The Return of the "Hissy Fit"!

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We have discussed many times over the last decade or so how the market's reactions to scary headlines and prognostications of gloom can be described as a "hissy fit".  You know, it's like the reaction of the spoiled child who is told they can't have any more candy: stomp out of the room in a huff and whine and complain for hours as if that is going to make a difference.  Worse yet, and certainly the root cause of "spoiled child syndrome," the parent gives in and lets the child have what they want only to find the child finds something else to be "pissy" about.

Obviously, given the way markets have acted lately, clearly the markets are the child, and one might argue a combination of the Federal Reserve and the financial media are the parent!  As we are about to witness yet another Fed meeting this week, and the paranoid in the financial world are all atwitter about what the wizards of money are going to do with interest rates, one would think the sun rises and sets based on their actions.

It is our belief that the economy suffered greatly by the overdone and excessive "zero interest rate" (ZIRP) policy by the Fed in the wake of the 2008-9 financial debacle,  the effects of which served to distort the concept of risk in the minds of investors.  Essentially, with zero percent interest rates, time was considered to have no value and, thus, the desire to risk capital over time considerably dried up.

Just as the Fed has begun to get its sanity about it and taken steps to correct that distortion, the drumbeat has become louder and louder that they should stop raising the target for interest rates, in order to save the economy from certain recession.  These calls are coming from the same folks who have been predicting for ten years now that we were sure to be heading for Armageddon in the financial markets and the economy, only to have been consistently proven wrong.  No doubt, at some point, there will be a "correction" in the economy, and it will likely be due to the Fed overreaching and raising rates too high.  Or it may come from some external shock.  Or it may simply be a normal "cycle correction" -- as is perfectly normal in a dynamic economy.

Nonetheless, the violence with which markets have reacted to these fears has amounted to the worst hissy fit we have seen in a few years.  Certainly, correcting stock prices are also a normal occurrence in the markets.  However, the ferocity of this correction and the wild day-to-day swings (even intra-day swings) have been something to marvel at.  We have also noticed that, at least in our portfolios of growing companies, the volume of shares trading has been quite low, given the volatility.  It may be part of why we are seeing this level of "manic" market activity.  It's been a sort of "buyers' strike," if you will.

All of this reminds us of what our mentor, Dick Taylor, used to counsel: "are you going to let 1% of shareholders tell you what your businesses are worth on any given day?"  Those are words by which every investor would be wise to live.  And as markets seem to relentlessly be stuck on a downward spiral, remember that this too shall pass, and those who have taken a business approach to investing will be best served, and live to experience the inevitable recovery.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

The Fixation on the Fed

Regardless of what the Chairman of the US Federal Reserve said yesterday, including his "two words", the bigger issue is the extent to which the financial punditry continues to be so enthralled in the analysis of every word that comes out of the Federal Reserve, as if the Fed were the primary harbinger of growth in the economy.

This is total nonsense!  

The Fed is at the center of the world for bankers and financial engineers – so their obsession with monetary policy is understandable. But investors should be careful of confusing the financial world and the banking world with the world of real products and services, where the vast majority of real investment opportunities are to be found. 

The Fed has never invented any product, written a single line of software code, navigated a business through the volatility which it often fosters with its constant manipulation of currencies, and thus is a terrible determinant of a sound investment.  

Simply put, the Fed is better at getting in the way of innovation, which ultimately is what creates economic growth, than it is at fostering innovation.

And this same punditry, which has been calling for a recession every year since the end of the Great Recession of 2008-9, is back at it again.  They are once again stoking fear and consternation in the minds of investors of all stripes (individual and institutional) with their suggestions that the strong economy is likely headed for a downturn based on higher interest rates, "end of stimulus," Brexit, Italy's budget woes, and on and on!

This gets to the heart of why we don't "do the market"!  Okay, realistically, we have no choice but to occasionally do so when we want to buy or sell a company, but, truly, the best advice is to ignore these market fluctuations, comments from the Fed, comments from "Economists" (who rarely actually recognize the important trends in innovation), financial media "experts" (usually "traders") and pay attention to the businesses in which one is invested.  

