Chuck Akre: Don’t Seek Opportunities In The Hardest-Hit Businesses Without Regard For Quality

Johnny HopkinsChuck AkreLeave a Comment

In Chuck Akre’s latest Q2 2020 Market Commentary he makes a couple of great points regarding the importance of ignoring market forecasts, and why investors should avoid seeking opportunities in the hardest-hit businesses without regard for quality. Here’s some excerpts from his commentary:

Why Investors Should Ignore Market Forecasts

The year 2020 should (but will not) dispel any faith still remaining in market forecasts. Who predicted the coronavirus? Or, having successfully predicted the arrival of the coronavirus in early 2020, what would have been your forecast for the stock market this year? Let us re-frame the question: if you knew in advance that the unemployment rate in the United States would go from 3.5% in February to 11.1% in June (with a stop at 14.7% in April) what would be your prediction for the stock market? Down 30%? Down 40%? Down 50% or more? Instead, through June 30, the S&P 500 Total Return is down just over 3%.

This example underscores why market forecasts play no role in our investment process. Our focus is on individual businesses: their quality, prospects, and the valuations at which we would consider initiating or adding to positions. We endeavor to manage the fund in such a way that our decisions to buy or sell are entirely specific to each individual business without regard or reference to general market conditions and forecasts.

The focus on individual businesses informed our active buying in March, which resulted in our cash weighting dropping from 17% at calendar year-end to 10% by the end of the first quarter. With the rapid recovery off of the March 23 bottom, we were much less active buyers in the second quarter. However, we did put cash to work opportunistically in several names which, in combination with the strong recovery, helped reduce our cash weighting to just over 8% by the end of June.

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Don’t Seek Opportunities In The Hardest-Hit Businesses Without Regard For Quality

It is also important to highlight something we did not do during the recent market plunge: namely, seek opportunities among the hardest-hit names and industry sectors without regard to quality (for example: airlines and cruise lines). There undoubtedly was deeply discounted value to be had in some instances. However, we did not relax our quality standards and long-term compounding approach in order to rent beaten-up stocks with one eye on the exit. As Warren Buffett said, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” Such was our approach, with its attendant emphasis on what we believe are exceptional businesses rather than cheap stocks.

You can find his latest market commentary here:

Chuck Akre Q2 2020 Market Commentary.

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