Stubbornness and ignorance and determination are a very fine line from each other. I'm a very stubborn person, but not so stubborn that I can't learn new things and meet new people, but I have a one-track mind.   Joe Nichols (Wiseoldsayings.com)

When I was in college, I lived in a house with classmates. We often talked about, excuse me, let's be more accurate, argued about trivial matters. The most common disagreements revolved around sports, and specifically, what player was better or which team would win the championship. I know, I know, really important stuff. My tendency would be to stay as long and discuss as much as needed, trying to convince the other people the merits of my viewpoint. My classmates remember those discussions to this day, which I suppose can be seen as either memorable, or laughable, depending on your perspective. As each of us go through our journey in life, the line between stubbornness and determination gets blurred. In many cases, sticking with things until the bitter end ultimately leads to success and accomplishment, irrespective of the other opportunities one has to turn down to see the original task through. In thinking about this idea, I think it is important to relay why it applies to investment practice.

When you allocate capital in the equity markets, in almost all cases, companies are trying to improve their business. In the majority of cases, it involves a plan to grow from X to 2x to 3x over a specific time frame, the shorter the better. As an example, Amazon grew revenues in the 30% plus range last year, even with being a nearly 200 billion dollar business. Microsoft grew its cloud division business nearly 60% year over year. Companies also try to become more efficient from a profitability standpoint. It might be a corporate transaction like a spin-off, an acquisition, a merger, or a joint venture. It also can revolve around a financing opportunity with respect to raising capital, or reworking an existing financing arrangement. In nearly all of these situations, there is no magic potion, or special wand the company can wave to accomplish the task.  

In nearly 30 years of investing, if there is one thing you must possess it's patience because there is no abracadabra, hocus-pocus, boom, something gets done. In fact, most of the time, when you hear nothing, its probably a good sign that things are being worked on. The companies that are always sending out press releases over trivial matters, well, let's just say, usually not good. So, you need to have patience in order to let a company finish something they deem important. However, these situations often take a year or more, and if too much time passes and you don't see any results, then the time value of money principle dictates you have to rethink your investment premise. So that fine line between determination and stubbornness is quite applicable in the investment world. Now, let's turn towards this year, how things wound up for the market, and some reflection on what took place in our little neck of the woods.

It was a wonderful year for equity owners all over the globe, especially in the United States. All major indexes are up over 20% for the year. With all the muss and fuss made over the trade negotiations between the United States and China, the biggest impact on the market was probably a change in policy from the Federal Reserve Board in the beginning months of 2019. When the Fed moved to lower interest rates and stayed on that course, investors increasingly realized there was a floor underneath the market and it was time to be more aggressive. Just as important, investor sentiment remains skeptical about equities, and the hesitancy to embrace stocks is very helpful for existing owners. While the investment community remains cautious about stocks, it makes for better valuations for those of us who wholeheartedly not only want to own equities, but want to own plenty more. Problems usually arise when the whole world jumps on the bandwagon and caution gets thrown to the wind. The end of the year boost hasn't got us there yet, but valuations are a touch elevated.

With respect to what transpired at Y H & C Investments, without being self congratulatory, we made good decisions on quite a few situations where we had strong conviction that the market mis-priced quality companies. In a few of those cases, it involved impending acquisitions which just had to close or the market realized the benefits of the transaction. In other cases, the selloff at the end of last year made high quality companies available that just got too cheap, and that helped as well. The biggest mistakes have taken place with owning situations for too long and waiting for improvement or growth to take place which hasn't arrived, or not quite quickly enough. In one specific case, it involved an advantageous tax position, and the mistake was letting the tail wag the dog. Duly noted. What about 2020?

As we have written previously, the economy looks strong with consumers leading the way. The Fed is on hold for at least the next six months, and it probably won't want to do anything during the last half because of the election cycle. The biggest obstacles for equities are related to the valuation, which is a touch high for the overall market, and the potential for inflation, trade issues, geopolitics, or an outside event to make investors skittish. Without question, the lingering issue will remain the outcome of the Presidential election, and during the first half of the year we will find out who the Democrats nominate. As far as return expectations, I wouldn't get your hopes up on a duplicate of 2019, and I would be plenty happy with 5-6% in 2020 as a nice start to the decade. A flat year would be fine, too. On that, I hope you have a great New Year's and 2020 is a healthy and happy one for you and your family.

Finally, here are a few links to others' thoughts about 2020 here and here.