This is the Show
<December 16, 2021>
Growing up in the 1970’s and 1980’s, we didn’t have cable television. Instead, we had the good old rabbit ears TV with four and a half channels. I say “half” as one channel only worked half of the time depending on the hour of the day and our ability to move the antenna just right. Despite the limited number of channels, we were able to watch most of the popular shows, including sitcoms. I’ve listed my favorites by decade below.
While I wasn’t around in the 1960’s, reruns were available in the 1970’s and 80’s, and they were free! Top 1960 sitcoms included Bewitched, The Munsters, Gilligan’s Island, and The Andy Griffith Show. As much as I enjoyed Gilligan’s Island, as a huge Barney Fife fan, The Andy Griffith Show gets the top spot.
The 1970’s is tougher, with too many shows to list. My favorites include MASH, All in the Family, Sanford and Son, The Brady Bunch, and Happy Days. If I had to pick, I’d go with Happy Days, but it’s a close call.
While you’d think the competition would get better as the years went by, I felt the 1980’s wasn’t as strong of a lineup as the 1970’s. Nevertheless, there were still great shows, including Married with Children, Family Ties, and Cheers. The top pick for the 80’s, in my opinion, is Cheers and my favorite character, Norm.
"Can I pour you a beer, Mr. Peterson?"
"A little early, isn't it, Woody?"
"For a beer?"
"No, for stupid questions."
And finally, there was the 1990’s. I think most would agree there are two heavyweights—Friends and Seinfeld. For me, there isn’t a debate. While I respect those favoring Friends, there is simply no way you convince me otherwise—the best sitcom of the 1990’s is Seinfeld, also known as the show about nothing.
The label “the show about nothing” was introduced during the 43rd episode “The Pitch”. During “The Pitch” an NBC executive asks the lead character of Seinfeld, Jerry Seinfeld, to create an idea for a TV series. While Jerry and his best friend, George Costanza, ate at their favorite diner, George comes up with the idea about the show being about nothing. After joking about the idea, Jerry concludes that George might be on to something!
Jerry and George eventually pitch their idea to a group of executives at NBC. As their meeting begins, George explains, “I think I can sum up the show in one word. Nothing!” Despite George’s enthusiasm, the NBC executives are not amused. George insists the show must be about nothing and people will watch it simply because it’s on TV. The head of NBC responds, “Not yet.”
Jerry and George’s meeting with NBC executives reminds us of the countless number of presentations we’ve given to institutional consultants over our careers. Institutional consultants are gatekeepers of significant pools of capital, such as foundations, endowments, and pension plans.
The trick to being hired by an institutional consultant is to make it through their due diligence process. Early in the process, the portfolio manager is asked to give a presentation, followed by a Q&A session. To successfully make it through the Q&A session, it’s important to answer the consultant’s questions correctly.
One of the questions we always seem to get wrong is, “What is your philosophy on holding cash?” While we know the correct answer (what the consultant wants to hear), we’ve never been able to say it. Instead, we explain that when small cap equities are overvalued, we’ll refuse to overpay and will hold as much cash as necessary to meet our strategy’s full cycle objective. This is typically when our meetings go about as well as Jerry and George’s pitch to NBC! Most consultants are not amused.
At the end of their meeting with NBC, George grows frustrated by the executives’ lack of interest, storms out of the room, and says, “Look, if you want to keep doing the same old thing, then maybe this idea is not for you. I, for one, am not going to compromise my artistic integrity. And I’ll tell you something else, this is the show, and we’re not going to change it.” While we’ve never ended a consultant meeting this way, we might as well have, as we’ve rarely made it past the introduction and Q&A session. Our flexible investment process and willingness to hold cash typically eliminates us from most manager searches.
We respect the institutional consultant selection process and certainly understand the business risk they’d assume by hiring a manager like us. Over the years we’ve accepted the fact that our strategy doesn’t fit the consultant model and no longer seek to invest on their behalf. Why keep trying to fit a round peg in a square hole?
The unwillingness to hold cash and invest patiently is not isolated to institutional consultants. It seems most investors feel their capital must always be working, never resting. How many times have you heard the expression, “Have your money work for you!”? Rarely do you hear, “Let your money rest and do nothing.” But in our opinion, that’s exactly what investors should consider during periods of excessive overvaluation and risk.
In addition to protecting capital when overvalued assets fall and market cycles end, cash allows absolute return investors to act decisively when opportunities return. Holding cash, in our opinion, is essential in allowing investors achieve their full-cycle absolute return goal. While this makes perfect sense to us, why is it so hard for so many investors to hold cash?
For professional managers, we believe business risk is the overriding factor. In addition to being eliminated from most consultant searches, holding cash can project an image of apathy. Although we understand how holding cash may look to outsiders, patience should not be confused with inactivity. During periods of overvaluation, we spend considerable time researching and improving our potential buy list. In effect, while our cash may be resting, we are not.
As was the case as recently as March 2020, patience and preparedness can pay tremendous dividends. While we acknowledge the current market cycle has been expensive for an extended period, we believe the policies maintaining current asset prices and corporate profits are unsustainable and will ultimately lead to significant losses and opportunity. As such, we believe the current market cycle, like every cycle before it, will eventually end and patience will once again be rewarded.
Although it’s difficult to know when volatility and opportunities will return, we are closely monitoring newly formed cracks in the small cap market. Specifically, as inflation has forced the Federal Reserve to reduce its bond purchases, we’re noticing growing weakness in many of the stocks on our possible buy list. In effect, all boats are no longer rising. Even with the popular stock indices trading near record highs, several of the stocks on our possible buy list are becoming more attractively priced, with a growing number of stocks approaching their 52-week lows.
After its full cycle (1989-1998), Seinfeld ended up becoming one of the best performing sitcoms of all time. The show about nothing proved the rewards for unconventional thinking can be substantial. As we take the road less traveled in what we believe is the most overvalued stock market of our careers, we are encouraged by the recent weakness in the broader equity market. Though genuine values remain scarce, assuming current trends continue, we are optimistic our willingness to be patient will ultimately pay significant dividends. While a strategy of patience and preparation may be too uncomfortable for most professional investors, as Jerry and George concluded, we think we’re on to something and are not changing. This is the show.
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