We have long subscribed to the notion that we will own our businesses through multiple market and economic cycles as those businesses deliver innovation and creativity to their customers/clients and value to us as shareholders.  This is the way we believe we can get the best returns on our investment.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

The Correction Begins

In our recent Investment Climate, we warned that a correction (maybe sizable) was inevitable.  It appears, at least in the prices for high technology and most "growth" companies, that the correction is here.

Frankly, while it is never fun to watch our portfolios drop in value, we have always said that it is a healthy byproduct of a functioning market that these abrupt, and sometimes violent, price movements happen.  We have experienced significant appreciation in the value of our growth portfolios over the last several years and sometimes the "payback" for that is what we are experiencing in the last few days.

We suspect this will take a few weeks to fully blow over, but the reasons for these machinations currently being lauded in the financial press (ie. China trade wars, higher interest rates, slowing economy, inflation, a too "hot" economy, a flat or inverted yield curve, Italy, the Supreme court battle, the mid-term elections, the Federal Reserve's monetary policy, etc., etc.) are all non-starters, in our view.  We would react to NONE of these issues, even the ones that directly contradict each other!

This is about the time that we trot out one of our mentor's, Richard Taylor's, favorite lines when navigating ugly markets: "are you going to let 1% of the shareholders of your businesses drive your decisions about what represents the true value of those businesses?"  In other words, since on any given day the trading volume in stocks represents roughly 1% of the total shares outstanding (of course, give or take), we don't want to let the trading tendencies of "traders" dictate our long term investment decisions.

We could comment on each one of the "reasons" for consternation in the markets today and refute them, or maybe even agree that there is reason for some level of concern regarding some (for instance, China trade wars).  But we would reiterate that none of the "issues of the day" are cause for us to change our overall views regarding narratives that are driving long term value creation in our companies. Even potential drawn out trade wars could ultimately serve to drag China into the 21st Century with respect to the rule of law and property rights related to another's intellectual property.  Could you imagine how much more value would be created if the rest of the world's software IP wasn't regularly pirated by bad actors in China (while the Chinese government generally looks the other way)?

Nonetheless, if one is laser-
focused on the businesses of the companies they own, much more so than the daily fluctuations of the stock price of those companies, we believe value will ultimately be sorted out reasonably,  And in a properly diversified portfolio, it will more often than not be sorted out favorably, over time, for the true investor!  Stay tuned.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Investment Climate Oct 2018 - Focus on the Business

We continued to see significant and broad-based gains in our growth strategies over the last quarter and have significantly surpassed the returns of the overall market averages, which have had pretty nice runs themselves.  Given this increase in company values, and the length of this post-2008/2009 crisis rally, many are asking us what to expect going forward the next couple of years?  While we certainly expect that a sizable correction is very likely (perhaps greater than 10% down), we simply don’t buy the persistent pessimistic argument that we have been hearing now for the last ten years that “doom” is surely right around the corner.  We simply respond, what corner?

Although we are sometimes accused of being “perma-bulls,” as just stated, we expect a sizeable correction at some point over the course of the coming months/years.  However, we have found over decades of investment experience that it has paid us well not to “play” the market.  As investors, we believe our focus should be purely on the fundamentals of the business in which we are investing.  The noise of the market can cause investors to make decisions that are based on technical, market-based issues and not the actual business of the company in which they have invested capital, thus leading to serious and costly errors.  While the price you pay for a business should certainly be a consideration before finally deciding to buy, it should not be the only consideration, and is best considered last in the decision-making process.

We are amazed by the amount of emphasis that is placed on “the Market”!  The market is an instrument, a technical mechanism that enables investors to purchase or sell; nothing more, nothing less.  And yet far more analysis is done on what the market is going to do than is done on the businesses of the companies that make up the market.  This is backwards, at least to us.  We posit that investors would be much better off considering the business merits of a company than the action of the stock price for shares of that company in determining whether or not to place their hard-earned capital into it.  Most of the financial media ask investment analysts what they think “the Market” is going to do far more frequently than they ask about the merits of the business of specific companies or about the environment for business overall.

