Radical, Fanatical & Illogical Investing

For those who are reading our commentaries for the first time, welcome. For those who have been reading these for years, this will be a little different. In addition to our market outlook
and thoughts on managing wealth, we will delve into why at times it may seem we are “illogical” when managing our money and yours.

SEPTEMBER 2024

The 3Q24 market returns, across the board, were very good. The S&P 500 was +5.78% for the 3rd quarter and +21.7% for the first three quarters of 2024. The economy is growing—albeit modestly— employment and inflation are steady, the Federal Reserve lowered interest rates, and
overall, people are feeling good.

Our portfolios are currently nearly fully invested, primarily due to rising prices, and that causes us to pause. We know when “everyone” feels despair it is time to buy and when everyone is feeling good, it is time to be cautious. Despite our caution, we have said over the last year that the greater risk may be
not being invested. However, our portfolio positioning is intentional because when markets sell off, no one is totally immune.

WHAT WOULD WARREN DO?
I drive by the headquarters of GEICO to and from work every day. The sign of Berkshire Hathaway’s economic engine causes me to think, given the current market conditions, WWWD (What Would Warren Do)?

This past year, Buffett has again done what others have not. He sold half of his Apple holdings, reduced his position in Bank of America, and increased his allocation to energy companies1,2,3 Berkshire Hathaway now has ~30% in T-bills and ~20% in energy.4 Additionally, Buffett’s insurance guru, Ajit Jain, sold more than half of his Berkshire Hathaway stock.5

It begs the question—why raise so much cash and swap out of the most loved stock
to buy more in the least liked industry?6

BEING PREPARED MEANS HAVE A LITTLE CASH

Growing up, my family always took a one-week vacation the first week in June (the rental rates went up
the second week). My parents and six kids “luxuriated” in a non-air conditioned, no television, two bedroom and a pull-out couch rental on the beach. You can correctly surmise we were not “rolling in it.”

These weeks were always great, but one particular year my dad was preoccupied. In between riding waves and tossing the football, he kept sneaking back to use the pay phone to call long distance. He called so often, he must have spent $10 in dimes! On the third day, he finally got the news for
which he had been praying. Poch Hardware got the Small Business Loan that would keep the store afloat. Because he was able to get cash when he desperately needed it, the family business survived. I didn’t realize it at the time, but had he not gotten that loan, our lives would have been very different. The importance of having cash when you really, really need it can be inestimable. We may be raising cash as the markets trend higher, despite having to pay capital gains taxes.

MARKETS
3rd Quarter in Review
The broader stock market caught up with the handful of mega cap technology companies that earlier
led the rise. Technology was up 1.88% while real estate, industrials, and basic materials were all up over
10% for the quarter.7 The spot price of crude oil was down more than 15%. Generally speaking, our exposure to financials performed well and selective companies had strong results.

As you know, we don’t buy industry sectors, we buy financially strong companies when they are attractively priced. At times, an entire sector is out of favor, allowing us to purchase a significant amount, and our portfolios end up tilting that way. For the last four years we have had a large
exposure to energy. We continue to believe energy will do well, yet we sold one major oil company because many client portfolios were approaching 25-30%.

Fixed income benefited from the decrease in the overnight Fed Funds. For the nine-month period, the
U.S. Aggregate Bond ETF [AGG] was +2.64%8. and yet the last 5 years it is down -2.11%. Cumulatively over the last five years, investors in this ETF lost money, which, mercifully, we avoided by owning money market funds.9 Further interest rate declines in the short end of the fixed income market (under three years) arelikely. Owning intermediate term bonds isappropriate when money market yields are lower.
With inflation likely, we are not extending maturities. More on inflation later.

FINANCIALS
Last year, we added to our financial industry exposure by adding a basket of security exchanges. We
purchased these compounders because we felt they had better long-term potential than the mega-cap tech giants and were selling at roughly half the valuation. The underlying operating performance has been strong,especially this past quarter, and we still believe the businesses will continue to benefit from existing trends. Our thesis for increased liquidity, lower interest rates, higher asset prices, and lower energy prices were, at least for the quarter, realized. In the long run, we have faith in capitalism. In the short term, we have no idea if prices of companies will go up or down.

