This is the first update, currently being done quarterly, in respect to how the fund is doing as well as my current thoughts in relation to the market. This initial letter will likely be different from subsequent letters, specifically letters after the fund has been going for a year, where I will show year-over-year(YoY) comparisons.
I would also like to emphasize that results in the short term can easily be determined by luck, good or bad, and that I believe decisions having been made are the more important factor.
Q2 Results
April 1st
June 30th
$ change
% change
Jones Fund
$200,000
$225,575.33
+$25,575.33
+12.787%
S&P500
$2,470.50
$3,100.29
+629.79
+20.3%
Difference
-7.51%
Essentially, we haven’t done as well had you put all of your money in the S&P 500(our performance bar). Let’s talk about why.
When your additional capital was entered into the fund on April 1st, it was adding to my existing positions, which resulted in about $100,000 in cash, and about $100,000 already invested in positions in multiple companies and industries.
It is my belief, which I will get into later, that the economy(and stock market) will continue to drop over a period of months and possibly years. I consider that having cash will allow us to get larger advantages when truly great opportunities present themselves. I find our fund in good company with the likes of Buffett(who is currently on his largest cash pile in history of $137 billion) as well as other incredible investors.
Our current cash position is $119,000.
While this means that the $106,000 in the market has done, on average, better than the S&P500 with a ~+21.5% increase, the metric at the end of the day is total increase. I still believe that we will beat the S&P in the longer term. The 3-year compounded annual growth rate(CAGR) is the bar I hope you hold me to.
One of the reasons I give infrequent updates is because it can be alarming to look at the value on shorter periods. There were times in just the last 3 months where we were down-5% to up 30%. I don’t think three month is indicative of much, though we have been fortunate to have some realized gains.
Good Decisions, Bad Decisions
Let’s start with the bad decisions.
In February and March I placed positions in three different airline and travel businesses. Notably, Boeing, Southwest Airlines, and Delta Airlines.
In a portfolio with the goal of owning no more than 8-10 positions at anyone time you may immediately recognize the lack of diversification in industry. I got caught up in the hype from some of my peers — despite the fact that I only truly loved Southwest Airlines. I felt like there was safety in the fact that many other great value investors(including Buffett) who owned these companies. As the economy started to crash I very quickly realized my blunder in over investment.
I quickly have begun to back pedal, specifically Delta Airlines, which is a favorite for many people, but also at significant cash risk of potential bankruptcy which would lose all the money in the company. Luck has been on our side in that they received a bailout that only diluted stockholders by 1%. I want to be clear that this was luck, historically companies have been diluted with much more or faced bankruptcy. I am currently in the process of exiting this position with as little loss as possible — which has its own risk rather than simply exiting at existing market prices.
I am still happy to hold onto Southwest. They have never had a bankruptcy and have significant cash reserves and the highest cash-to-debt ratio out of any airline. It is important to also know they have also received a bailout from the US at this point in time. They are still a risk, but one I am willing to take. We’re currently at an unrealized positive on this airline.
I have exited Boeing completely, though it had been purchased at such a price that even if they did declare bankruptcy(incredibly unlikely because of their defense arm), that the divestiture(selling off) of Boeing would likely have resulted with little loss and possible gain. Companies that are selling at a price under their net asset value are sometimes referred to as“net-net” companies and is famously how Benjamin Graham(Warren Buffett’s teacher) got rich. We’ve made 4.5% of increased value directly from this company. I consider this a success.
As far as good decisions go, I believe that we have fantastic positions in many great companies. Some of these companies will likely take many months of years to realize their value, and a couple I consider to be“compounders”(companies that continue to compound their growth over time) and companies that we will hopefully never sell.
State of the world
I’d like you to remember that in order for one to beat the market they must inherently be contrarian to the market. It is also important to remember that the inverse is not true: being contrarian to the market that does not mean that you will beat the market.
As of April 1st we had been in lockdown for about three weeks. This has been the largest shutdown, world-wide to date. There has been considerably uncertainty in the world as how to continue, let alone the market. We have seen the largest pandemic in our history, highest level of layoffs and unemployment since the great depression, record-level closures and cancellations, political division, national protests and rioting, constitutional challenges at both state and federal level, trillions of dollars printed and put into our economy, and almost comical level of other events from locusts in Africa to earthquakes.
The stock market has turned optimistic and has recovered most of its loss and some people claim that we will be back to“normal”. It’s important to note, however, that the Federal Reserve has given out about ten trillion dollars, around half of the US GDP in 2019. It seems likely that this will cause inflation, probably severe inflation. In 2008 with the Fed bailing out the banks it was expected to have a strong increase but inflation remained low. Buffet and others have claimed they simply don’t know that’s going to happen.
What we do know is that America, and much of the world, is producing much less than it was before COVID-19. Some of these companies have permanent or“lasting” size reductions and will have to continue growth from a new, lower basis. It is my belief that this will inherently mean that the stock market, a supposed reflection of the underlying values of those companies, will also fall. When looking into historical context to things like the great depression, dot com bust, the great recession — the lowest point was many months or years after the initial trigger. This is what I believe we are in for.
Q2 Results
Good Decisions, Bad Decisions
State of the world