A look at investment themes for 2022

James Sullivan |

The paragraphs I wrote below were for the Outlook for 2020.  As I look back at the contents of this note it is obvious that our patience paid off as the investments, we own did extremely well during the following 2 years.  Long-term investing works.  It’s worth a relook.   

 

“Overall, I would characterize our overall performance last year (2019) as below par.  The companies we own are seemingly safe at the time of purchase, but due to major disruptions and panic in the last few months of the year, they got a lot cheaper. Clearly, looking back I could have been more cautious, and I failed to recognize the magnitude of the crisis that was unfolding. It’s impossible to time markets. And I don’t pretend that I can.  However, the prices we paid are not high and we are expecting a complete recovery once the market settles down.  We have already started the year well above market returns.”

 

We believe the only way to be invested in the equity markets and retain one's sanity is to focus on a picture of at least 3-5 years. A 3-month period, no matter how dramatic, is still only a short-term event in the longer horizon. I thought two anecdotes might bring the point home.  Warren Buffett famously bought his stake in The Washington Post in 1973. He said that the company was obviously trading at 25% of fair value, something readily agreed upon by members of the financial press and analysts.  He proceeded to buy 10% of the company. Throughout 1974 and 1975, the company continued to struggle, and revenues and earnings declined. The stock fell about 25%, so Buffett had a 25% loss after 2 years. In 1977, four years after the purchase, the stock was worth three times what he paid, and today it is worth an astonishing 117 times what he paid. When retelling this story 30 years later, those first two years obviously look immaterial. But at the time, after the first 2 years, the next 28 years were not known and many investors would have lost their nerve. By focusing on the long term, Buffett was able to make an excellent investment, even though he was not even within 2 years of the bottom. 

 

Themes to focus on this year and beyond:

  • Vice Investing:  Look for states and local municipalities to embrace the needed tax revenue that will come from the passage of legalization of online gambling and marijuana usage.   The Biden admin will give states the ability to quickly pass legislation.  A shout out to my Virginia friends. 
  • Digital Assets:  2021 became the year when digital assets went mainstream and are now considered an investable asset.  We believe the Biden administration will look very favorably on the prospects of a digital currency world. 
  • Financial Services:  Banks are incredibly cheap investments due to artificially low interest rates.  We believe rates will slowly increase in the next few years and will help the banks in growing profits.
  • Energy:  Energy companies will continue to perform well with rising commodity and oil prices.

 

These are only a few of the themes we are focused on as we look out for the next many years.  As always, we are looking for investment ideas that sell below their intrinsic value and are attractive on a long-term basis.  The goal of SWCM is to create wealth through the long-term appreciation of stock in companies we own over a lifetime.