Talguard Value Fund LP outperformed all major indices such as the Dow Jones, the S&P500, the Euro Stoxx 600, and the Shanghai Composite. Many major indices have negative returns this year such as the Corporate Bonds Index, High Yield Bonds Index, the Hang Seng Index, and Gold.
Cash Flow Assets:
Cash flow is king. That has been true for investments since the dawn of civilization. This is especially true as we head to a period of fluctuating inflation and rising interest rates. We continue to hold investments in our quality companies which we believe will ride out the main threats of inflation and rising interest rates in the coming years.
Our quality companies have proven most capable time and again to weather economic downturns and more recently, a global health pandemic. We will also take defensive measures when appropriate. We continue to avoid high flying companies that have negative cash flow valued at price to sales and companies that are loaded with debt.
Our best performing sectors were software, information technology, health care pharmaceuticals, industrials, retail, and manufacturers. Sectors that underperformed were financial services, consumer discretionary, defense, biotechnology, and information services. Other sectors were neutral. We stepped up our investments in health care early this year as I saw opportunity in quality stocks at a discounted price and they have performed very well. I reduced allocations to the restaurant and supply chain industries early in the year, which we benefited from due to a fast run up in prices during the reopening and those asset prices have come down since we sold.
We Avoid Speculative Assets:
There are only two types of assets in the world – cash flow assets and speculative assets. Cash Flow Assets are assets that generate cash over time which include stocks of quality companies, productive machinery, valuable patents, real estate, and farmland. Speculative assets are assets that produce nothing and you only hope someone will pay higher for it than what you paid for. Speculative Assets include negative cash flow stocks, gold, Cryptocurrencies, art, and collectibles.
As I discussed in my recent annual letter, there are pockets of irrational exuberance for various asset classes. Many have experienced a significant downturn but they are still grossly overvalued and some of these assets are really worth nothing at all. I am referring to Cryptocurrencies, SPACs, Meme stocks, and IPOs of companies that have never made a dime of profit in their life. Stocks that are valued at Price to Sales because they have no earnings have been crashing back down to Earth. Some of these speculative assets should really be valued closer to zero.
Covid Omicron Variant:
Preliminary data from South Africa and other countries indicate Omicron is more contagious but less deadly than previous strains of note including the Delta and Alpha variants. If this data holds true as Omicron spreads, that is good news for markets and the world. Covid would evolve more towards being like the flu where it will be with us but will not cause the worldwide havoc that it is doing now. Another possibility is that vaccines and previously infected people are reducing the cases of severe symptoms.
Covid Omicron Variant:
Preliminary data from South Africa and other countries indicate Omicron is more contagious but less deadly than previous strains of note including the Delta and Alpha variants. If this data holds true as Omicron spreads, that is good news for markets and the world. Covid would evolve more towards being like the flu where it will be with us but will not cause the worldwide havoc that it is doing now. Another possibility is that vaccines and previously infected people are reducing the cases of severe symptoms.
Supply Chain Disruption:
I am less concerned than most people because these bottlenecks tend to work themselves out and there have been actions by companies and governments to wind this down. For example, I visited the Long Beach and Los Angeles Ports recently to see for myself. There are long wait lines for truckers and there are containers parked at overflow lots and even on streets. However, the number of container ships waiting is lower now out at sea than there were two months ago. Port and transportation data show signs that supply chain delays are slowly abating.
Federal Reserve:
Chairman Jerome Powell made it a point to state in a recent congressional hearing and in a Federal Reserve policy meeting that the Federal Reserve plans to end Quantitative Easing (“QE”) a few months sooner than expected. This should coincide with a sooner than expected raising of interest rates which is likely to happen next year. This is most likely the largest risk to equities and all other asset classes. Assets are measured against the safest return instrument, which right now are U.S. treasury bonds and short term notes. The most at risk assets are the high flying growth stocks with their expected earnings far in the future. These earnings will discounted the most with high rates versus stocks of companies that earn profits now.
Rates will most likely rise as a result of lower asset purchases by the Federal Reserve and the Fed directly raising short term rates. Rates should rise somewhat because it is a sign of a healthy, growing economy. If rates rise too fast they become a big weight against rising asset prices.
Health care cost inflation has run faster than average inflation for years well before the pandemic. Other inflationary costs are more transitory such as commodities and discretionary goods. Once supply chains improve next year, some of these inflationary pressures should abate.
