General Commentary – December 2017


As I wrote to you last quarter, I believe the US stock market is expensive but is not in bubble territory. Other equity markets around the world and other asset classes continue to be somewhere between reasonable and expensive. What’s remarkable about this bull market is that it’s been detested since it began in 2009. Caution and skepticism have been expressed by most market participants and, for the most part, continue to be. Euphoria, a necessary ingredient in a bubble, has been absent, but that is beginning to change.

Euphoria is starting to emerge, especially in private markets, like venture capital and cryptocurrencies. Other examples include European High Yield bonds (formerly known as “junk bonds”) that now yield a paltry 2.69%, up from an even lower 2.20% in November, and Argentina successfully selling a 100 year bond – a country that has defaulted on its external debt four times in the past 100 years.

It’s been increasingly difficult to find attractive investment opportunities over the past year, but then again, you’re not paying us to take it easy. It was too obvious and easy for us to buy Johnson & Johnson at twelve times earnings in 2011 and Google at fourteen times a year after that. These opportunities are gone for now. Our reaction to this environment, however, is not to reduce the quality of our underwriting standards like others may do.

Instead, we’ve reacted by widening our net and looking for opportunities beyond the obvious. We have also expanded our investment horizon, which allows us to look beyond the short-term uncertainties that other investors are focused on, and focus our thinking on what intrinsic values would be five or ten years from now.

We’ve found attractive investment opportunities by looking at different geographies, smaller and less liquid stocks, and in misunderstood situations within hated industries.
That resulted in us making investments like Nordstrom, Discovery Communications, Ascential, Kyushu Railway, and L’Occitane.

Unlike most funds, we can do that because we are not encumbered by a mandate to rigidly adhere to our benchmark’s market capitalization or its geographic and industry allocations. That allows us to go anywhere to find investment opportunities.

Also unlike other funds, we are unafraid to sit on cash and wait patiently if we cannot find opportunities that will generate satisfactory returns for us over the long term, even if that means underperforming the market in the short term.

Our size is also a significant advantage, allowing us to invest in smaller and less liquid opportunities that would be too small and illiquid for funds with $1 billion or more in assets.

Today, we have very high confidence that the investments we hold will compound in value at a satisfactory rate over the next five, ten, and twenty years. We will continue to follow their results closely to make sure nothing fundamental changes for the worse. Occasionally, something better may present itself and, if we don’t have cash to invest in it, we may sell something we own. But if neither of these things happen, we will continue to hold our investments and do nothing.

With investing, patience and inactivity are a virtue. We like to describe our strategy as one with long periods of calm, punctuated with short periods of intense activity.
And we believe that you should also do the same (CAUTION: the following comments happen to also be self-serving).

Studies show that most fund investors underperform the same funds they’ve invested in because they trade into and out of these funds, trying unsuccessfully to correctly time their exits and entries, something that we believe cannot be done.

The most sensible way to pick funds is to find a fund manager that follows a strategy that you understand and believe will achieve satisfactory results over the long term. You should then check whether this manager has a clearly-defined process that ensures that they can successfully apply that strategy. Then, as long as they continue to satisfy these conditions, you should stay invested. Strategy and process are a much better predictor of future returns than returns achieved over the previous year or two.

First published in Mayar Fund’s Letter to Partners – December 2017 (portions may have been redacted)

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