The Value Fund Monthly Update – August 2022

Performance for August 2022

The Value Fund was down 4.8% for August 2022 and is down 12.4% since the fund started in February 2022.

The Premium Fund, which we opened up to members in August, was up 1.5% for the month but is down 8.2% since the fund started, also in February 2022.

 

Performance vs the Market

The S&P 500 and Nasdaq Composite indices were down 4.2% and 4.6% respectively for the month.

It has been another manic month of volatile swings in the market as both indices were up midway through the month only to make a wild reversal post the Federal Reserve’s (US central bank) comments at Jackson Hole, specifically they will continue raising interest rates. Both our funds followed a similar path to the market with the Value Fund up over 5% at one point during the month while Premium Fund was up almost 10%.

The volatility is due to uncertainty as inflation remains high driven by record gas prices, supply constraints, global tensions, and climate change. The lack of confidence in central banks to respond adequately is not helping the matter. Unfortunately, all this uncertainty works in the favor of the sell-side as uncertainty leads to increased trading which in turn leads to more commissions earned by these brokers. This misalignment of interests is why it’s important to view the information out there with some skepticism and apply your own thinking to your investment decisions. As far as we are concerned, as long as the long-term fundamentals of a company remain intact then there is no reason to change your investment thesis.

The S&P 500 and Nasdaq Composite are down 17.0% and 24.5% respectively year-to-date.

 

Comments

The largest detractor for the month was our diagnostics company which disclosed that it was being investigated for unnecessary laboratory testing at the beginning of the pandemic. The company has disclosed that the investigation only relates to a small portion of its revenue, and while it is fully cooperating with the government, it does not expect the investigation to have a material impact on the business. The share price declined over 27% as a result of this disclosure, yet we believe the outlook of the business has not changed. We have reached out to management for further comments as we believe the large share price decline might present an opportunity.

Another detractor to performance was our container shipping investment whose share price declined due to declining freight rates during the month. Although rates have been declining they remain well above pre-pandemic levels, and while we are conscious that rates are likely to normalise in the medium term, the company continues to generate cash which is being returned to shareholders in the form of dividends. We continue to monitor rates closely but for now, expect to earn large dividends, at least for the next 12 to 18 months.

Performance was partially offset by our manufactured housing company, Legacy Housing Corp (LEGH) which after long delays released its December year-end financials and is set to release its first and second quarter results during September. The share price was up 25.5% for the month however we still believe LEGH to be undervalued.

 

Conclusion

This is a very volatile market at the moment as investors look for any excuse to sell. The initial reaction is to remain on the sidelines and wait it out as all the uncertainty can cause anxiety for even the most experienced investor. We believe this reaction is wrong as now more than most times we need to remember what we are trying to achieve;

We are long-term investors looking to invest in high-quality companies at the best price possible. The opportune time to do that is when others are scared because that is when you are going to buy high-quality companies at prices you might not see again.  We believe we are finding such opportunities, so much so that we added a significant portion of our own money into both the Value and Premium Fund at the beginning of this month.

We are genuinely excited about what we are buying and the benefits we are going to reap from these established, profitable businesses that should generate cash for its shareholders, i.e. us, for years to come.

 

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