JRW Financial management commentary for the second quarter ended July, 2015.

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Introduction

In our first quarter commentary, we made reference to the Aeternitas Fund. Going forward, the single portfolio managed by JRW Financial will be referred to as the JRW Core Equity Portfolio. Although a matter of semantics, we believe our portfolio is better characterized by a frank description of what it is: a single portfolio of equities that forms the core fundamental offering of investment services provided by JRW Financial.

JRW Financial

Our portfolio performed well in the second quarter, as it did in the first quarter, making up for operational missteps in the latter portion of 2014. As the “since inception” column shows, our performance overall has lagged the markets relatively significantly since inception in July 2014, but this was due in large part to our ill-fated attempt to catch a falling knife in Lumber Liquidators (LL). That is a mistake we will not make again (though there will be others).

As we stress time and again, quarterly and even yearly performance is not truly indicative of the quality businesses we own and the potential for compounding investment returns over a long-term time horizon. Our method of investment operations may be out of favor for significant periods of time, including most notably during peak bull market periods. But judged over long periods of time that encompass full market cycles, which is the time period on which we focus our investments, we believe our performance will outperform our benchmark, the S&P 500 index, as well as offer exceptional compounding potential with limited risk of permanent capital loss.

JRW Financial - Market Overview

It seems that not much changes within the global marketplace. Reasons for the demise of equity markets are espoused frequently and have included inflated asset prices due to various rounds of easy monetary policies, potential Greek default and exit from the European Union, and the inevitable raising of interest rates by the U.S. Federal Reserve. These same issues that are at the forefront of commentary these days have been around for years. And the shorter-lived causes for financial peril, such as the precipitous decline in the price of crude oil and the precipitous rise in the value of the U.S. Dollar against all other foreign currencies, have since dissipated.

And to what end? In the U.S., broad based stock indices have glided higher over the past 6 years since the advent of this bull market, and have been at or near all-time highs as recently as a few weeks ago. Investors who have remained invested for the long-term have seen significant gains while the dooms-dayers and nay-sayers have been wrong time and again.

At JRW Financial, we think it prudent to be as aware as possible about what goes on in the global financial world. We keep track of the news and we think long and hard about the issues that may affect our portfolio holdings. But we do not think of these events as reasons to sell our ownership interests in the businesses we have purchased, nor do we think in terms of needing to be "out of the market" or "on the sidelines" should broad based equity measures begin to correct, sell-off, or even crash.

Warren Buffett talks about the need to be fearful when others are greedy and greedy when others are fearful. This mental model offers a paradox at present. On one hand, if the financial pundit community is to be believed, we are on the precipice of calamity. In such instances where the prevailing market sentiment seems to be extreme fear, we would look to be opportunistic purchasers of our target businesses. On the other hand, markets that make new highs, stock prices that are deemed “expensive” broadly across the board, and easy monetary policy fostering “artificial” economic stimulus portends a froth-riddled, greedy market. In such cases normally, we would reserve our purchases for a time when prices and sentiment were not so dear.

So which is the appropriate course? I tend to come down somewhere in the middle with regard to the broader market. From looking at the stocks we monitor closely, there are few bargains available, and in general market prices look at best fairly valued, if not inflated somewhat. But there are many signs that point to an improving and positive global economic outlook, including growth among many developed nations worldwide (although the emerging market struggles of Brazil and Russia, and the significant slowing of growth in China may give reason for pause). Companies are exceeding estimates on both the top and bottom lines, and the best and brightest of the companies we follow continue to earn returns on invested capital that far exceed their conservatively estimated cost of capital, particularly in a continued low interest rate environment.

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