Rowan Road Capital letter to buyers for the first quarter ended March 31, 2019.
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We’ve simply closed on our greatest quarter yet since inception. Within the first quarter of 2019, Rowan Road was up +19% (gross) vs. +13% for the S&P 500 Index. April has been a superb month for us as nicely: year-to-date as of this letter the fund is up +28% (gross).
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Q1 hedge fund letters, conference, scoops and so forth
Right here is how we stacked up over the past 15 months from January 1, 2018 until March 31, 2019 (gross of charges):
Once you acquired your 2018 end-of-year statements, your funding returns for 2018 didn’t look very thrilling, though you probably did a lot better than the overall stock market. Nevertheless, in case you add simply three extra months of return on prime of your 2018 return, the previous 15 months have been the perfect wealth creation period within the history of Rowan Road Capital.
There are numerous classes here, as our returns didn’t are available a straight line, by any means. December was a troublesome month out there as we explained in our 2018 year-end letter. Nevertheless, we caught to our guns and took benefit of newly created alternatives in December, and our convictions have already started to repay as you’ll be able to inform from our 2019 outcomes.
Section for Restricted Partners solely
On the finish of March, you must have acquired your Okay-1s for 2018. You’ll discover vital realized good points there. We needed to just remember to perceive that the positive aspects we realized in 2018 have been mandatory with a purpose to reinvest the proceeds into very engaging alternatives that we have been finding in the month of December. Your first quarter statements that you need to have acquired in your e mail show your positive factors up to now in 2019. These features have been created by the opportunities that we have been capable of benefit from in December.
Taxes will all the time be a big consideration in all our investment selections, nevertheless your long-term internet funding return all the time takes priority. For example, we might have taken losses in December and decreased your 2018 tax bill, but by doing so you’d miss out on the perfect efficiency month in our historical past (+19% in January). We don’t imagine that may be a trade-off any rational investor can be prepared to make.
Most important lesson from the past 15 months: Volatility and Learn how to Assume About It?
Volatility all the time scares buyers. Most individuals go into investing, understanding the history of the stock market and the extraordinary wealth it has generated over time. Then market volatility occurs, and buyers experience 10%, 20%, 30% (we skilled a 20% drawdown in Rowan’s portfolio in December) and typically 40%+ drawdowns of their portfolios, and that’s when worry takes over and all rational thought goes out the window. That is when you’ve a large legion of buyers that say, “This is wrong, this is broken, I need to make myself safer and get out.” And most essential, they do this with the mindset that they’re making themselves safer. They’re taking out their family’s money, their retirement money, their youngsters’ school money, they usually assume they’re injecting security into their life. They do that with out realizing what they’re virtually definitely doing is decreasing their long-term returns (most of the time significantly so), which is among the largest risks that they will take as an investor.
Once you research the history of the stock market, volatility shouldn’t be the actual danger. Volatility is a part of the course of investing. Actually, there isn’t any wealth creation without volatility! That’s just the worth of admission that the market demands you to pay. However that is just not how most individuals take a look at it.
At Rowan Road, the #1 foundational principle of every thing we do is we’ve a mindset of a business proprietor – this is how we strategy all our investments. If you start wanting on the world by means of the lens of a business proprietor, you begin paying much less and fewer consideration to the stock tickers that bounce up and down each day and understand that more often than not these day by day inventory worth gyrations have very little to do with the long-term intrinsic worth of the enterprise. Over the long term, nevertheless, stock costs precisely mirror the fundamentals of businesses. For instance, if you buy a home or a business property or buy into a small business, you do not get a quote on it every single second or each single day. You’re in it for the long run, and you make your funding choice based mostly on the earnings that your property or enterprise can generate over the subsequent 5-10 years in relation to the capital that you need to put up up-front. You don’t worry about what the Federal Reserve goes to do at their subsequent assembly or what the subsequent Trump’s tweet can be on commerce with China. Why should your strategy to investing in shares, which symbolize fractional possession of companies, be any totally different?