ECONOMY
Global Liquidity
When we refer to “global liquidity” we are referring to all cash equivalents, debt, and available credit around the world. There is ~$350T of sovereign debt outstanding.10 We have regularly noted that global
government debt is increasing and, in our opinion, at an unsustainable rate. Last fiscal year, the U.S. annual deficit was estimated by the Congressional Budget Office (CBO) to be $1.7T and it came in at $2T. The CBO is worse than the weatherman.

Deficit spending will likely continue regardless of election outcomes. As governments run deficits, they run out of money unless they issue bonds. Currently at 121%, it is almost a certainty that the U.S. debt
to GDP ratio will eventually hit 200%.11,12 This in turn will almost certainly cause higher inflation. Those outcomes may not occur for several years, but in our opinion, it is a matter of when, not if.

As clear as the U.S. problems are, China is struggling, and Europe is worse. Last week, the Peoples Bank of China (PBOC), pumped money into many aspects of their economy specifically to prop up stock prices, not just spur on the economy.13 Pursuing non-nuclear green energy and ambitious social policies has been a massive economic drag as laid out in “Europeans are Becoming Poorer.”14 The Eurozone economy has grown just 6% in the last 15 years while U.S. GDP has grown
82%.15

The European Central Bank and the Federal Reserve are also doing the same thing as the PBOC in one
form or another. It is clear to us world governments will roll over their debt regardless of interest rate levels. There is no other choice. Therefore, we anticipate that overnight Fed Fund interest rates will be kept low by central banks; the alternative would accelerate a crisis.

How long will this persist? We believe it can go one for some time, maybe years, despite the drawback of
eventual inflation. [See Marty Zweig’s, “Don’t Fight the Fed” and Keynes’s “The market can stay irrational
longer than you can stay liquid.”] The good news is the U.S. is doing better than most
countries. We have long felt owning U.S. companies offered superior investment opportunity. U.S. exceptionalism exists because we have a strong dollar, abundant energy, rule of law (most of the time) and reward innovation and capitalism. Ergo, that’s why most of our holdings are U.S. companies.

OUTLOOK
As we have said many times, we are not traders, nor do we pretend to know what will happen in the next
month, quarter, or year. However, we do follow larger trends, because if you own wonderfully managed
companies that benefit from big trends, your odds for favorable results improve markedly. No one wants to own the best buggy whip.

We see no reason to change our primary views:

• Annual deficits of major countries will continue.
• Global indebtedness will increase.
• Increasing global liquidity will cause asset prices to rise.

Possible effects:

• U.S. Banks will be required to increase capital (absorb
  the supply of treasuries).
• Volatility may have periodic spikes, but generally will be
  more muted allowing for higher collateralization.
• Currency debasement continues, inflation ensues.
• Inflation will feel worse than the Bureau of Labor
  Statistics reported numbers.
• Gold continues to rise as foreign governments deficit
  spend and drift away from the U.S. dollar.
• Crypto currency will become an accepted asset class.

LOGICAL OR ILLOGICAL INVESTING?
Over the last 30 years, financial advisors have been trained to think and invest in “style boxes.” “Style box” investing is the lumping of stocks into growth, value, small cap, large cap, international, emerging markets, and alternative categories. This method, popularized in the early 90’s by Morningstar as an offshoot of Markowitz Modern Portfolio Theory, is now ingrained in the psyche of the average
investor.16,17 From an industry perspective, “style box” investing is easy to measure, explain, and sell. As Supertramp might say in their 1979 hit, it was “Logical.”

In our opinion, the shortcomings of this style are many, and its effectiveness after taxes, inflation, and human behavior is debatable.18 One simple example of the “style box” approach
has been the decades long allocation to “developed international” stocks, aka Europe, favored by major global investment committees.