I am less concerned than most people because these bottlenecks tend to work themselves out and there have been actions by companies and governments to wind this down. For example, I visited the Long Beach and Los Angeles Ports recently to see for myself. There are long wait lines for truckers and there are containers parked at overflow lots and even on streets. However, the number of container ships waiting is lower now out at sea than there were two months ago. Port and transportation data show signs that supply chain delays are slowly abating.
Federal Reserve:
Chairman Jerome Powell made it a point to state in a recent congressional hearing and in a Federal Reserve policy meeting that the Federal Reserve plans to end Quantitative Easing (“QE”) a few months sooner than expected. This should coincide with a sooner than expected raising of interest rates which is likely to happen next year. This is most likely the largest risk to equities and all other asset classes. Assets are measured against the safest return instrument, which right now are U.S. treasury bonds and short term notes. The most at risk assets are the high flying growth stocks with their expected earnings far in the future. These earnings will discounted the most with high rates versus stocks of companies that earn profits now.
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| Rates should rise somewhat because it is a sign of a healthy, growing economy. |
Rates will most likely rise as a result of lower asset purchases by the Federal Reserve and the Fed directly raising short term rates. Rates should rise somewhat because it is a sign of a healthy, growing economy. If rates rise too fast they become a big weight against rising asset prices.
However, Chairman Powell also stated that the Federal Reserve will be sensitive to any economic slow downs so they may delay the end of QE and raising rates as the economy’s health necessitates. In other words, he left the door open to changing policy course if the economy heads south.
Inflation:
A confluence of factors has created a shortage of workers for customer facing jobs, thus driving up wages. Some workers fear their line of work carries a higher risk of Covid infection, some stayed home, some took early retirement, and others looked for other lines of work. Lower wage workers are in high demand for industries such as food services and retail outlets. There has not been such a shortage for higher income workers such as white collar office positions. Take a drive around your town and you will see “Help Wanted” signs posted at retail stores and restaurants everywhere. Some smaller businesses closed down temporarily or permanently due to a lack of workers. Wage inflation rarely ever goes backwards except in times of extreme recession.
Inflation:
A confluence of factors has created a shortage of workers for customer facing jobs, thus driving up wages. Some workers fear their line of work carries a higher risk of Covid infection, some stayed home, some took early retirement, and others looked for other lines of work. Lower wage workers are in high demand for industries such as food services and retail outlets. There has not been such a shortage for higher income workers such as white collar office positions. Take a drive around your town and you will see “Help Wanted” signs posted at retail stores and restaurants everywhere. Some smaller businesses closed down temporarily or permanently due to a lack of workers. Wage inflation rarely ever goes backwards except in times of extreme recession.
Health care cost inflation has run faster than average inflation for years well before the pandemic. Other inflationary costs are more transitory such as commodities and discretionary goods. Once supply chains improve next year, some of these inflationary pressures should abate.
What’s Next:
What I said in my prior letter holds true today. There continues to be pent up energy from consumers and being fed-up with lockdowns and the pandemic in general. That is why air travel has returned to near pre-pandemic levels. People are going out and about on trips. The data has suggested Omicron is not as deadly as the Delta variant. This could be due to Covid mutating into a more contagious but less deadly variant or the power of vaccines to reduce the risk of death. It can also be a combination of both factors. Either way, it does not appear that prolonged lock downs are tenable. The recovery will have bumps and volatility in the coming years. However, we should be well positioned to weather the coming storm as we navigate the high seas of the investment world.
What I said in my prior letter holds true today. There continues to be pent up energy from consumers and being fed-up with lockdowns and the pandemic in general. That is why air travel has returned to near pre-pandemic levels. People are going out and about on trips. The data has suggested Omicron is not as deadly as the Delta variant. This could be due to Covid mutating into a more contagious but less deadly variant or the power of vaccines to reduce the risk of death. It can also be a combination of both factors. Either way, it does not appear that prolonged lock downs are tenable. The recovery will have bumps and volatility in the coming years. However, we should be well positioned to weather the coming storm as we navigate the high seas of the investment world.
Conclusion:
I conclude with my prior observations as they remain prescient and relevant today.
The main concern right now is an overheating global economy causing high inflation to the prices of goods and services. Our investments in the equities of quality companies is the best way to outpace inflation and to guard against inflation. When inflation happens, and it is happening now, only companies with durable competitive advantages can raise prices for their products and services to outpace it.
Interest rates will rise and Central Banks will be forced to take action against low rates. Debt investments such as outstanding Treasury bonds are going to get smashed as interest rates rise. Commodities should do well but they underperform stocks in the long run. Real estate does well too in a rising rate environment but historically real estate is the second best performer behind stocks. Speculative assets that have no cash flow underperform cash flow stocks over the long run.
