The purpose of this update is to inform our investors regarding the following subjects:
1. Discuss the key economic events that occurred during the 1st quarter of 2024
2. A look ahead at the U.S. economy and the global markets
3. Updates regarding Dash Investments portfolios
The Markets
Fueled by the increasing likelihood of Fed rate cuts, a growing expectation of a soft landing for the U.S. economy, and bubbling enthusiasm for generative AI-related companies, U.S. equity markets got off to their best first quarter start in five years. This is despite persistent inflation that continues to linger above the Fed’s target.
It wasn’t long ago that consensus was calling for interest rates to remain “higher for longer,” along with heightened expectations for an imminent recession. In recent months, amid improving market sentiment, the consensus has been looking for a soft landing for the economy and a more stabilized interest rate environment.
Although valuations of many companies in early 2024 look very much like they did in the second half of 2021, post-COVID, we’re not likely to see a similar decline in earnings growth that occurred with some growth companies in 2022. At that time, we expected a sharp increase in interest rates from historically low levels, so we were not shocked by its negative impact on our portfolio.
We attribute today’s more positive outlook to the difference in the interest rate environment in 2021 as compared to today. Whereas long-term treasury yields had no place to go but up back then, today, they are not likely to move significantly in any direction from here. Therefore, we don’t anticipate the kind of valuation headwinds that rose up in 2022.
Investment Portfolio Update
Despite all the reasons for optimism in the market, we remain steadfast in our long-term approach to investing—buying and holding only the highest-quality companies in the world with solid balance sheets, durable competitive advantages, and sustainable growth tailwinds. Our companies, rigorously screened for those factors, are well-positioned to generate above-average earnings growth with below-average risk regardless of global economic conditions.
Still, as always, we apply our disciplined research and process to identify holdings where valuations are beginning to outpace fundamentals. We will either trim them from the portfolio or reallocate to companies with more attractive valuations and higher growth ceilings.
Going forward, we expect our portfolio companies’ aggregate earnings per share (EPS) growth to continue to average 10% over the next 10 years. And, as history shows, when EPS continues to grow, returns are not far behind.
While we can’t predict the near-term direction of the global economy, we can confidently project that our portfolio companies, which are performing well currently, will continue to perform well through the cycle. Considering that our companies are among the best in the world, their current valuation is fair, with plenty of upside potential.
Dash Investments’ 20th Anniversary
We find great value in reflecting on our milestones. One of my deeply held beliefs, as shaped by some of history’s great investors, is that managing stock portfolios with a focus on quality remains critical to compounding our clients’ capital over time.
Here are some other reflections from 20 years of investing on behalf of our clients:
Find Great Companies and Allow Them Time to Compound
We strongly believe that choosing exceptional businesses and allowing long-term compounding to take its course is crucial. Our ability to identify high-quality companies and our commitment to maintaining high standards for our portfolios differentiate us from others. Additionally, our long-term perspective further strengthens our approach.
We continuously search for well-managed companies with the potential to grow sustainably at high returns on operating capital in the long term. These companies should have stable operating profits, strong pricing power, and limited leverage. While identifying such companies is crucial, allowing them to compound naturally over time is equally important. We believe in owning businesses for the long term rather than just renting them.
Reap a Two-Fold Benefit by Investing in High-Quality Companies
To build true wealth, investors must focus on avoiding the permanent destruction of capital as much as the chance to generate returns. In doing so, our clients reap a two-fold benefit. Firstly, by investing in successful businesses that continue to grow and compound over the long term, and secondly, by limiting losses during sustained market downturns. This approach enables investors to win regardless of how the market performs.
Forget Relative Risk and Focus on Absolute Risk
In the investment industry, much emphasis is placed on risk, but the focus is too much on relative risk, such as comparing returns to a benchmark. Instead, investors should concentrate on absolute risk, which is the possibility of losing money on an investment, regardless of its performance compared to
a benchmark. We focus on understanding and managing financially significant risks to our companies’ valuations. This approach allows us to identify long-term winners and avoid the losers, which is crucial for our success.