Over the last 30 years, the average annual return ofdeveloped international stocks, measured by the MSCI EAFE Index, has been 4.9%.19 Over that same time, the S&P 500 had a return of 10.7%.20 If one followed that recommendation and invested $10,000 in the MCSI EAFE Index, it would have grown to $42,001. Invested in the S&P 500 Index, that same $10,000 would have grown to $211,071, nearly five times greater.

CASH FLOW IS KING
We prefer to assemble portfolios seeking the potential for increasing cash flow. We have found if cash flow increases at a rate in excess of inflation, after taxes and fees, it has led to attractive total returns. Consistently rising income increases our purchasing power and standard of living and
lets us “sleep well at night.” As a side benefit, consistently rising cash flow and dividends can lead to lower volatility than the broader market.

CONCLUDING THOUGHT
History’s greatest investors have told us that being “logical” and investing like everyone else may not the most profitable.

At the risk of being misunderstood or considered “radical orfanatical,” we believe fundamental investing is the intelligent and more profitable path than the “style box” approach. Astute investors will draw their own conclusions.

Christopher F. Poch
October 4, 2024

1 https://www.investors.com/etfs-and-funds/sectors/sp500-warren-buffettpanic-
sale-of-apple-stock-cost-6-2-
billion/#:~:text=Buffett’s%20sale%20of%20389.4%20million,stocks%20rallied%
20back%20%E2%80%94%20and%20fast.
2 https://finance.yahoo.com/news/warren-buffetts-firm-sells-another-
161905526.html
3 Berkshire Hathaway Buys Full Control of Its Energy Unit
4 Berkshire Hathaway 30% is in cash
5 https://www.barrons.com/articles/berkshire-hathway-stock-sell-jain-buffett-
7421346bhttps://www.barrons.com/articles/berkshire-hathway-stock-selljain-
buffett-7421346b
6 https://www.marketwatch.com/investing/index/spx
7 https://www.morningstar.com/markets/13-charts-stocks-bonds-q3-rollercoaster-
rallies
8 IShares Core US Aggregate Bond ETF 10.01.24
9https://www.ishares.com/us/products/239458/ishares-core-total-us-bondmarket-
etf

10 What is ‘global debt’ – and how high is it now?
11 https://www.youtube.com/shorts/kdgUgyQP1Dg
12 https://fiscaldata.treasury.gov/americas-finance-guide/nationaldebt/#:~:
text=The%20GDP%20data%20is%20sourced,new%20debt%20data%
20is%20available.&text=The%20average%20GDP%20for%20fiscal,GDP%20Ra
tio%20of%20121%20percent.
13 https://www.reuters.com/markets/asia/chinas-cenral-bank-injects-cashlowers-
14-day-reverse-repo-rate-2024-09-23/
14 https://www.wsj.com/articles/europeans-poorer-inflation-economy-
255eb629
15 https://newsletter.doomberg.com/p/judgement-day
16 https://www.investopedia.com/terms/s/stylebox.asp
17 https://www.investopedia.com/terms/m/modernportfoliotheory.asp
18 https://www.investopedia.com/terms/s/stylebox.asp
19 https://www.lazyportfolioetf.com/etf/ishares-msci-eafe-efa/
20 https://www.perplexity.ai/search/when-was-the-msci-eafe-index-cqT5H2KI5SUChdLkdQR3n1Q
21 https://www.investor.gov/financial-tools-calculators/calculators/compoundinterest-
calculator
Important Disclosures
Investment advisory services offered through Promethium Advisors, LLC,
a Registered Investment Advisor with the U.S. Securities and Exchange
Commission.
This material is intended for informational purposes only. It should not be
construed as legal or tax advice and is not intended to replace the advice
of a qualified attorney or tax advisor. This information is not an offer or a
solicitation to buy or sell securities. The information contained may have
been compiled from third-party sources and is believed to be reliable.