Pain for Eventual Gain


I’m a sucker for to-do lists (Remember The Milk – best iPhone app ever) and the start of every new year has me writing down ideas and tasks at break-neck speed. Truth be told, I have a love-hate relationship with my lists. I love the potential they represent but hate the pain involved to get them done. And when I think about pain, I can’t help but reflect on the past few years in the market. But in this new year, talk about a rally! January was a huge positive month across the board for all the major indices. Sure, unemployment numbers didn’t get worse and manufacturing figures got better. The European Central Bank is still working on a bail out though most investors think that Greece will default. So why the huge move?

I think it’s like the feeling I get when I look at my to-do lists. There’s giddiness about the eventual gain despite the ongoing pain. Over the last few years, we’ve seen a “deleveraging” going on in the market (i.e., defaults). Whether it’s a never-to-be repaid credit card bill, mortgage payment or government bond, bad debt is making its way out of the system. A big reason for the market volatility. But for all its short-term outlook shortcomings, the market is a great discounter of already-known news. This is what investors mean when they say things like “Oh, that bad earnings report last quarter? It’s already baked into the stock”.

The great thing about the market is that it’s forward-looking; it’s not stuck living in the past. So as we work through this deleveraging process, risk is being taken out of the system, all else being equal. With less risk, investors are feeling less fearful of the future. Though I don’t think anyone really knows how much bad debt is out there, we have a few years’ worth of less bad debt on the books. And unlike my lists which have no system in place to limit the number of my to-dos, institutions and governments have been putting regulations in place so that, for example, people without income can no longer get six figure loans.

Klarman: Baupost’s Core Principles Have Helped The Fund Outperform

Seth KlarmanWhen Baupost, the $30 billion Boston-based hedge fund now managed by Seth Klarman, was founded in 1982, it was launched with a core set of aims. Q4 2021 hedge fund letters, conferences and more Established by Harvard professor William Poorvu and a group of four other founding families, including Klarman, the group aimed to compound Read More

The credit crisis and subsequent deleveraging we’ve been seeing is helping take risk out of the market. With less chance of default, the market’s looking ahead to happier days. There’s still huge uncertainty out there and well beyond our borders – China’s economy slowing down or the Middle East’s political unrest, to name a few. But such temporary events serve up buying opportunities for the long term investor like me and other than checking things off my to-do list, nothing gives me more joy than buying high quality companies on sale.

Performance Update

For the month of January, quarter-to-date and year-to-date, SAM was up 6.16% versus the Russell 2500 benchmark return of 6.65%, underperforming by 0.49%. Despite lagging the market, an over 6% return in a month is nothing to sneeze at and I’m happy that the portfolio is behaving the way it should in such a sharply rising month.

Until next month, we continue to work hard to grow your nest egg of investments.

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