Focus on What You Don’t Own as Much as What You Do Own
It’s important to consider not only what you own but also what you don’t own. At our firm, we prioritize high-quality stocks in certain industries over others. For instance, we avoid investing in banks, utilities, real estate, and energy sectors. Our strategy of selecting high-quality stocks and industries has resulted in attractive long-term returns and resilience for our clients over the past two decades.
Valuation First
We prioritize both quality and price when making investment decisions. This approach has led to our long-term success. As investment legend Charlie Munger once said, even a great company can be a poor investment if purchased at an overvalued price. Our strategy involves purchasing companies at or below a conservative estimate of their long-term intrinsic value. We prioritize free cash flows over earnings, as cash is tangible. If an investment seems too costly now, we exercise patience, knowing it may become more affordable in the future.
Question Management
To make informed investment decisions, engaging with management and evaluating their long-term perspective and cash allocation strategies is crucial. We assess whether they prioritize growth and innovation or solely focus on short-term gains. Moreover, we analyze their investment in long-term intangibles such as research and development and branding/digital marketing, which are critical drivers of sustainable growth. We also evaluate how well management allocates capital, as short-term, focused pay plans can have damaging consequences for long-term success. We remain aware of the incentives that influence their behavior and encourage changes in pay plans that do not align with our investment values.
Choose Asymmetric for the Win
Investors naturally want investment strategies that offer higher returns with lower risks. Asymmetric portfolios, which capture most of the market’s gains while limiting the downside risk, are ideal for such investors. Investing in a high-quality asymmetric profile can benefit from steady compounding and reap more robust rewards over time. This approach may seem less thrilling than chasing the latest trends, but it offers a more attractive core allocation for investors’ portfolios. Moreover, it can help investors sleep better at night, knowing they are not exposing themselves to the wilder alternative rides in the market.
Never Stop Learning
After managing investment portfolios for 20 years, we believe that one key to success is to remain curious and constantly seek knowledge and growth. It’s important to always ask the right questions and encourage your team to do the same, even if it means questioning yourself. By fostering a culture of curiosity, we can stay engaged and passionate about our work and continue to find innovative ways to compound our clients’ capital.
Be Principled While Staying Flexible
For two decades, we have been investing in businesses with the potential to grow at sustainably high returns over time. However, we understand that the world is constantly evolving, and sometimes, the businesses that fit our criteria may not be found where they were previously. It is important to remain adaptable and open to new opportunities without compromising our core values and principles. Like rivers that change their course, we must adjust and find new bridges to cross.
The Market Always Rewards Patience
Patience is vital when it comes to investing in high-quality companies for above-average long-term returns. As Charlie Munger once said, “The big money is not in the buying or the selling but in the waiting.” Our strategy is to identify such companies and give them the time they need to grow and compound.
It may not seem like the most glamorous approach, but the tortoise’s steady and persistent progress ultimately wins the race, not the hare’s fleeting bursts of speed driven by hype and speculation.
Serving our clients for the last 20 years has been our privilege. The lessons learned over that time will make us even better investment managers for the next 20 years.
In Closing
As always, we thank you for your continued trust and partnership with Dash Investments.
Please note that our next written communication will be via the Q2 2024 update. However, if you have any questions or need information before that time, don’t hesitate to contact us directly.
“In investing if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
— Peter Lynch
Respectfully,
Jonathan Dash
CEO & Chief Investment Officer
Forward-Looking Statement Disclosure
The discussion of our investments represents the views of the Company’s portfolio manager at the
time of this report and is subject to change without notice. References to individual securities are for informational purposes only and should not be construed as recommendations to purchase or sell individual securities. As portfolio managers, one of our responsibilities is to communicate with clients in an open and direct manner. Insofar as some of our opinions and comments in our letters to our partners are based on current management expectations, they are considered “forward-looking statements,” which may or may not be accurate over the long term. While we believe we have a reasonable basis for our comments and we have confidence in our opinions, actual results may differ materially from those we anticipate. You can identify forward-looking statements by words such as “believe,” “expect,” “may,” “anticipate,” and other similar expressions when discussing prospects for particular portfolio holdings and/or the markets, generally. We cannot, however, assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Further, information provided in this report should not be construed as a recommendation to purchase or sell any particular security.
