For the first three quarters of 1997 our average account gained approximately +15.69%.
It was a better quarter for our results than it was for our thinking, as we managed to add only one new investment of any size in the quarter. We like watching the headline number on your monthly statement go up, maybe almost as much as you do. But it’s what goes on in the body of the report that tells whether future wealth was being created that month, and we can’t help thinking all of Wall Street has taken more out of the village well than has flowed back for quite a while now. We are no different, although, we hope, considerably more self-aware.
Last quarter, in a fit of unusual good timing, we abandoned one disappointment. (Guinness), and managed to find a bit of value with the proceeds (Digital Equipment). It made us feel that we had jumped back in time from this decade to a previous one. At our purchase price for Digital, net cash on the balance sheet was equal to two thirds of our investment, and the value of its various ancillary businesses (Alta Vista amongst others) more than supported the rest. The basic business of making and servicing computers came to us for naught, which, as it turns out, is the only price we are consistently willing to pay for technology stocks. Unfortunately, Randy Johnson throws underhand more often than technology stocks come past at such Graham and Dodd levels. You are about as likely to find Halley’s comet in your backyard as to discover the next such experience in your portfolio.
This is not to say we have lost all our bull market friskiness, however. You may have noticed we have been acquiring shares of Orbital Sciences for you. This is literally an exercise in rocket science. Orbital builds and launches satellites for the thrifty. Small, lightweight and launched into low earth orbit, this is exactly the part of the communications industry set to grow most vigorously. Orbital comes to us in an amusing fashion as well, since we had owned a modest position in its more mature competitor, Comsat. While still officially declared the dominant carrier in satellite communications worldwide, Comsat is dependent on just the type of huge, expensive fixed-place satellites Orbital is making obsolete. Here again, we sold one for the other, proving, we hope, that if we are not always smart we are at least always flexible.
The last quarter has started so strongly that we feel a modest warning is in order. Capitalist life has been running with such smoothly charming profitability of late we wonder if the inmates of Wall Street are not slowly losing all powers of discernment. Last month members of the Shadow Open Market Committee, a sell-appointed collection of economic cranks who have been hectoring the Federal Reserve Board for 24 years, could find nothing wrong with Federal Reserve policy and so canceled all meetings until further notice. This is the first cancellation on record, and has the unsettling quality of a New York City passenger complimenting a cab driver on his efforts. The eerie silence from carpers and critics reminds us that our prime selling point has always been our conservatism. You can’t spend relative performance, and in any downturn we do not intend to come back to you with any explanation that can be reduced to “We were maimed less than the other fellows”. Conservation of capital was the founding mantra of Levy, Harkins and Co., and if you drop by world headquarters you will hear us murmuring it in the hallways today.
Sincerely yours,
Edwin A. Levy
Michael J. Harkins