Letter from Cobleskill – Spring 2019

“The university’s storied history centers around coaching legend John Wooden who won 10 championships, including a remarkable seven in a row. Mr. Wooden has a library of timeless quotes. One quote epitomizes the extensive research we conduct on your behalf, ‘You can’t have confidence unless you are prepared. Failure to prepare is preparing to fail.’ Our fieldwork equips us to make purchases even during times of adversity.” Letter from Cobleskill Spring 2019

Please see Fenimore disclosure.

Bank Insights from KBW

FAM Funds CIO John Fox & FAM Small-Cap Fund Co-Manager Andrew Boord

FAM recently attended KBW’s Winter Financial Services Conference. Here are some key trends from the meeting that reinforce our investment thesis within our small regional bank positions.

  • Geographic Shift: The movement of people from high tax states to low tax states appears to be accelerating, benefiting places like Nashville, Dallas, Charlotte, and Florida, while making it harder to grow banks in other areas.
  • Industry Consolidation: The merger of SunTrust and BB&T may benefit a number of our bank holdings as impacted bankers and customers migrate to other institutions. More broadly, “merger of equals” may become a trend as there are few smaller banks in attractive urban markets left to acquire on a “bolt-on” basis.
  • Loan Growth & Quality: The outlook is for moderate loan growth in 2019. There are no systemic concerns around credit quality. Banks are being a little more careful given how long the upcycle has continued and shrinking exposure in certain areas such as hotel construction.
  • Net Interest Margins: Pressure from competition for deposits is easing and margins should be roughly flat or only slightly lower relative to 2018. Stable margins plus high loan quality support our favorable outlook for banks.
  • Culture is Key: Spending time with bank CEOs reinforces our view that leadership and culture are paramount because every bank has essentially the same opportunity set.

Please see Fenimore disclosure.

Seeking Quality at Bargain Prices

As someone once said, “The stock market is the only store in America where, when everything goes on sale, people run out the door!” However, the FAM Funds team gets excited and runs into the store seeking to invest in high-quality companies at bargain prices.

We do this with confidence because history demonstrates that stock markets tend to be fairly rational over the long term with prices typically correlating to the true economic value of the enterprises.

Discover what stocks our fund managers purchased in 2018 as well as their thoughts for 2019.
FAM Funds 2018 Annual Letters

Please see Fenimore disclosure.

Headwinds, Fundamental Analysis, & Opportunities

We are studying the economic and political concerns of the day. So far, our conclusion is that while these issues are quite real – we see many companies reporting slower growth and thinner profit margins – it remains unclear if they are severe enough to trigger a recession as some may fear.

Meanwhile, there are reasons to be optimistic. Many of the problems facing us will likely be resolved. For instance:

  • No matter your political leanings, we can all probably agree that politicians around the world tend to focus on self-preservation – while posturing is sure to be involved, we expect resolutions to both the U.S./China trade conflict and government shutdown
  • The Federal Reserve may decide that current conditions no longer warrant further interest rate increases

At the company level, challenges are usually met and overcome through a combination of ingenuity, hard work, and adaptation. With our holdings, this includes:

  • Finding suppliers outside of China to avoid tariffs, cutting costs, and raising prices to offset higher costs to the extent possible
  • Continuing efforts such as growing through product additions, entering new geographies, and acquiring smaller competitors

The economic and political backdrop in which we invest is always shifting. As a result, Fenimore tries to take advantage of opportunities when people sell due to fear and invest in enterprises that we estimate can do well, and grow, in a wide variety of scenarios.

Please see Fenimore disclosure.

Short-Termism – Investors’ Returns

By Drew P. Wilson, CFA

This is the third in a series of posts about short-termism from FAM Value Fund Co-Manager Drew Wilson.

There are any number of reasons investors may find it difficult to achieve their financial goals. In some cases, unexpected and uncontrollable events can wreak havoc on a financial plan. But it is often an investor’s own actions that lead to the failure of meeting their objectives. There is a branch of science called Behavioral Finance dedicated to exploring how an individual’s propensities and predilections can short circuit rational investment decisions.

Unfortunately, in my opinion, there is a powerful gravitational pull that has fostered a short-term mindset with many investors. This force comes from academicians, practitioners, pundits, and the financial press who promote – wittingly or unwittingly – return-diminishing behaviors such as market-timing and performance-chasing.

How well does a short-term investment approach work? In my next post I’ll highlight a compelling research study that compares performance-chasing versus buy-and-hold behaviors. At FAM, we have a long-term approach; however, despite consistent results for buy-and-hold strategies, this research study exposes a challenge the investment industry faces. Stay tuned.

Please see Fenimore disclosure.

Short-Termism – Hurts the Economy

By Drew P. Wilson, CFA
Investment Research Analyst

There are many who believe that short-termism hinders the U.S. economy. On June 6, 2018, corporate titans Jamie Dimon (CEO of JPMorgan Chase & Co.) and Warren Buffett (famed investor and CEO of Berskshire Hathaway), wrote an op-ed in The Wall Street Journal highlighting the problem of short-termism:

“…Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather.”

“…The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades. Short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity…”[1]

Additionally, a McKinsey Global Institute study that focused on 2001 through 2014 shows that the economic costs can be material. Their research gleaned that firms with a long-term focus had materially higher revenues, earnings, profits, and market capitalizations at the end of this time compared to those who had a short-term view.[2]

Next time, I’ll discuss how short-termism can hamstring many investors’ returns.

[1] Source: The Wall Street Journal’s Opinion, By Jamie Dimon and Warren E. Buffett, June 6, 2018

[2] Source: McKinsey Global Institute, “Measuring the Economic Impact of Short-Termism,” February 2017

Please see Fenimore disclosure.

Short-Termism – Impacts Everyone

By Drew P. Wilson, CFA
Investment Research Analyst

Whether or not you are familiar with the term “short-termism,” it most likely affects you. In my opinion, short-termism is a vicious cycle that negatively affects both the economy and many investors’ returns. I believe that there is a natural tendency toward short-termism that is further influenced by the investment environment. I will address this in a future post.

To begin, though, let’s set the context for the problem with this definition from FCLT Global:
“Too many investors continue to seek returns on their strategies as quickly as possible. Companies are missing out on profitable investments for fear of missing quarterly earnings guidance. Corporate management significantly undervalues and underinvests in longer-term prospects. Savers are missing out on potential returns because stock markets are penalizing companies that make long-term investments. Society is missing out on long-term growth and innovation because of underinvestment.” *

Do you have a short- or long-term view?

* Source: FCLT Global, “A roadmap for focusing capital on the long term.” September 2016

Please see Fenimore disclosure.