- Stocks are fully / fairly valued, and the global economy is firing on all cylinders. That’s exciting for our portfolio: we’re relatively fully invested, but we’re invested mainly in companies who should perform well regardless of the global economy (i.e. cable companies) or special situations like liquidations and merger arbitrage investments that should return cash to us in the near term. We think this positions us very well to outperform / add exposure if markets ever fall, while allowing us to continue to participate in market upside as our businesses grow in value.
- Global indices and returns are increasingly driven by large tech companies. That makes tons of sense as they are increasingly important parts of our everyday lives. Our portfolio consists of almost no exposure to these large tech companies or the major indices in general (of our twenty largest positions, which account for the bulk of our portfolio, only our investment in Charter (disclosure: Long through the Liberty complex) and a merger arbitrage position in Time Warner (disclosure: Long) are included in the major indices), which significantly decreases our portfolio’s correlation with the broad markets. While this lack of tech exposure has hurt us in the recent past, we think this positions us well if those companies ever start running into little things like “antitrust / regulatory crackdowns” or “the law of large numbers.”
- To tie this back to the first point on market valuation, I think the increasing importance of large tech companies has vast implications for cyclical valuations. In general, these large tech companies are much better businesses than some of the more cyclical industrials that dominated indices in the past. Because they’re better businesses, they likely deserve higher multiples, and these “superior economics” combined with their increasing index weighting should continue to drive global index valuations higher. In addition, the way these businesses have scaled and grown earnings is unprecedented and likely distorts historical / cyclical earnings metrics. Consider Facebook- in 2016, it earned >$10B in net income, and it likely earned close to $20B in 2017. In 2012, it earned just $53m. Cyclical earnings metrics that use Facebook’s 2012 earnings will drastically understate the company’s (and thus the overall market’s) earnings power.