2022 Investor Letter I (Spring/Summer)
Below is a preview of Canterbury's 2022 Investor Letter I. Read the full letter here.
Most valuation metrics show robust, larger technology companies at or near all-time lows. I wouldn’t have expected so many inflation and interest rate resilient firms to be trading at lower net free cash flow yields than your average rental property.
Those market jitters have yet to translate into hedging payoffs. Fear among market participants has been only a faint quiver. Equities and bonds are pricing in a higher likelihood of recession while home prices and consumer spending chug along as if all is well. In April, a couple private equity and venture capital peers told me the outlook remained solid—LPs still had lots of cash ready to be put to work. The past month probably gave them whiplash as private markets have begun to feel the liquidity crunch.
The innate view seems to be that all declines are equally dreadful, regardless of where things will stand two or three years from now. Rarely do they distinguish between what will take a decade-plus to recover, if ever, vs. what has simply been dragged down along with it. Recall my last letter, and others before that, where I detailed periods of decline for some of the world’s finest long-term investors—those who’ve taken and managed risk prudently for at least a generation. They all experienced painful periods. That doesn’t tell you anything about what happens next. The differentiating factor is a fundamental orientation toward holding assets that will make it through the storm, and an unremitting desire to learn and improve.
…“efficient” and “inefficient” are overly simplistic terms for exchange-traded markets. Or as Jim Grant put it, “To suppose a stock's value is determined purely by a corporation's earnings discounted by the relevant interest rate is to forget that people have burned witches, gone to war on a whim, defended Stalin & believed Orson Welles when he told them Martians had landed.” The only lasting feat proponents of any theory accomplish is to show that markets are difficult to beat year to year. But it does not then hold to say, “most investors won’t beat the market this year, therefore markets are (always) efficient.” There are too many reasons buyers and sellers buy and sell to conclude they’re all seeking reasonable pricing.
One must look at results over time. If the past year has shown us anything it’s been that chasing high-flyers, particularly on margin, remains a surefire way to eventually go bust. Which is another way of saying, to presume the most recent price is the right price, without priority to the cash flow generating characteristics of the asset, is a fool’s game.
[Re: inflation] Contrary to popular belief, monetary policy’s role has been much less direct. Central banks kept rates low for more than a decade, which surely contributed to inflation, or at least the environment in which it would thrive, by encouraging borrowing and propping up asset prices. Yet inflation was subdued all the way up until March of 2021, right after the U.S. government began depositing money into people’s bank accounts. That month, according to Tyler Goodspeed of Stanford’s Hoover Institute, demand for goods rose an astonishing 240%.[I]
Click below to read the full letter.
[i] Bloomberg, Balance of Power with David Weston. May 12, 2022. Guest: Tyler Goodspeed, Hoover Institution Fellow and former WH Council of Economic Advisers acting chairman.