General Commentary – March 2018


The most striking feature of this quarter has been the return of volatility after a couple of years of it being exceptionally low. The change was especially prevalent in February when the CBOE’s SPX Volatility Index, “the Vix” spiked to a high of 37 (a level seen only once over the past six years) and continued to be above average throughout most of March.

This matters to us not because we are speculative traders, but because in the absence of volatility it is less likely for stocks to get mispriced offering bargains for us to buy. We are therefore enthused to see volatility come back. It is our friend as long-term value investors.

This is also the type of market environment when our strategy should work well, and as you can see from our results above, it did not disappoint.

Two major events that happened during this quarter could have profound impacts on our portfolio companies, so I would be remiss not to comment on them. The first is what is happening between the United States and (mostly) China on the trade front. The Trump administration has fired the first shot of what is either a very dangerous game of chicken, or a damaging trade war which, despite what those ignorant in economics may think, no one ever wins.

Without getting into more detail than this letter’s limited space can accommodate – or its writer ‘s limited expertise can illuminate – we believe that the current situation is a serious worry because there is a real possibility of this escalating into a situation that will be very harmful to the global economy.

One specific area that could be severely affected is freight. That is the main reason we have sold our shares in Expeditors International. While on the one hand we currently have a global economic recovery that would be very beneficial to the company’s business, any serious curtailing of global trade, let alone a full-blown trade war, would be very damaging to the company.

With the absence of a margin of safety in the company’s share today, we have decided that it is more prudent to sell the shares and wait for either more clarity or a better valuation. Normally, I wouldn’t make such a call based on a macro prediction, however it is also hard today to bet on the rationality of the important global players in this situation. I hope to be proven wrong on this decision.

The second major event is the emergence of serious privacy failures at Facebook. In a continuous snowballing crisis that started with issues pertaining to the manipulation of the US 2016 presidential election, it has emerged that Facebook has, through negligence, indifference or incompetence, allowed a company (Cambridge Analytica) to access massive amounts of user data without the users’ consent.

This story is still developing at the time of writing this letter, so I would like to wait for more information to emerge before making any predictions, but there is a real risk of this becoming a very big problem not only for Facebook but also for Google. If governments and users decide that (a) those companies have too much information about people and (b) act to materially curtail that access, there is a serious
threat to the business models of those and other similar companies.

Coincidentally, we trimmed some of our Alphabet holdings just a few days before the Facebook-Cambridge Analytica thing came out, precisely because we thought the market was not properly pricing-in that risk. In the case of both Facebook and Google, there is still tremendous upside if this situation can be contained and a solution found that preserves most of the current business model’s economics. But the risk of an adverse outcome has certainly increased substantially versus what I used to believe is the case. We will keep watching.

 

First published in Mayar Fund’s Letter to Partners – March 2018 (portions may have been redacted)

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