The Quarterly Review for 1Q is available, and the general theme is that those who remained disciplined and diversified got smacked because there was nowhere to hide. But since one quarter is only one quarter, there’s no reason to deviate from the fundamentals.
Running low on sarcasm this week, so let’s quickly touch on a few things…
Floor on inflation.
Inflation is a key subject in the Quarterly Review, and there is evidence that it could peak in the coming months. If so, inflation could reverse course by the end of the year. But I want to be clear that I don’t see how we can return to the sub-2% days we had for so many years leading into the government-mandated economic shutdown.
The reason is the money supply. You can’t increase the money supply by 40% in two years and expect the pig to go through the python in a few months. That money is out there. It’s in our bank accounts and corporate treasuries, and there’s no shot that Americans will voluntarily give it back to Uncle Sam.
I’m not smart enough to know where inflation will land. I’d wager 5-6% simply because demand should normalize somewhat. But the money supply exploded so much that I feel it’s put a floor on inflation. It is hard to conceptualize how it goes lower than 5%-ish in the next year or two unless the money is taken out of the system.
We rarely discuss single stocks here, but Netflix is worth mentioning since we own it in one of our growth portfolios. Netflix has historically been an extremely volatile stock. Here is a chart of drawdowns over time. This recent drawdown is extreme, but it’s not the first nor the largest since the stock began trading.
That being said, from the two largest drawdowns in 2005 and 2012, the stock has returned over 15,300% and 2,300%, respectively. Meaning patient investors have been handsomely rewarded even after this most recent selloff.
This company has faced a lot of adversity over the years. They were the pioneer in the space, but the strength and quality of their management team have successfully guided them through tough times like Qwikster (admittedly, this was self-inflicted).
However, that is the past, and we must focus on the future. Much of the recent news is not only surprised us but also a lot of prominent investors. We’re working through the next steps as we speak.
The real lesson for investors is that our risk controls are designed to avoid building large positions in any stock for this exact reason. It doesn’t matter how good the track record or how much work is put into an idea – there will always be stocks that blow up. Being wrong is just part of this business, so keeping position sizes from growing too large mitigates the effects of mistakes.
While most investors talk about their mentors being Fama, French, and Benjamin Graham, I’ve always found the behavioral side of finance to be way more interesting and profitable. I’m talking Richard Thaler, Dan Kahneman, Charlie Munger, George Costanza, etc.
Well, here’s a chart every advisor should print out and post on their office wall. That way, when clients walk in, you can point out whatever bias you encounter during your reviews.
Enjoy the weekend…
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