That is why owning the stocks of companies with pricing power and positive cash flow is the way to succeed and out run the bears known as inflation and rising interest rates. The other key is to purchase these investments at a reasonable price or at a discount to intrinsic value with a long term mind set.
I conclude with my prior observations as they remain prescient and relevant today.
The main concern right now is an overheating global economy causing high inflation to the prices of goods and services. Our investments in the equities of quality companies is the best way to outpace inflation and to guard against inflation. When inflation happens, and it is happening now, only companies with durable competitive advantages can raise prices for their products and services to outpace it.
Interest rates will rise and Central Banks will be forced to take action against low rates. Debt investments such as outstanding Treasury bonds are going to get smashed as interest rates rise. Commodities should do well but they underperform stocks in the long run. Real estate does well too in a rising rate environment but historically real estate is the second best performer behind stocks. Speculative assets that have no cash flow underperform cash flow stocks over the long run.
That is why owning the stocks of companies with pricing power and positive cash flow is the way to succeed and out run the bears known as inflation and rising interest rates. The other key is to purchase these investments at a reasonable price or at a discount to intrinsic value with a long term mind set.
My investment strategy helped us play defense in big downturns such as the one in March of 2020. My strategy has also helped us play offense when stock prices were depressed. What the future holds is never certain. What we offer at Talguard is a long term investment strategy that seeks to preserve and grow wealth over time.
My goal is to survive the one year that no one else does. 2020 was that year as Talguard preserved and grew our capital double digits. COVID is still with us and will likely linger for years to come. But we will continue to march on as seen with our double digit returns so far in 2021.
We now turn the page to 2022 and the decade ahead. If history rhymes like it does most of the time, expect more volatility ahead. The recovery will be bumpy. All this money printing by Central Banks will have ramifications. As the old saying goes, “the piper has to be paid.” On the flip side, for many people there is pent up energy and restlessness to get out there and re-engage and explore the world.
My goal is to survive the one year that no one else does. 2020 was that year as Talguard preserved and grew our capital double digits. COVID is still with us and will likely linger for years to come. But we will continue to march on as seen with our double digit returns so far in 2021.
We now turn the page to 2022 and the decade ahead. If history rhymes like it does most of the time, expect more volatility ahead. The recovery will be bumpy. All this money printing by Central Banks will have ramifications. As the old saying goes, “the piper has to be paid.” On the flip side, for many people there is pent up energy and restlessness to get out there and re-engage and explore the world.
There is no doubt about it, COVID-19 has been a tragedy for many families and it has created scars in the collective conscience of humans. Approved vaccines are little comfort for those who lost loved ones. The only solace is that there is a light at the end of the tunnel for those still living. We just have to make sure we reach that light, everyone together.
Until next time, I hope you and your family stay safe and happy.
This document does not constitute an offer to sell or a solicitation to buy membership interests in the Talguard Value Fund LP. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only.
Investment in the Fund will involve significant risks due to, among other things, the nature of the Fund’s Investments (as defined herein). Investment in the Fund is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks in an investment in the Fund. No assurance can be given that the Fund’s investment objectives will be achieved or that investors will receive a return of their capital.
In making an investment decision, prospective investors must rely on their own examination of the Fund and the terms of this offering, including the merits and risks involved. Prospective investors should not construe the contents of this letter as legal, tax, investment or accounting advice. Prospective investors are urged to consult with their own advisors with respect to legal, tax, regulatory, financial and accounting consequences of their investment in the Fund.
Until next time, I hope you and your family stay safe and happy.
Best,
Dan H. Chen
President
Talguard Investments LLC
Disclaimer Statement:
This document and information herein represents the views of Talguard Investments LLC and is not to be considered investment advice. The information herein should not be considered a recommendation to purchase or sell any particular security or financial instrument. There can be no assurance that any securities discussed herein will remain in the Talguard Value Fund LP. This document does not constitute an offer to sell or a solicitation to buy membership interests in the Talguard Value Fund LP. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only.
Investment in the Fund will involve significant risks due to, among other things, the nature of the Fund’s Investments (as defined herein). Investment in the Fund is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks in an investment in the Fund. No assurance can be given that the Fund’s investment objectives will be achieved or that investors will receive a return of their capital.
In making an investment decision, prospective investors must rely on their own examination of the Fund and the terms of this offering, including the merits and risks involved. Prospective investors should not construe the contents of this letter as legal, tax, investment or accounting advice. Prospective investors are urged to consult with their own advisors with respect to legal, tax, regulatory, financial and accounting consequences of their investment in the Fund.