Q3 2023 Performance Report

Q3 2023 Performance Report

Early this year, I agreed with Stanley Druckenmiller that this was an incredibly difficult year to manage, given all the crosscurrents. My answer to that was to just concentrate in traditional safe havens. Until recently, that’s turned out to be a terrible idea.

In general, I plan on getting away from overly binary decision-making. As a case in point, buying in January wasn’t a super-easy decision. Because rates had moved up so much, from an equity risk premium perspective, stocks were actually a worse value than they were at the start of 2022, despite dropping so much. On the other hand, sentiment was terrible, as could be seen from volatility structure, for instance. With mixed signals, what do you do?

I think it would be reasonable to buy some, as a middle ground, particularly in areas that were hit hard and could bounce. That’s certainly what I wish I did and plan to do in the future. Instead, I let tax considerations dominate. I didn’t want to throw off a lot of short term gains by overtrading. On the other hand, I increased our dispersion against the index. In the future, I’d rather take the tax bill.

Ultimately, I took the most difficult environment I’ve seen, professionally let bad habits from the past dominate actions. In the future, I plan on being much more proactive to the environment presented to us.

Along those lines, what does the system that said to buy in January say now? While we spent most of the year in a pro-growth environment, that started to falter in late-August and really fell off the truck in October. That’s why I’ve been slow to make changes, as that’s more like what we’re positioned for. We’ve seen that, as our relative performance has started to pick up from here.

While I think it’s fully appropriate to focus on the problems, here, I suppose an advocate for me could say that we’ve had a far lower drawdown from the top than the market has. We’re also much more competitive with the average stock, which is why I included the equal-weight S&P 500 performance, for reference.

More importantly, what happens, going forward? By the numbers, I’d say there are two basic likelihoods. First, we could start to grind out the tougher economy that the market has started to price in, similar to what we saw in the first half of last year. Second, we could have some kind of crisis.

While we need to be prepared for both, I tend to favor the second possibility. Markets have become stressed this month, stemming mainly from fixed income and geopolitical issues. That has once again pushed them to the brink of snapping. Investors have become very used to markets springing back but I wonder if this time the spring breaks. Real crashes happen from oversold conditions.

We’ll probably know more after this week. We have the Bank of Japan meeting, where they have to deal with their rising bond yields and falling yen. We have the FOMC meeting, where investors will look for shifts. We have the Treasury’s Quarterly Refunding Announcement, where they talk about how they plan to fund the government. We also have ongoing earnings and Middle East strife. If we can come out this week relatively unscathed, it becomes easier to get more constructive.

What to buy, and when, is a function of what happens. If this week goes OK, we can probably buy sooner, rather than later. The focus would be on names that do well in a slower growth environment, in alignment with the regime the market is currently pricing.

If we end up breaking down, rather than springing back, we’ll wait to see if real panic develops. If and when that panic dissipates, chances are we can get more constructive on what we buy. Crashes create good prices, and the economy still isn’t bad enough to see big problems spring up in the immediate future. That panic bounce likely will only last for a matter of months, but I’d rather participate than sit that out, like we did in January.

For most of this year, I’ve done a bad job in a tough environment. I’m certainly not happy with that, and I don’t expect investors to be happy, either. Yes, we look much better from the start of last year but have given back a lot of relative performance. Going forward, I plan to be more active in managing that. I think it’s worth facing a potentially bigger tax bill for a smoother ride and hopefully capturing more upside.