.

I’m ok with patiently systematically investing cash over time and buying high cash generating assets while investors try to reprice the true costs of holding assets.

Once that new cost level is set by the market - it’s going to be a wonderful time to be an active investor.

Market Declines Create Opportunities

We think there will be an opportunity in three core areas:

1. Public merger’s and acquisitions as corporate executives consolidate unproductive assets

2. Dividend Paying Stocks which will provide a tax shield and give back cash in investors pockets.

3. Stocks in the top 10% of free cash flow yield in their sector. Free Cash Flow yield is calculated by taking the free cash flow per share divided by the current share price. We believe proven capital allocators with cash on the sidelines will win big when financial conditions eventually improve.

Credit: Goldman Sachs