Broyhill 2017 Annual Letter: Everyone is Getting Hilariously Rich and You’re Not

Smart Money
  • In 2017, Broyhill generated low double-digit returns
  • Performance fell short of the strong gains posted by equity indices; relative underperformance was primarily due to our lower than normal exposure to risk assets
  • Last year, all asset classes appreciated, every equity index rose in every quarter, and US stocks went up in every month
  • In a bull market, aggressive risk-taking can easily be confused as intelligence. The challenge, for passive investors, will be to hold onto those gains when the tide goes out. You don’t need Broyhill in a bull market

Everything Old is New Again

  • On 12/27/99, Barron’s published the article, “What’s Wrong, Warren?” – the title suggested that Buffett may be losing his magic touch
    • Its market cap was nearly halved in the final years of the tech bubble. Over the same time, Nasdaq gained 145% during its final surge
  • A few months later, on 3/31/00, The New York Times published an article titled, “The End of the Game; Tiger Management, Old-Economy Advocate, is Closing”
    • In two short years, Tiger’s assets fell from more than $21Bn from its peak in 1998, to $6Bn
    • In his final letter to investors, Julian Robertson, blamed his fund’s problems on the rush to cash in on the Internet craze
  • Current challenges are not new. It’s helpful to go back and get a sense of what it must have felt like to have been “wrong” for that wrong. And to remember what it felt like to watch speculators around you get hilariously rich
  • Value stocks underperformed growth stocks by 17% in the US last year – their worst calendar-year performance since 1999; value underperformed everywhere else around the world as well – in emerging markets, the gap was closer to 20%
  • The surge of retail activity in the markets is a late cycle indicator. It’s something we see at market tops

Old Economy Steven

  • In a similar fashion to the last great tech bubble, the decline of “old economy” stocks has accelerated as competitors with seemingly endless pockets challenge incumbents
  • Disruption is not new to capitalism. There’s always a new, new thing. Yet, businesses that have been built over generations on solid foundations usually have at least a few good reasons to be around as long as they have
  • No one questions the assumptions underlying today’s “new economy.” And it is precisely this consensus sentiment what creates opportunity for brave, contrarian investors. When you’re home for the holidays and mom asks you about Zuckerberg’s video strategy, then popular sentiment is getting extreme. When Grandma’s worried about Amazon disrupting the cozy, cross-cable knit blanket market, it’s time to fade the hype
  • Sentiment can change. It wasn’t that long ago that people literally laughed at us when we pitched Microsoft as our beta idea. At the time, the stock was trading at a single-digit multiple net of cash – today, the same company trades for nearly 30x earnings
  • Old dogs rarely get credit for learning new tricks. But young dogs rarely believe that they may even stumble
  • We cannot recall a time in recent memory when dichotomies were as wide as they are today
  • When purchased at the right price, even a melting ice cube can offer a refreshing return, as one of our investors in the envelope business (USPS is not exactly a growth industry) has demonstrated. The liquidation of peers, acquisitions that consolidate market share, and cost cuts often leave the last man standing with quite a nice stream of recurring cash flow

Broyhill 2017 Annual Letter, March 1, 2018

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