Portfolio manager’s Letter January 2004
2003 was a good investment year. 2003 Investment year results: a composite of all Losch Management Company accounts was up 23.7% versus 25.3% for the Dow and 26.3% for the S&P 500. Company underperformance is largely a product of our large holdings of Berkshire Hathaway, and is no great concern for the reasons discussed below. While Berkshire Hathaway dragged some on these years’ results the same is not true for the three and four year comparisons were Company’s figures look considerably better.
For three years ending December 31 Losch Management Company’s composite is up 43.1% or 12.5% per year, compared to the S&P 500 which was down 5.6% per year. The Wilshire Total Market Index was down 11.3% for the three years for average annual return of minus 3.92%
The four year figures, which take us back to the tail end of the bubble, show Losch Management Company with a gain of 11.9% per year compared to a Loss of (6.0% per year) for the Wilshire. This means that our advantage over the Wilshire for the four year period has averaged 17.9% per year.
Since all Company’s accounts are handled as individual accounts there is some variation with these figures from account to account, with large taxable accounts doing worse that the average (capital gains problems) and smaller non-taxable accounts doing better that the average. Moving out of a position that has appreciated is a lot easier when there are no tax consequences.
Clearly this level of advantage to the overall market can not be sustained on a long term basis. I can not promise that we will do as well in the next bear cycle as we did in the last, but we will do the best that we can.
Berkshire Hathaway was up 16% last year, while the Dow was up 25%, the S&P 500 26%, and NASDAQ 50%. I up to my you know what in Berkshire Hathaway, I suppose this should bother me, but it does not. For one thing, the three comparisons show a considerable different picture from the bubble top in March 2000.
But a more important consideration is risk. I like to think of risk as a function of popularity. The more popular a stock becomes the higher risk. Mutual funds attract money (fees) based on performance, so in this market money chases risk and value bears an inverse relationship to performance. Because of this, chasing performance will always eventually become an exercise in self-immolation.
So as our baby bubble expands I take comfort in Berkshire Hathaways underperformance because its price is not growing much faster than its value and I do not have to make any decisions. If the price where to start to rise rapidly (say to $125,000 per A share) then I would have think about selling a portion of Losch Management Company’s positions. This would complicate my life because it forces other decisions. What do I do with the money and when do I buy Berkshire Hathaway back etc., etc.?
In the long run my life will remain simpler and I will be a lot happier if Berkshire Hathaway’s price continues to remains at a level that does not accurately reflect its intrinsic value.
At years end, financial pundits of both the Electronic and Print varieties were pointing to the rally of the NASDAQ as a demonstration of strength in the equity markets. Few of the commentators took the time to point out that at 2000 the NASDAQ was still down 60% from its peak in March 2000. Yes, this average which is dominated by Tech stocks has recovered some from its lows, but bragging about a 50% gain is a simple distortion of reality. The Average which had been off nearly 80% from its highs is now only down 60%, so it time to rush out and by tech stocks, right?
It is the same as if you owned a stock that had been selling for $100 which fell to $20.00, now it is back up to $30, a bounce that is not likely to send you out to buy a new Porsche. This may be a 50% rally but the numbers twist the reality. The Dow Jones Average Peaked around 11,800 about the same time that the NASDAQ was at 5,000 so the year end price of DOW of 10,450 was only down 11% from its peak in 2000, and this $100 stock has recovered to $89. To my addled brain this would appear to be a superior performance, but what do I know, the media says the NASDAQ did better that the Dow last year so it must be true.
As for 2004, Losch Management Company’s crystal ball is cloudy as usual, but unless there is a dramatic change in our thinking, you can expect to see your cash balances rise. You can also expect more sell tickets than buy tickets as we position your portfolios for another down market. Exactly when the bear will re-emerge we can only guess. But sooner or later he will reappear. Values are still high compared to historical levels, and Company do not feel that the speculative fever that gripped the market at the beginning of this decade has been completely cured. It is likely, Losch Management Company think, that further therapy will be necessary.
Markets always tend to over react in either direction; hence the extreme overvaluation of 1999 – 2001 should eventually lead not just to a correction of that over valuation, but eventually to undervaluation, perhaps of the sort that we saw in the late 1970’s. The trick is to have money available to take advantage of those values when they appear. Remember you make all your real money in bear markets, you just do not know it till later.