MARKET COMMENTARY
by Jonathan Dash
Good Evening, May 17, 2023
Overview
The purpose of this update is to inform our investors regarding the following subjects:
1. Discuss the key economic events that occurred during the 1st quarter of 2024
2. A look ahead at the U.S. economy and the global markets
3. Updates regarding Dash Investments portfolios
The Markets
Fueled by the increasing likelihood of Fed rate cuts, a growing expectation of a soft landing for the U.S. economy, and bubbling enthusiasm for generative AI-related companies, U.S. equity markets got off to their best first quarter start in five years. This is despite persistent inflation that continues to linger above the Fed’s target.
It wasn’t long ago that consensus was calling for interest rates to remain “higher for longer,” along with heightened expectations for an imminent recession. In recent months, amid improving market sentiment, the consensus has been looking for a soft landing for the economy and a more stabilized interest rate environment.
Although valuations of many companies in early 2024 look very much like they did in the second half of 2021, post-COVID, we’re not likely to see a similar decline in earnings growth that occurred with some growth companies in 2022. At that time, we expected a sharp increase in interest rates from historically low levels, so we were not shocked by its negative impact on our portfolio.
We attribute today’s more positive outlook to the difference in the interest rate environment in 2021 as compared to today. Whereas long-term treasury yields had no place to go but up back then, today, they are not likely to move significantly in any direction from here. Therefore, we don’t anticipate the kind of valuation headwinds that rose up in 2022.
Investment Portfolio Update
Despite all the reasons for optimism in the market, we remain steadfast in our long-term approach to investing—buying and holding only the highest-quality companies in the world with solid balance sheets, durable competitive advantages, and sustainable growth tailwinds. Our companies, rigorously screened for those factors, are well-positioned to generate above-average earnings growth with below-average risk regardless of global economic conditions.
Still, as always, we apply our disciplined research and process to identify holdings where valuations are beginning to outpace fundamentals. We will either trim them from the portfolio or reallocate to companies with more attractive valuations and higher growth ceilings.
Going forward, we expect our portfolio companies’ aggregate earnings per share (EPS) growth to continue to average 10% over the next 10 years. And, as history shows, when EPS continues to grow, returns are not far behind.
While we can’t predict the near-term direction of the global economy, we can confidently project that our portfolio companies, which are performing well currently, will continue to perform well through the cycle. Considering that our companies are among the best in the world, their current valuation is fair, with plenty of upside potential.
Dash Investments’ 20th Anniversary
We find great value in reflecting on our milestones. One of my deeply held beliefs, as shaped by some of history’s great investors, is that managing stock portfolios with a focus on quality remains critical to compounding our clients’ capital over time.
Here are some other reflections from 20 years of investing on behalf of our clients:
Find Great Companies and Allow Them Time to Compound
We strongly believe that choosing exceptional businesses and allowing long-term compounding to take its course is crucial. Our ability to identify high-quality companies and our commitment to maintaining high standards for our portfolios differentiate us from others. Additionally, our long-term perspective further strengthens our approach.
We continuously search for well-managed companies with the potential to grow sustainably at high returns on operating capital in the long term. These companies should have stable operating profits, strong pricing power, and limited leverage. While identifying such companies is crucial, allowing them to compound naturally over time is equally important. We believe in owning businesses for the long term rather than just renting them.
Reap a Two-Fold Benefit by Investing in High-Quality Companies
To build true wealth, investors must focus on avoiding the permanent destruction of capital as much as the chance to generate returns. In doing so, our clients reap a two-fold benefit. Firstly, by investing in successful businesses that continue to grow and compound over the long term, and secondly, by limiting losses during sustained market downturns. This approach enables investors to win regardless of how the market performs.
Forget Relative Risk and Focus on Absolute Risk
In the investment industry, much emphasis is placed on risk, but the focus is too much on relative risk, such as comparing returns to a benchmark. Instead, investors should concentrate on absolute risk, which is the possibility of losing money on an investment, regardless of its performance compared to
a benchmark. We focus on understanding and managing financially significant risks to our companies’ valuations. This approach allows us to identify long-term winners and avoid the losers, which is crucial for our success.
