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| July 7, 2010 |
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Dear Client, For the first six months of 2010 our average account gained approximately +4.33%. The times are always uncertain, but the present moment feels as though we are setting an uncertainty record. Across the Western world governments are exhausted. Their tax revenues have dropped precipitously as profits erode and salaries disappear, and public work initiatives run their course and taxpayers revolt against paying for more. As their debt ratios climb inexorably finance ministers say their work is done, whether it has achieved its desired effect or not. Unemployment rages on, and no one seems to be doing anything about it. In America, the Obama government is not helping matters. The President alternates between language sharply critical of business one day, to outright vitriol the next. The people who create jobs grow frightened when they are vilified, and so a President venting about a part of the population he’s never liked does none of us any good. Longing for more jobs and despising the people who create them is a logical absurdity and a common position in the Democratic party. Republicans offer the policy of “no”, but after that, what? So far, a doleful silence. Shunning uncertainty, investors have turned to bonds, one specie of which strikes us as near lunatic with hazard. We mean the municipal bond market, where yields are miniscule and risks are breathtaking. Will a major municipal issuer fail? Given the current parlous state of states from California to New York and many points in between, it would almost seem more likely than not that at least one will go. In the instant moment after such a calamity, good luck selling even the best paper back into that market. When the market comes to understand that the bondholders are the last to be paid, behind the police, behind the firemen, last in line behind every other stakeholder, the fall out throughout the muni market is likely to be severe. A Federal bailout of a state is unthinkable because 49 others will be at Treasury within an instant. Doing nothing is also unthinkable. What a conundrum, and how happy we are to be a great distance away. Nonetheless, we own a lot of stocks, and for the best possible reasons: They are cheap and in the long run, uncertainty is our friend. We say this because we know that “certainty” is almost always an illusion. You pay a very high price for it in the investment world and then you hardly ever get what you paid for. There is never anyone to go to subsequent to disappointment and say, “Here is my receipt, I paid for certainty. My certain outcome did not come to pass. I want my money back.” Life simply doesn’t work that way. Uncertainty has made stocks cheap, and that is the best thing you can ever say about an investment. Indeed, the pessimism bubble has grown so large that last week the New York Times took to disparaging the cash on hand at a number of technology companies, saying maybe their cash should be discounted from their valuation, or even ignored entirely. Here’s a question for the Timesman, “If you don’t like cash, and the rapid accumulation of more of it, what is it you do like about business?” What an about-face in ten years time. A decade ago many and many a technology firm had multibillion dollar market valuations and not a penny to their names. That ended very badly. This moment sees companies like EMC and Qualcomm and Google with cash hoards that are a quarter to a third of their stock prices, and growing rapidly. We will take that any day. Indeed we lust after it. Our style is to own only companies that have great cash generating abilities. That style works through all cycles and most uncertainties. There are a few things in life more fun than gazing through a Value Line survey, coming across the Tupperware page and noting that you can stare forever and never see a trace of a recession in its results. We might note that when we first bought it a few years ago it was a stretch for a Levy, Harkins investment, as it had significantly more debt than equity. But such has been the cash flow capacity at Tupperware that the company is set to end this year with twice as much equity as debt. Can increased dividends be far behind? It is amazing that this style of value investing can work year after year, greatly outperforming the standard stock averages and yet be so infrequently emulated. Well, perhaps not so amazing in a world where the leading financial commentator regularly leans into a camera lens, spittle flying and veins popping, odd noises bellowing, and screams investment ideas fifty to the minute. How people can think that style is the road to riches is beyond us, but the public has been taught that’s what investing looks like. For our part, we’ll stick to our knitting of finding great businesses at good prices, with moats around them and cash pouring out of them. It beats all the forecasting and prognosticating there ever was. Sincerely, Edwin A. Levy Michael J. Harkins |