<January 16, 2024>
The investment management industry is filled with thousands of extremely smart people. Top in their class smart. It could easily be argued that there is an oversupply of smart investors. Throughout their lives they’ve received accolades and pats on the back reconfirming what they already know—they’re extraordinarily smart. One thing we’ve learned over the years is smart investors, understandably, don’t like to look stupid. While we have absolutely no data to support this, with an investment world overflowing with smart people, we believe there is a shortage of professional investors willing to look stupid.
That’s a shame because looking stupid is often necessary when practicing absolute return investing. Throughout our careers, we’ve proven we’re more than willing to look dumb. There have been times when our relative performance was so bad, Bloomberg ranked it “N.A.” Based on our history with Morningstar, we’ve destroyed more stars than most black holes! While this would be embarrassing for most managers, we view our past “stupid” positioning as a necessary part of our investment process, providing us with the ability to generate attractive absolute returns over a complete market cycle (our investment objective).
Instead of being embarrassed, we view our ability and willingness to look stupid as a competitive advantage. If there were market leaders in looking stupid during irrational markets, we would like to think we’d be on the short list. As long as performance deviations aren’t due to valuation errors or permanent losses to capital, investing differently during periods of inflated prices may not be stupid at all, but a sign of discipline, perseverance, and even intelligence. In other words, looking stupid is not the same as being stupid.
The secret of looking stupid is not caring about what other people think. Perception risk is a very real and underappreciated risk in the investment management industry. In our opinion, it’s one of the leading threats to maintaining investment discipline and one of the reasons so many active funds act the same as their peers and benchmarks. If you’re constantly concerned about what your firm, peers, and clients think about you, you’ll never master the art of looking stupid.
To be clear, looking stupid indefinitely is not a smart long-term strategy. For instance, absolute return investors should not remain patient or overly conservative throughout the entire market cycle. The goal of positioning differently, or remaining patient during market extremes, is to take advantage of the inefficiencies and distortions created by groupthink. For example, when the current cycle ends, we expect there will be tremendous opportunity, which should allow flexible investors to transition from being patient to aggressive. In effect, there are periods in every market cycle when opportunistic and aggressive positioning is necessary, and ultimately beneficial.
In our opinion, current equity valuations do not justify aggressive positioning. However, as we witnessed in Q4 2023, valuations alone have not deterred investors from chasing asset prices higher during the current market cycle. With small caps soaring into the end of the year, we're sure our patient positioning didn’t look very bright. But this isn’t new for us. Patient positioning almost always looks unintelligent during periods of sharply rising asset prices. And while we can’t predict the future, we expect we’ll continue to experience periods of looking stupid, and maybe even smart, but rarely will our paths look the same.
The purpose of looking stupid is to look smart over a complete market cycle. To successfully look stupid and generate attractive full-cycle absolute returns, investors might consider setting their egos aside, thinking independently, and eliminating the importance placed on perception. Good luck. Looking stupid isn’t as easy as it appears!
Eric Cinnamond
Performance data quoted represents past performance of the Fund's Investor Class (PVCMX) and does not guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be higher or lower than the performance quoted. Performance of the Fund current to most recent month-end can be obtained by calling 904-747-2345.
The Palm Valley Capital Fund can be purchased directly from U.S. Bank or through these fund platforms.
Index performance is not indicative of a fund’s performance. It is not possible to invest directly in an index. Past performance does not guarantee future results. Current performance of the Fund can be obtained by calling 904-747-2345.
There is no guarantee that a particular investment strategy will be successful. Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.
Fund holdings and allocations are subject to change and are not recommendations to buy or sell any security. Current and future portfolio holdings are subject to risk. Click here for the fund’s Top 10 holdings.
Mutual fund investing involves risk. Principal loss is possible. The Palm Valley Capital Fund invests in smaller sized companies, which involve additional risks such as limited liquidity and greater volatility than large capitalization companies. The ability of the Fund to meet its investment objective may be limited to the extent it holds assets in cash (or cash equivalents) or is otherwise uninvested.
Before investing in the Palm Valley Capital Fund, you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. The Prospectus contains this and other important information and it may be obtained by calling 904 -747-2345. Please read the Prospectus carefully before investing.
The Palm Valley Capital Fund is distributed by Quasar Distributors, LLC.
Definitions:
S&P SmallCap 600: An equity index of small-cap stocks managed by Standard & Poor's. Stocks in the index have a market cap range of approximately $800 million to $5 billion.