The month of March was not as favorable as the preceding two months. We have now seen four weeks of negative returns out of the last 11 weeks. As we approach the end of the first quarter, we continue to look for more conservative investments. We have received a number of questions regarding the bond market and what to expect from our bond investments over the next several years. One of the positive aspects of investing in bonds is the level of projectability and transparency for a certain period of time (usually the duration of the actual bond). In cases of stock market corrections or economic recessions, many stocks do not enjoy the same transparency or projectability. This can lead to investor anxiety and widespread sales of their holdings. When many investors sell simultaneously, widespread drops in asset prices are common and often expected.
Over the last few months, we have expressed concern about current market valuations. In February, we detailed the famous valuation ratio between the overall market capitalization vs. the gross domestic product of the United States. In conclusion, the markets were trading well above their historical norms. We believe the risk/reward of investing aggressively in these equity markets does not provide adequate value at this time.
By contrast, bond valuations do not typically move in a flat line until maturity. Bonds fluctuate in value with the constant flow of buyers and sellers of any asset, stock, or bond. As a bond closes in upon its maturity date, the bond trades closer to par value. In summation, the shorter length of the bond, the less its value curve moves. The projectability of knowing with a degree of confidence that a bond investor will see investment capital returned on a specific date while also collecting dividends during the duration provides greater assurance than a typical stock (or equity) investment. Conversely, when an investor invests in a stock (or equity), typical projections are that a company will grow revenue and earnings over the next three to five years. In the event of a recession, this projection is deeply set back.
In conclusion, the respective positions we have reviewed in this letter have moved more in the price than the overall average of the broad indices that we follow. As with crude oil prices, we do believe that we will see near term volatility return and, in contemplation of historical averages, the volatility may favor the downside. When we do not feel comfortable during our due diligence of a prospective investment, we gladly retain our cash.
As your partners during these interesting times, we will always err on the side of caution. We continue to strive for value regardless of the current state of equity or debt markets.