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  • Writer's pictureEric Cinnamond

The Second Serve

<April 13, 2020>

As a kid growing up in a small town outside of Louisville, Kentucky, I was an avid basketball fan. I was determined to one day play for my favorite team, the Kentucky Wildcats. I was not alone. Most of my childhood friends loved to play basketball and were huge fans of either the Wildcats or their in-state rival, the Louisville Cardinals (boooo!).

Advancing my dream of playing college hoops, my father built a large basketball court in our backyard. Our house quickly became one of the more popular afterschool destinations. The court had lighting as well, allowing us to play into the night, often with bats flying overhead. Looking back, it was a special time and a lot of fun. I wouldn’t trade those days and nights on the court for a thousand iPhones and video games!

Our court and neighborhood turned out some pretty good players. In fact, one player in particular went on to be the leading scorer at Centre College (located outside of Lexington, Kentucky). His name was David Hicks. Few of us in the neighborhood, or state for that matter, could stop him. David was a classic Kentucky pure shooter and had an incredible knack for hitting off-balanced shots. He also had exceptional athleticism and physical attributes.

Unlike David, my physical attributes left much to be desired. Although I was a good player throughout elementary school, as I entered middle school the competitive landscape changed drastically. Most of my friends began to grow and grow by a lot. Meanwhile, my body’s growth clock was ticking at a much slower pace. In fact, during middle school I didn’t grow an inch! Eventually I was one of the shortest kids in school. I finally had a growth spurt during my sophomore year in high school, but by then it was too late, as I already missed out on years of competitive basketball.

Not all was lost. My small childhood stature forced me into other sports, such as tennis. Although I started playing tennis later than most, I picked up the sport relatively quickly and became a decent player. I played four years in high school and even played one year as a walk-on at Stetson University. My college tennis days were limited, however. Shortly after making the team, my grades took a nosedive. Fortunately, I understood I wasn’t going to be playing tennis for a living and ultimately chose grades over sports (I don’t know how college athletes do it!).

When I first started playing tennis, I wanted to hit the ball like a professional—hard! I spent considerable time trying to develop a big first serve like Boris Becker or Pete Sampras. My determination to be a big hitter came at a heavy price. My game was often inconsistent, including too many unforced errors and double faults. The best way to beat me was to keep the ball in play and watch me show you how hard I could hit the ball…out!

My tennis game as a young player and the last three market cycles have much in common. Investors and policy makers have been playing aggressively, overhitting, and ultimately committing too many unforced errors. Over the past two decades, we’ve been in a period of rotating asset bubbles, encouraged by ultra-easy monetary policy, fully invested mandates, and an obsession with keeping up with the herd (relative return investing).

With the latest asset bubble and market cycle ending, the Federal Reserve is back to its usual playbook—hit hard (flood the system with money) and with little control (hope the money lands in the right spot). While the Fed’s actions have been all too predictable, investors do not have to play along. They have a choice. Instead of allowing monetary policy drive investment policy, investors may be better served by taking some pace off the ball, gaining control, and improving consistency. A good first step, in our opinion, is to only take risk when getting paid, not when being coerced by policy makers, peers, and the fear of missing out. Put simply, resist the pressures to conform and overpay.

Corporations could also benefit from a more consistent and independent mindset. During the last market cycle, many corporations took on considerable financial risk in order to buy back stock and pay dividends. Amazingly, corporations in the S&P 500 allocated over $9 trillion in buybacks and dividends over the past decade! Imagine if corporations retained half of what they spent on shareholder distributions over the past decade. Instead of trillion-dollar bailouts and debt monetization, we’d have trillion-dollar cash buffers to help corporations survive the current economic downturn.

Based on the past two months, we suspect many corporations and investors would benefit from a thorough review of their capital allocation strategies. After a decade of increasing debt and disproportionately favoring shareholders over other stakeholders, corporations may benefit from a more balanced and liquid capital allocation strategy. For investors, it’s likely a good time to analyze past capital allocation decisions and how they performed during the recent market decline. Did investments, asset managers, and correlations perform as planned, or was there a large dispersion between model expectations and actual results?

With trillion-dollar stimulus plans and unlimited Quantitative Easing (QE) on the way, capital allocators may get second chance to adjust policies and rotate into more effective or suitable investments. In effect, aggressive monetary policy, including asset purchases, could create a near-term bid in a variety of securities and asset classes.

Large bounces in asset prices during bear markets are not unusual, with the 2008-2009 bear market in small cap stocks being a good example. Falling from its high of 856 on July 13, 2007, the Russell 2000 hit 385 on November 20, 2008. The pain of the 55% decline was temporarily reduced, as the Russell 2000 bounced 34% over the next several weeks, reaching 515 on January 6, 2009. The bear market rally provided small cap investors with an opportunity to reduce losses or take gains from recent purchases. Of course, the rally didn’t stick, as the Russell 2000 soon resumed its sharp decline, reaching its bear market low of 343 on March 9, 2009.

As can be seen in the chart below, the bear market of 2008-2009 was not a “V” as often described, it was a “W”. The nice thing about bear markets that resemble a “W”, is investors are given a fortuitous second chance to mitigate losses and adjust pre-crash capital allocation missteps. And this can be done before the real crash or bear market low occurs.

As I became older, I eventually learned I didn’t need to kill the ball to be a good tennis player. In fact, some of the best players I play with today use angles, spin, and consistency to wear down and beat their opponents. Limiting unforced errors in tennis is important. Limiting unforced errors in investing is everything. As the current bear market and recession proceeds, I’m hopeful corporations and investors avoid the mistakes I made as a young tennis player. Instead of overhitting, stay in the game, limit unforced errors, and if given a second chance, whatever you do, don’t double fault!


In case you missed it, our Q1 Quarterly Letter has been released. We’d like to thank current shareholders and clients for sticking with us through the 90%+ cash days. We know it wasn’t easy!

For potential new clients that have been attempting to buy the Palm Valley Capital Fund on their brokerage platforms, the fund’s distribution remains limited. Currently, it can only be bought directly through U.S. Bank or through Vanguard and Pershing. For the fund to become more accessible and get on more platforms, we need your help. If you are interested in buying the Palm Valley Capital Fund, please contact your brokerage representative and express interest. We’ve been informed this is the most effective way for small and young funds like ours to gain access to platforms.

We sincerely appreciate any help you can provide and please email or call us with any questions. Thank you for your interest and support!

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. 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.


Russell 2000: The Russell 2000 Index is an American small-cap stock market index based on the market capitalizations of the bottom 2,000 companies in the Russell 3000 Index. One cannot invest directly in an index.

S&P 500: The Standard & Poor's 500 is an American stock market index based on the market capitalizations of 500 large companies.


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