Focus on What You Don’t Own as Much as What You Do Own
It’s important to consider not only what you own but also what you don’t own. At our firm, we prioritize high-quality stocks in certain industries over others. For instance, we avoid investing in banks, utilities, real estate, and energy sectors. Our strategy of selecting high-quality stocks and industries has resulted in attractive long-term returns and resilience for our clients over the past two decades.
Valuation First
We prioritize both quality and price when making investment decisions. This approach has led to our long-term success. As investment legend Charlie Munger once said, even a great company can be a poor investment if purchased at an overvalued price. Our strategy involves purchasing companies at or below a conservative estimate of their long-term intrinsic value. We prioritize free cash flows over earnings, as cash is tangible. If an investment seems too costly now, we exercise patience, knowing it may become more affordable in the future.
Question Management
To make informed investment decisions, engaging with management and evaluating their long-term perspective and cash allocation strategies is crucial. We assess whether they prioritize growth and innovation or solely focus on short-term gains. Moreover, we analyze their investment in long-term intangibles such as research and development and branding/digital marketing, which are critical drivers of sustainable growth. We also evaluate how well management allocates capital, as short-term, focused pay plans can have damaging consequences for long-term success. We remain aware of the incentives that influence their behavior and encourage changes in pay plans that do not align with our investment values.
Choose Asymmetric for the Win
Investors naturally want investment strategies that offer higher returns with lower risks. Asymmetric portfolios, which capture most of the market’s gains while limiting the downside risk, are ideal for such investors. Investing in a high-quality asymmetric profile can benefit from steady compounding and reap more robust rewards over time. This approach may seem less thrilling than chasing the latest trends, but it offers a more attractive core allocation for investors’ portfolios. Moreover, it can help investors sleep better at night, knowing they are not exposing themselves to the wilder alternative rides in the market.
Never Stop Learning
After managing investment portfolios for 20 years, we believe that one key to success is to remain curious and constantly seek knowledge and growth. It’s important to always ask the right questions and encourage your team to do the same, even if it means questioning yourself. By fostering a culture of curiosity, we can stay engaged and passionate about our work and continue to find innovative ways to compound our clients’ capital.
Be Principled While Staying Flexible
For two decades, we have been investing in businesses with the potential to grow at sustainably high returns over time. However, we understand that the world is constantly evolving, and sometimes, the businesses that fit our criteria may not be found where they were previously. It is important to remain adaptable and open to new opportunities without compromising our core values and principles. Like rivers that change their course, we must adjust and find new bridges to cross.
The Market Always Rewards Patience
Patience is vital when it comes to investing in high-quality companies for above-average long-term returns. As Charlie Munger once said, “The big money is not in the buying or the selling but in the waiting.” Our strategy is to identify such companies and give them the time they need to grow and compound.
It may not seem like the most glamorous approach, but the tortoise’s steady and persistent progress ultimately wins the race, not the hare’s fleeting bursts of speed driven by hype and speculation.
Serving our clients for the last 20 years has been our privilege. The lessons learned over that time will make us even better investment managers for the next 20 years.
In Closing
As always, we thank you for your continued trust and partnership with Dash Investments.
Please note that our next written communication will be via the Q2 2024 update. However, if you have any questions or need information before that time, don’t hesitate to contact us directly.
— Peter Lynch
Respectfully,
Jonathan Dash
CEO & Chief Investment Officer
Forward-Looking Statement Disclosure
The discussion of our investments represents the views of the Company’s portfolio manager at the
time of this report and is subject to change without notice. References to individual securities are for informational purposes only and should not be construed as recommendations to purchase or sell individual securities. As portfolio managers, one of our responsibilities is to communicate with clients in an open and direct manner. Insofar as some of our opinions and comments in our letters to our partners are based on current management expectations, they are considered “forward-looking statements,” which may or may not be accurate over the long term. While we believe we have a reasonable basis for our comments and we have confidence in our opinions, actual results may differ materially from those we anticipate. You can identify forward-looking statements by words such as “believe,” “expect,” “may,” “anticipate,” and other similar expressions when discussing prospects for particular portfolio holdings and/or the markets, generally. We cannot, however, assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Further, information provided in this report should not be construed as a recommendation to purchase or sell any particular security.