Investment Climate July 2022: Growth Isn't Dead!

The first half of 2022 is over, and it was a brutal period for stocks in general and for our Core Growth Strategy in particular. Stocks in smaller, more future-oriented growth companies were completely out of favor, and at the end of the second quarter (the mid-point of the year), our portfolio had experienced the worst nine months in its history after having the best twenty-four months in its history just prior!

A confluence of multiple factors, including unprecedented money creation in conjunction with heavy-handed regulatory actions during the Covid situation, set the stage for serious inflation. Then the Russian invasion of Ukraine coupled with the imposition of severe sanctions by the US and Europe exacerbated the inflation problem further. The conventional wisdom coming from the supposed "smart money" on Wall Street, which was repeated endlessly in the financial media and by many of our contacts in the industry, is that inflationary scenarios are bad for growth stocks and favor larger, more established companies.

In addition, the conventional wisdom also generally argues that in order to tame inflation, the Fed needs to raise rates drastically, even to the point of deliberately creating a recession and a recession's accompanying high rates of unemployment. Former Clinton Treasury Secretary Larry Summers has famously been on record in recent months declaring that "We need five years of unemployment above 5% to contain inflation [. . .], or one year of 10% unemployment" (Bloomberg, 20 June 2022).

With many investors accepting outrageous "conventional wisdom" like that (and we have actually heard variations of what Larry Summers said repeated to us by more than one other person in positions of significant responsibility who should know better), it is perhaps no wonder that smaller, more future-oriented, and less well-established companies like the ones we own in our Core Growth Strategy would see the prices of their shares getting hammered in recent months.

You can probably tell that we completely disagree with Larry Summers -- and more widely with the constant Wall Street obsession with the Federal Reserve. Most investors and commentators, including former Secretary Summers, completely miss the point that the best way to soak up extra dollars and cure inflation is through more production and economic growth. What we really need right now are more pro-growth policies, but we're not holding our breath while waiting for any pro-growth policy to come out of the current crop of policymakers in Washington DC.

Despite the generally bipartisan ineptitude we see from policymakers, we are encouraged by the fact that our portfolios hold shares in companies with growth prospects that are absolutely tremendous. Names like Boot Barn, Dutch Bros, Vuzix, ClearPoint Neuro, Apyx, and InMode are companies which should all have extremely bright futures, based on our analysis, and nothing in the current environment, despite all the stock market turmoil, changes our opinion on that score. In fact, due to the drubbing that stocks in growth companies have been experiencing, shares in outstanding companies are currently available at valuations that we have not seen in years, and we would encourage additional investment at these prices whenever appropriate (based of course on your individual situation).

Before leaving that topic, we would also point out that, contrary to the conventional wisdom on the Street, we strongly believe that investing in growth companies is one of the only ways to stay ahead of inflation over time.

Another significant melt-down over the past six months has been the collapse in the crypto speculation bubble, along with the bankruptcy of some crypto-related hedge funds and even exchanges. We would encourage investors to draw a clear distinction between the speculative "hot money" volatility of certain tokens and exchanges, some of which have now become insolvent, and the longer-term business utility of blockchain as a technology, which we believe is significant and is not going away. We see opportunities in companies and tokens or projects which are building the backbone of this new technology, and we own both Coinbase and Silvergate in Core Growth Strategy, while continuing to research this space.

The past nine months have been extremely painful, but we remain absolutely convicted that trying to predict economic twists and turns is not a viable strategy for long-term investment success: we can't predict them, and no one else can either (no matter what they might say to the contrary). We are equally adamant that the best strategy for long-term investment success lies in the ownership of innovative, well-run, forward-looking, growth-oriented businesses. We are absolutely confident that these are exactly what we own in the portfolios that we manage for you, our valued clients.

We thank you for your continued trust and confidence in us and in our time-tested approach, and we look forward to brighter days ahead.