|January 9, 2014|
At year end 2013, our average account gained approximately +26.95%.
Our results in 2013 were significantly above our long term rate of compounding, which is 12.6% per annum. So in that sense it was a very satisfying year. The year was also rewarding in that one damn thing after another happened throughout the twelve months in the political and economic sphere, hardly any of it good, and it didn’t seem to matter much in the year’s final tally of asset prices. This suits us fine. We have preached for thirty four years now that what you pay for assets is all important, and the news is a loud sideshow. The last four years have proved that out, as the economy is tepid, the political system is broken, and the returns have been just fine. Will it surprise you to hear it has always been thus?
We opened our doors in October of 1979, and therefore per SEC rule our record starts officially from January 1, 1980. From then to now we have compounded money at a 12.6% annual rate, which is to say a dollar invested with us then and left alone would be 54 dollars as of December 31st. That is after all fees and completely unleveraged. Fifty-four times your money, and can we say without blushing or false modesty, we never really had a clue what would happen next in either the political or economic realms. Plenty of times we thought we did, but we always had the mother wit to know really we didn’t, and to stick to our knitting and re-examine the price we owned everything at. We are as human as the next guys, meaning in this case as prone to making lame predictions as anyone else, but we tried not to act on them much. Instead we focused on whether businesses produce real cash, whether their shares sell at prices that a savvy business man would snap up at once if they were all on offer, that they have sound and unleveraged balance sheets, and so on and so on. In short, we focused on the value canon you have read about in these letters for 30 years and more, while all around our heads mayhem and bedlam was in the air more often than not. Can we tell you what we take most from the experience? It’s the sheer ordinariness that stands out. Tupperware is no more exciting now than Gross Telecasting was in its day, except that we have made many multiples on our money in each. It is the sheer dullness that seems to put off most people about value investing, the idea that nothing much is happening this year in a value shop and brilliant global insights are going unused in exciting money management shops down the block. Utterly dull and nothing special, until you get to 54 times your money, at which moment the sheer dullness may take on a mercenary charm. Surely if we were dull and boring before, we can do that again, no? And if the only thing that’s “extra” about our ordinariness is what happens when we pass the thirty year mark, well, we can live with that. Of course, there are no guarantees that past performance will bring future success from here. But surely it must be a comfort to know that lack of recognizable brilliance is no impediment to making 50 times your money either, no? Thank heaven above we have settled into the one activity that dull men can excel at.
So where are we now? The Standard and Poor’s Index started last year at 16.5 times trailing earnings, started the year before at 16 times earnings and is about 17 times earnings as we write this. Almost as dull as we are. The ever so racy bond market, however, is the tarted up sister of the financial family these days. The intermediate Treasury market finally came through with our long predicted loss last year, about 5% or so, and the municipal market was just about as bad. We wouldn’t touch either with a barge pole even so. What has “improved” mightily in bond land are the prices for dodgy sovereign debts which so bedeviled the world for the last five years and more. We write improved in sneer quotes above because someone this week lent the Irish more than half a billion Euros at 3.5% for 10 years. Ireland is a lovely place and the people are grand, but has somebody got a screw loose? That investment can only have two possible outcomes: poor, and really rotten. When people are willing to take such risks for a truly moderate return in the best of all possible outcomes it puts Tupperware’s 2.7% yield in an all together different light. And we ought to examine the word “willing” in that sentence above in a different light too. The practical effect of Quantitative Easing means investors are driven to this foolishness, in dicey Spanish bank bonds, in squirrely loan pools, in covenant lite buyout syndications. Did we have a bit of financial upset some five years ago caused by such things? Who would guess it now? One of us swore it would take a generation and more to see this idiocy return. There’s a reason why that dolt signs last.
The front cover of this week’s Time Magazine promises more. The incoming Fed Chairwoman, Janet Yellen, is hailed as “The Sixteen Trillion Dollar Woman” before she prints a penny. Inside you can read all about how truly brilliant she is. But can we point out that for thirty years Isaac Newton was Master of the Mint, and he invented gravity? Everybody thought he was really smart too, until his easy money policy helped cause the South Sea bubble twenty years into his reign. As his niece Catherine Condiutt pointed out subsequently when Isaac tightened money and the bubble collapsed, he, “lost twenty thought pounds. Of this, however, he never much liked to hear.”* Yes, well, three hundred years later we are much advanced in physics, in finance, not so much. At the moment we are getting richly paid to forget this lesson. We do want you to know that under different conditions it will rattle back from the recesses to the front of our brains.
One happy development continues to be underreported and outperforming. Cheap energy is the foundation of economic power, it has been since Titusville, Pennsylvania 150 years ago and it will always be. We have written about America’s energy boom almost from its start in 2008, and we have always been behind the curve. Partly this was due to a justly held reticence to forecast, and partly it was due to sheer disbelief at what we were seeing. Energy was certain to be threatened and dear forever, how could it be getting cheaper and more plentiful right before our eyes? America’s energy boom is no prediction today, and if current trends persist for five years, America’s trade account problems, deficit worries, jobless woes and manufacturing hollowing out fears will be things of the past. And mind, current trends have accelerated every time we have written about this for five years. Even more startling, it is becoming clear that this is a North American boom exclusively. The French have outlawed fracking, the British look to be about to, the Germans are closing down power production at an unbelievable rate and the Chinese have still not spudded one well. For those of you who have been to the Persian Gulf emirate states, or just seen pictures, imagine Minot, North Dakota ten years from now more prosperous and glamorous than any stretch of Madison Avenue. Then repeat that in every hamlet across the upper Mid-West and Texas, perhaps upstate New York, all through the spine of California. Indeed prosperity might be our future if 48 states join Texas and North Dakota in enlightened self-interest.
We will try our best to be boring throughout it, when somewhere, at the five year mark perhaps, we hope to turn your yawns to smiles. Wishing you and yours all the best in the New Year, we are,
*Thought to be worth about three million pounds today
Edwin A. Levy
Michael J. Harkins
Levy Harkins Rates of Return
Since Inception 1980
Rates are Compounded Rates of Return After Fees
Year End 2013……….…………….+26.95%
15 Years Ended 12/31/13…….…….+12.40%
NOTE: The figures above represent the composite performance of all fully discretionary, balanced accounts. These figures exclude accounts managed for less than one year, accounts using short selling and accounts consisting only of fixed income investments, to more accurately reflect the past performance of fully discretionary, balanced accounts. These numbers are after all fees. However, past performance is no guarantee of future results.