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2024 Fourth Quarter Update

 

As we begin another new year it is natural to reflect upon our successes and disappointments.  Our general summary of last year’s stock market would be that the strong got stronger and the weak got weaker (at least as measured by their respective returns).  If we picture the market as a stretched rubber band, it seems that both ends are being pulled ever tighter.  

Turning our focus to the future, we wonder if this increasing “stretch” does not ultimately portend a more intense snapback than we have seen for some time.  This dynamic informs our cautiously optimistic outlook—not blind to the uncertainties that may lie ahead but buoyed by the lessons we have learned in the past.  Opportunities seem to be shifting toward the so-called “laggards” and away from the “leaders”, and our investment approach reflects this evolving perspective.

A Time to Trim or Sell

We have been fortunate to own some incredibly high-quality companies across sectors such as technology, energy, insurance brokerage, auto salvage and others.  These industry leaders have leveraged steady tailwinds to grow earnings and extend their market dominance. Their success underscores their strength and innovation, but as fundamentals-driven investors, we remain vigilant in assessing value.

Our decisions to hold or purchase shares are grounded in a company’s earnings stream, growth potential, and capital allocation practices. Even the best businesses can become overvalued when market enthusiasm outpaces intrinsic value. For several of our holdings, we believe that time may have come.

Last year, we made the deliberate decision to trim or sell some of our larger, long-term positions as the market offered us an opportunity to do so at a premium. For taxable portfolios, this meant realizing gains and paying taxes — these decisions were not taken lightly. Selling shares of great companies is never easy, particularly when their future remains bright. However, disciplined investing means recognizing when valuations are no longer justified (or less justified) by fundamentals.

By reducing positions with riskier upside/downside equations, we de-risk portfolios and create room to reinvest in areas where potential rewards outweigh risks. Our goal is to ensure that every new investment is meaningfully better than the one we have sold. While we don’t aim to trade unnecessarily, we embrace opportunities when warranted as a result of significant valuation discrepancies, prudent risk management or better opportunities elsewhere.

A Time to Buy

As large-cap market leaders dominated headlines, we believe that smaller, unloved, underfollowed, and sometimes internationally domiciled businesses are offering intriguing contrasts. These companies are trading at discounts to our estimates of value despite strong fundamentals or promising growth trajectories. Investing in such opportunities requires patience and a willingness to venture where others are not looking, but history suggests that attractive returns often originate in overlooked corners of the market.

We believe that the rise of indexing has amplified these opportunities.  The most prominent indexes are often “cap-weighted”, i.e. the biggest companies comprise proportionally more of the index.  As an example, the cap-weighted S&P 500 returned 25.0% in 2024, while the equal-weighted S&P 500 only returned 13.0%.  We believe this market distortion may be leaving smaller businesses undervalued.  

We are finding attractive businesses in these smaller companies, which are not headline names but are strong players in their respective industries.  We do not plan to totally abandon our larger capitalization companies, but think incremental opportunities are more likely to be pulled from these less-fished waters. 

Optimism Rooted in Fundamentals

Our investment fundamentals remain the same: Invest in high-quality businesses, strong balance sheets and aligned management teams; buy them at the right price; and stay focused on long-term value creation.

The global economy, while increasingly complex, continues to adapt and grow, fueled by human ingenuity and resilience. For patient and deliberate investors, the years ahead hold abundant opportunities.

Thank you for your continued confidence.  We consider ourselves fortunate to serve you and your family, and we remain committed to your long-term success.

We hope that you and yours had a joyous holiday season, and we wish you a happy and prosperous new year.

 

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