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  • Ben TeSelle

Dorato News, October 2020

Updated: Jan 4, 2021

Portfolio Issues

 

New Employee

I want to introduce you to my first employee: Ben. Ben graduated with a degree in Economics from the University of Colorado in 2013. He is a level three candidate in the Chartered Financial Analyst program, and has the Enrolled Agent designation from the IRS for tax preparers. Ben also happens to be my son.

The first employee for any small business is a big risk. The owner and employee might not work well together; they may have trouble trusting each other. All of that can be terribly disruptive to running a business. I suppose there's some risk that Ben and I will butt heads, but I think it's highly unlikely. We've never had that sort of relationship. And I trust him without question. He's an excellent young man, and I think you will come to the same conclusion whenever you get the chance to meet him.

Over the next couple of months, I will be training Ben in everything that I do. The idea is that either of us will be able to help any of you, so that Dorato can continue to grow while still providing you with the level of service that you deserve.

This is not some sort of early retirement plan for me. I intend to continue on until you or Ben tells me that I'm not making sense (or maybe a little before that). I do think, however, that it improves on the succession plan, should anything unexpected happen to me. That Dorato would be in Ben's capable hands gives me great comfort.


"I can assure you that I will never chase 'the next big thing'...unless it's a squirrel."


 

Market View- Bumps Ahead


By the end of August, the difference in year-to-date performance between growth and value stocks reached a staggering 60%. This is on top of several years of growth performing better than value, and it is a greater discrepancy than at any other time in the last hundred years. There is no research to support growth stocks outperforming value stocks. There is research to support value over growth, and there is some disagreement as to whether the value premium still exists to the extent it did in the past. But there is zero evidence that growth outperforms value over time.


In September, the tide has started to turn. Value is finally starting to perform better than growth. Whether this tide will continue is anyone's guess, but my guess is that this is the beginning of a significant change. Why do I say that?


The evidence has been building that we're in a growth-stock bubble. In addition to the abnormal performance mentioned above, investors appear to be throwing money at anything that might be popular. Nikola, an electric-truck company that has yet to produce a single truck, recently had a stock market value worth more than Ford. The founder of the company recently resigned, as questions surfaced about the company's capabilities. Nikola stock duly dropped. When investors will happily ignore good companies to chase after the next big thing, we're probably toward the end of a bubble.


People tell me that this is different from twenty years ago, and not a bubble, because the big companies like Apple and Amazon are making gobs of money. But so were Microsoft and Cisco twenty years ago. Growth-stock investing gets out of hand when investors think the good times will last indefinitely.


So I'm reasonably certain that value stocks will outperform in the near future. What's less certain is what this outperformance looks like. Will investor dollars slowly leak out of growth stocks and into value stocks? Or will dollars flow out of both, but just less out of value stocks?

Part of the answer to those questions lies in the fiscal policy response. Congress acted quickly earlier this year to provide support to unemployed people and to businesses affected by the lockdowns. But Congress needs to approve another chunk of stimulus money. Unemployment is still above 8%, and many businesses are operating at far less than capacity, partly due to lower consumer demand, but partly due to government restrictions. If Congress fails to agree on another stimulus package, business failures and unemployment will climb, and dollars will likely flow out of all stocks. My prediction is that Congress will eventually act as the stakes become clear, and after a bit of drama. Politics is mostly a less-interesting from of show business.

The Federal Reserve is doing what it can to keep the economy moving. Short-term interest rates are zero; long-term rates are less than 1%. But more borrowing isn't what we all need; and by itself, the Federal Reserve cannot create demand. It's worth noting that extremely low interest rates assist in the formation of bubbles, as investors hunt for investments that give them something more than a paltry return. The folks at the Federal Reserve undoubtedly know this, but feel they have few other options at this point.

It's also important to remember that Covid-19 is not a permanent state of affairs. If it were, I would be more cautious in my outlook. Even without a vaccine, the virus will dissipate. A vaccine, which I expect by early next year, will accelerate a return to normal activity.

So what's an investor to do? The short answer is nothing. You don't want to react to news from the 24-hour news cycle. Knowledge is good; action is not necessarily so. Expect more volatility than normal as Congress wrestles itself into action. But stick with your long-term plan, and your long-term allocations. That's the key to success for any investor.


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