In his latest Q4 2020 Shareholder Letter, Eric Cinnamond discusses the disconnect between market valuations and fundamentals, adding as investors we have a choice, we don’t have to overpay. He believes that there is a generational opportunity to differentiate investment outcomes by maintaining discipline on the prices paid for stocks. Here’s an excerpt from the letter:
No Country For Old Investors
Anton Chigurh: What’s the most you’ve ever lost on a coin toss?
Gas station proprietor: I don’t know. I couldn’t say.
Chigurh: Call it.
Proprietor: For what?
Chigurh: Just call it.
Proprietor: Well—we need to know what we’re callin’ it for here.
Chigurh: You need to call it. I can’t call it for you. It wouldn’t be fair.
Proprietor: Look…I need to know what I stand to win.
No Country for Old Men (2007).
(Source: Palm Valley Capital Q4 2020 Letter)
Dear Fellow Shareholders,
In No Country For Old Men, Javier Bardem plays a psychopath serial killer (Anton Chigurh) that walks into a quiet remote gas station in the desert. While paying his $0.69 bill, he stoically badgers the elderly proprietor as a prelude to calmly demanding that the older man call a coin flip. While the proprietor senses danger, he still wants Bardem to explain what’s at stake: “I need to know what I stand to win.” Everything. Unbeknownst to him, “everything” implied the status quo—the opportunity to live another day.
That classic coin flip scene is the opposite of an asymmetric bet. With even odds, the proprietor’s upside was limited ($0.25), while his downside was, in a cruel irony, everything. No sane person would make that bet voluntarily. Now, here’s our investment backdrop:
1. U.S. stocks are at the highest valuations in history.
2. The Federal Reserve is committed to supporting asset prices.
Which factor will drive future investment performance? If the Fed is omnipotent, investors may stand to win “everything,” in that they don’t lose their shirts and face a long period of mediocre prospective returns. Some even think asset prices have no upper limits in a liquidity-driven world. Instead, if market values reconnect with fundamentals, then the investment outlook could be very bleak. Which is it for you: Fed talking heads or fat left tails? Call it.
Like us, you may be frustrated that financial markets are not currently allowed to function on their own. However, you can’t blame it all on the Fed. They are the puppet masters in a market confidence game, but they aren’t setting the bid on every stock (yet).
As investors, we may not have good alternatives, but we have a choice. We can refuse to overpay. We believe there is a generational opportunity to differentiate investment outcomes by maintaining discipline on the prices paid for stocks.
While the government’s distortion of the capital markets won’t last forever, predicting its end date is tantamount to a coin flip. Today, investors seem dangerously focused on their upside. With “everything” possibly hanging in the balance, the question we should all be asking is: What do I stand to lose?
You can read the entire letter here:
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