What are you going to do if the subsequent recession comes in the subsequent 12-18 months and the market drops? Are you going to go to cash to protect capital?
This is the query that I get asked by virtually everybody I had spoken to just lately! There should have been some kind of truthful the place they handed out crystal balls that predicted a recession in the subsequent 12-18 months and I had utterly missed it. Darn it! Yes, we’ve been in one of many longest financial expansions of all time, however we do derive some consolation in that there’s a widely-held consensus on the market that this economic cycle will quickly die of previous age. I might be significantly extra involved if there was a consensus out there that the inventory market goes into stratosphere and there’s no recessionary risks in sight (Keep in mind 1999 and 2007? Or “crypto-consensus” of 2017? Sure, I simply made up this phrase).
But for those who actually take into consideration, when individuals ask me this question, what they are really asking is how are you going to react to volatility in the stock market? This takes us again to our lesson above: Volatility and How you can Assume About. Just to recap, what occurs when buyers strategy volatility with a mindset that they may make themselves and their households safer by pulling money out of the inventory market because their crystal ball informed them so? On the danger of being redundant, what they are doing is they’re considerably decreasing their long run returns and are, actually, making their households considerably poorer over the long run.
It was Peter Lynch (among the best buyers of the 20th century) that stated it greatest: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Women and gents, our view on all of the macroeconomic worries that take over buyers emotions every so often is identical because it all the time has been. We expect it is worthwhile to repeat what we wrote in our Q1 2018 letter:
We do not know what the market is going to do over the subsequent quarter or the subsequent yr, and we make no try and make such predictions. There’s nothing in our report that means that we will add any worth by making these predictions and making an attempt to time the market (in distinction to an inordinate quantity of power and assets that is spent on these actions on Wall Road). We stay targeted on what we do properly — identifying top quality, well-run businesses which are more likely to compound our capital at double-digit rates of return over the long term, and we attempt to acquire those opportunistically when Mr. Market provides us a lovely worth. This strategy has proven to achieve success for us throughout our funding careers, and we’ll continue to give attention to that as a result of we expect it’s logical, repeatable, easy and easy.
Now, since we missed the “crystal ball fair” and haven’t any clue when the subsequent recession is going to return or when the subsequent market downturn will happen (we undoubtedly did not predict the 20% correction in December 2018), all we will do is stick with our own guidelines of why we might promote (see under). Please observe that the typical stock market investor was a internet withdrawer of funds in 2018, however poor timing prompted a loss of 9.four% on the yr in comparison with the S&P 500 index that retreated solely 4.4% (we are certain that these buyers had extraordinary results when the market shortly rebounded in Q1 2019).
There are, nevertheless, loads of economists and news media sources that may make recession predictions with shocking precision – their data are unblemished with correct predictions of 2000-2002 and 2008-2009 recessions (we all knew they have been coming 12-18 months prematurely and ready properly for it).
Why we might promote a place?
- Overvaluation: If the inventory worth is egregiously overvalued and reductions earnings very aggressively into the longer term; when the danger/reward is not on our aspect.
- Deteriorating Fundamentals: For each company we spend money on, we doc our funding thesis. We don’t consider ourselves as “buy-and-hold” buyers, somewhat we are “buy-and-verify buyers. If the aggressive benefit of an organization we own is eroding, or the administration isn’t executing nicely or not allocating capital nicely, we’ll sell and reinvest in more engaging alternatives.
- Better Ideas: If we’ve got a extra compelling funding concept with extra engaging long-term prospects and/or where we’ve got more conviction, we’ll promote. This is precisely what we did in December 2018.
- Errors: We’ll sell once we recognize our unique thesis was flawed.
Thank you in your confidence and belief in our funding discipline. We’ll proceed to take a position with a long-time horizon like it is our own money – because it’s. We respect the opportunity to grow your family capital alongside ours. As all the time, should you’ve got any questions or comments, we might be very joyful to listen to from you.
Alex Kopelevich, CFA
Joe Maas, CFA
This article first appeared on ValueWalk Premium