To Our Partners,

Overview

The purpose of this update is to inform our investors regarding the following subjects:

1. 1 – Discuss the critical economic events that occurred during the 2nd quarter of 2022
2. 2 – A look ahead at the U.S. economy and the global markets
3. 3 – Updates regarding Dash Investments portfolios

Investing in an Inflationary Economy

Unquestionably, the surge in inflation is taking its toll on the stock market. You may ask, from an investment perspective, is it wise to remain invested in stocks when selling them could prevent further losses? Then the question becomes, what to do with your money.

We know that bonds are not the place to be when prolonged inflation continues to push interest rates higher. Between current low yields and falling bond prices, you are guaranteed to lose money.

Some commodities perform well during inflationary cycles, but the only way to make money is by selling them to someone willing to pay more than what you paid. They pay no interest or dividends and generate no profits that can be reinvested.

Real estate is an alternative, but prices are topping out in most of the United States—not a good time for investors.

You could move to cash, but with inflation running at 9% and bank CDs yielding no more than 2%, you are again guaranteed to lose money. Even if you are willing to live with that, when do you sell, and when do you get back into stocks? If you sell now, in the bowels of a bear market, you are guaranteed to suffer a permanent loss of capital. If you wait too long to get back into the market, you will likely miss the biggest gains, making it extremely difficult to recover your losses.

That leaves stocks. To be sure, many stocks underperform in poor economic conditions. However, highquality, well-managed companies with solid brands and dominant market positions have the ability to grow revenues in real terms and generate returns on capital in excess of the rate of inflation. While their share prices are susceptible to the vagaries of the market, their strong fundamentals serve to cushion their fall, allowing them to rebound more quickly when the market recovers.

Though it may seem like there are no good alternatives for investing in poor economic conditions, it’s important to remember that they are only temporary. Taking steps to limit your losses may provide some comfort in the short term, but if it comes at the expense of missing the most significant gains of the stock market, you could severely limit your long-term returns.

What About Recessions?

The consensus is that if the economy is not already in a recession, it will be, which concerns many investors more than rising inflation. But should it?

We’ve had a lot more experience with recessions than with high inflation because they occur more frequently, about every three-and-a-quarter years on average.

Looking at the 12 recessions that have occurred in the last 77 years (since S&P 500 prices became available), the median price increase in the S&P 500 was 25% in the two years following the start of a recession. Only one of the 12 periods resulted in a negative return. That’s higher than the median price increase of 17% that occurred over random two-year periods in those 77 years.

Although past performance does not indicate future results, it’s safe to say that a recession doesn’t automatically lead to lower stock prices. Investing in high-quality stocks is the best way to recessionproof a portfolio.

Investment Portfolio Update

As bad as things may appear in the big picture, our companies demonstrated reasonably good business performance during the first half of 2022. Our portfolio weighted average free cash flow per share grew during that period, as did their two-year top-line revenue growth by significant margins. Although it remains to be seen how they will perform in the bowels of a global recession, we are confident that the underlying structure of our companies’ profitability will buoy them.

We can also be confident that our companies will not likely experience a severe decline in top-line revenue growth. That’s because our portfolio is concentrated in consumer staples, healthcare, technology, with a sprinkling of consumer discretionary which can be expected to outperform other sectors in a recession that are likely to struggle with cyclical demand, higher fixed assets and costs, and lower cash generation.

Fundamentally, our companies are well positioned to weather the severe headwinds of high inflation and a recession. If we didn’t have to worry about them getting caught up in the contagion of the stock market dynamics, we would have very little to worry about.

We are also entering a period of rising interest rates, which can also cause havoc with stock prices, especially those of highly rated equities such as ours. That’s because the share prices of companies with higher price-earnings ratios reflect discounted profits or cash flows further into the future, making them more susceptible to rising interest rates.

While lowly rated ‘value’ stocks are less susceptible to rising interest rates and likely to outperform highly rated companies during these periods, their long-term performance has been underwhelming. Since we focus only on the long term, we have no interest in picking and choosing from sectors that perform inconsistently based on prevailing economic conditions.

For example, one sector we will never own under any circumstances is energy. The energy sector gained a whopping 29% in the first half of 2022. While that is impressive, that gain has done nothing more than return the S&P Energy Index to 2008 levels—not so remarkable from a long-term investment perspective.

While it’s impossible to predict how the forces of inflation, rising interest rates, and a recession will ultimately impact valuations, we know, based on the historical performance and strong underlying fundamentals of our companies, they will continue to prosper and come out stronger on the other end. The one certainty we know about our companies is that their share prices will ultimately reflect their fundamentals.

We continue to have strong convictions in all the companies in our portfolio that have demonstrated time and again their resilience and ability to power through the worst of economic conditions. Through a combination of low capital intensity, high returns on capital, and uncommon pricing power, they are nearly impervious to today’s economic challenges.

In Closing

As always, we want to thank you for your continued trust and partnership with Dash Investments.

Please note that our next written communication will be via the Q3 update. However, if you should have
any questions or need information before then, please feel free to contact us directly.

“The key to investing is not assessing how much an industry is going to impact society, or how much it could grow, but rather, determining the competitive advantage of any given company and, above all, the durability of that advantage.”

— Warren Buffett

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.