“When something is on the pedestal of popularity, the risk of a decline is high. When people assume – and price in – an expectation that things can only get better, the damage done by negative surprises is profound. When something is new, the competitors and disruptive technologies have yet to arrive. The merit may be there, but if it’s overestimated it can be overpriced, only to evaporate when reality sets in. In the real world, trees don’t grow to the sky.”
We pulled this excerpt from a recent memo written by famed investor Howard Marks, whose market letters are widely consumed by the investment community. Marks was referencing artificial intelligence in his letter, but these words ring true for other periods of technological advancement in the US. The emergence of railroads, electricity, and the internet all ushered in financial manias that eventually ended in pain.
Will AI, possibly the most consequential innovation of our time, produce a similar result? Time will tell. Since ChatGPT was first introduced to the world in late 2022, the S&P 500 has increased by over 50%. The Nasdaq, comprised mostly of technology companies, has grown a staggering 80%. The gain for the latter is eerily similar to the growth enjoyed in the two years following the release of the Netscape web browser in late 1994. Tech stocks went on to gain another 300% before the bubble was pierced in March 2000. It would be fifteen years before the Nasdaq would return to its previous high.
Our team doesn’t spend much time trying to discern if the market has become untethered from reality. Instead, we focus exclusively on the appraisals* of the individual companies we own and follow. We are buyers when share prices are below our underlying appraisals and sellers when shares prices exceed those appraisals. Not only a simple strategy, but one that removes emotion from our decision making.
Today our portfolio companies are trading a bit above their appraisals. Does this suggest a decline is imminent? Absolutely not. As we’ve seen in previous market cycles, sentiment can overshadow valuations for years. Furthermore, a large portion of the gains enjoyed since late ’22 can be attributed to a narrow band of truly wonderful companies. Looking at the S&P 500 in a democratized fashion (with each of the 500 equally weighted), the returns have been a more pedestrian 30% – far from euphoric.
Nonetheless, strict adherence to our valuation discipline is non-negotiable. As share prices have marched higher, we have been methodically trimming some of the more expensive positions in your portfolio. This selling is not an indictment of current market valuations. We are simply allowing our time-tested appraisals to dictate our actions. By staying rational while times are good, it will permit us to capitalize on irrationality when volatility returns.
Thank you for your continued trust in our approach – we appreciate it more than you know.
Barry, Chris, Amy, Chris, Frank & Kelsey
*Our definition of appraisal is the price we estimate a company would command if the entire business was acquired by an informed buyer.
BWP Outlook – Staying Rational
“When something is on the pedestal of popularity, the risk of a decline is high. When people assume – and price in – an expectation that things can only get better, the damage done by negative surprises is profound. When something is new, the competitors and disruptive technologies have yet to arrive. The merit may be there, but if it’s overestimated it can be overpriced, only to evaporate when reality sets in. In the real world, trees don’t grow to the sky.”
We pulled this excerpt from a recent memo written by famed investor Howard Marks, whose market letters are widely consumed by the investment community. Marks was referencing artificial intelligence in his letter, but these words ring true for other periods of technological advancement in the US. The emergence of railroads, electricity, and the internet all ushered in financial manias that eventually ended in pain.
Will AI, possibly the most consequential innovation of our time, produce a similar result? Time will tell. Since ChatGPT was first introduced to the world in late 2022, the S&P 500 has increased by over 50%. The Nasdaq, comprised mostly of technology companies, has grown a staggering 80%. The gain for the latter is eerily similar to the growth enjoyed in the two years following the release of the Netscape web browser in late 1994. Tech stocks went on to gain another 300% before the bubble was pierced in March 2000. It would be fifteen years before the Nasdaq would return to its previous high.
Our team doesn’t spend much time trying to discern if the market has become untethered from reality. Instead, we focus exclusively on the appraisals* of the individual companies we own and follow. We are buyers when share prices are below our underlying appraisals and sellers when shares prices exceed those appraisals. Not only a simple strategy, but one that removes emotion from our decision making.
Today our portfolio companies are trading a bit above their appraisals. Does this suggest a decline is imminent? Absolutely not. As we’ve seen in previous market cycles, sentiment can overshadow valuations for years. Furthermore, a large portion of the gains enjoyed since late ’22 can be attributed to a narrow band of truly wonderful companies. Looking at the S&P 500 in a democratized fashion (with each of the 500 equally weighted), the returns have been a more pedestrian 30% – far from euphoric.
Nonetheless, strict adherence to our valuation discipline is non-negotiable. As share prices have marched higher, we have been methodically trimming some of the more expensive positions in your portfolio. This selling is not an indictment of current market valuations. We are simply allowing our time-tested appraisals to dictate our actions. By staying rational while times are good, it will permit us to capitalize on irrationality when volatility returns.
Thank you for your continued trust in our approach – we appreciate it more than you know.
Barry, Chris, Amy, Chris, Frank & Kelsey
*Our definition of appraisal is the price we estimate a company would command if the entire business was acquired by an informed buyer.