This year has begun somewhat paradoxically for us at MCO Investments. Events at individual companies have kept us very busy, but the general “front-page” news flow has been muted compared to that of the last few years.
This suits us perfectly, as we’d much prefer prices to be driven by fundamentals specific to the companies we own instead of the macro-driven “risk-on/risk-off” mentality that we believe has largely determined the path of global financial markets since the financial crisis.
In March, we doubled our cash position to 10% of the portfolio. Our decision was based in part on the valuation of the overall US stock market (it’s not cheap, although it’s not at bubble valuations either) and in part on a reconsideration of how we believe our core positions will perform in a market downturn.
We seek to have enough dry powder available in the form of cash in the event of a steep market decline when all stocks sell off indiscriminately regardless of their fundamentals. Given the high expected return hurdle that each company must meet before we invest, we believe our cash position should not be a meaningful drag on our performance.
On the contrary, we believe our ability to pick up assets on the cheap will be an important source of performance if a significant market decline occurs, regardless of exactly when that might be.
In the meantime, we are focused on supplementing our two core positions--Fairfax Financial (FFH) and Berkshire Hathaway (BRK.B), which we believe will perform well in any kind of economic environment, with companies we believe are experiencing some sort of value-unlocking catalyst.
Whether the catalyst is increased dividends, large share buybacks, asset sales, emergence from bankruptcy, corporate restructurings, or debt reduction, what this disparate bunch shares in common is that the positive event is not expected by Mr. Market. We believe our returns from these investments should be very satisfactory once the catalysts become apparent even to Mr. Market.
The investments discussed are held in client accounts as of March 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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