We are back home after a 3000 mile / 1 month road trip through the Mountain West. It’s good to be back, especially for our young kids to settle back into a routine. But I’ll miss the daily action of new places and can’t wait to get back on the road again.
Markets have been nutty while traveling, but in a manner that I had long hoped for. Excesses of recent years have been unraveling, and the ensuing volatility is up. While our portfolio is marked lower today, the companies we own in our equity sleeve are likely seeing a deluge of opportunities to make decade defining investments at more logical pricing than the recent past.
I’m beating a well worn drum here, but it bears re-mentioning that the construct of our portfolio allows for lower stress in times like these, at based on my own personality. Investment income continues to flow in the door with no change to date (in fact, accelerating though distributions are mostly a reflection of past / current performance, not the future) and enables continued reinvestment on a regular basis.
I’ve been picking up shares of fiscally sound companies with dividend yields between 5-8%, that often appear to have no hope for growth in the next few years. Why? Investors love to buy things that have some measure of certainty in their story, something that gives them hope (e.g., share price is down but the future is so bright!). They don’t like to buy things that appear to bear the brunt of whatever the current drawdown is.
As an example, M&A volumes are in the tank right now. If one were to guess, it seems like uncertainty and fear is likely to persist for potentially the rest of the year and perhaps next year too. Certain M&A shops are trading as though this state of the market will persist indefinitely, and there won’t ever be a recovery of business. That may be the case, but it also may not. I’m happy to pick up shares with a generally uninteresting base case, meaning perhaps paying 10x current earnings (with earnings down ~75% from 2021) with a nice payout to shareholders annually and no growth, with the potential upside of M&A volumes improving in coming years.
While this is just what I’ve been up to, there are many ways to position or reposition for the changed economic environment, and I’m looking forward to digging into ways to play offense as new opportunities emerge.