This phenomenon is not just limited to the financial media -- most “hot” money managers nowadays are talking about how artificial intelligence, machine learning, and new algorithms are going to “enhance” their strategies for “trading” or, for that matter, serve as the sole basis for their entire strategy.  The dominance of this trend is simply overwhelming and has taken over the entire world of professional money management.  These managers have determined that math is more important than simple business “savvy” in making investment decisions (“investment” being the wrong descriptive term, since these are really “trading” decisions more often than not).  Color us skeptical, but we think that is nonsense!  And we have decades of proof from Richard Taylor before us, and Thomas Rowe Price before him, that our investment philosophy has lasted longer and has delivered better than average results measured in years, rather than in quarters.  The record is clear…


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Have you heard of this company? KRNT

We have written many times over the years about the investment philosophy that forms the foundation for our growth investment strategies, a time-tested philosophy descended from the approach developed by Thomas Rowe Price, Jr. (1898 - 1983) and pursued profitably by him for several decades.

It is a philosophy based not only upon investing in well-run businesses but upon investing in well-run businesses benefitting from powerful ongoing developments in their industry or in society at large. To explain by way of a metaphor, if individual companies were ocean-going ships, we would be looking not only for well-built vessels with good leadership and crews, but for seaworthy ships which were also positioned within powerful ocean currents which would assist them in reaching their destination.

Periodically, we highlight a company which we believe exemplifies this philosophy. 

Kornit Digital designs and manufactures high-definition digital printers and ink for textiles, used to print designs onto fabrics for the manufacture of clothing and other textile products, as well as onto finished garments.* Digital printing is transforming the textile industry and stands to benefit from many powerful "currents" driving greater adoption of the digital approach versus the traditional "analog" methods of textile printing.

Analog textile printing involves significant factory setup taking up lots of space and using costly equipment, a configuration which is optimized for large-batch production runs of several hundred or even thousands of garments or rolls of printed fabric. Once the operation is set up, it then becomes relatively inexpensive to crank out large numbers of garments, with the "cost per item" or "cost per print" going down as the batch size goes up. 

Flexibility is very limited once the print run is set up: the process is optimized for the production of large numbers of the same design or pattern. Setting up and operating the machinery is complex, labor intensive, and time consuming, as is making any  changes.

Digital textile printing, on the other hand, enables almost infinite flexibility. There is no complicated equipment to rearrange between printing one design and another: a digital printer can print a different design on every successive shirt, or every successive roll of fabric, without any changes to configuration whatsoever, in much the same way that your printer at home or at work can print a hundred different pages with different print or patterns on them, without any intervention from you in between each page.

Unlike the traditional analog approach, the cost of each print is basically identical to the previous print, with no reduction for volume. This means that, in terms of cost per print, it is no more expensive per shirt to print a run of five or of fifty shirts as it is to print a run of five hundred or five thousand shirts. While the traditional analog approach is economical for runs of many hundred or even thousands of garments or rolls, the analog approach is very un-economical for runs below a few hundred prints.

Additionally, the traditional analog print business uses toxic chemicals and enormous amounts of water, both of which create significant pollution -- to the point that the environmental regulations in most developed countries make such operations impossible, which is why most garment manufacture and printing is done in developing nations far from the markets where those textiles and garments will eventually be sold. Digital printing -- and especially the Kornit digital printers and ink -- are much more eco-friendly and do not produce toxic byproducts.

The strengths of the digital printing approach for printed garments and textiles should be fairly obvious -- as are some of the major industry and consumer trends which are increasingly playing to the strengths of the digital approach at the expense of the traditional analog methods. The radical changes which have transformed the retail landscape with the advent of e-commerce, Amazon.com, social media, and accelerated fashion trends (with shorter durability) all play to the strengths of digital textile printing.**

Whereas the older analog methods necessitated large bets on big runs of garments or textiles, often produced overseas with lengthy supply chains and significant amounts of time involved between concept and go-to-market, digital printing enables the economical production of smaller batches, with greater flexibility, produced much more quickly in order to take advantage of recent trends or developments, with much shorter supply chains (fabric or garments can be printed in the same markets where they will be sold).

The analog approach entails significant risk for retailers and other industry participants, making big bets on products well in advance, with limited flexibility to change once the large batches are produced and shipped to stores or warehouses. The digital approach enables much more experimentation with much lower exposure if something doesn't work out -- and with the ability to change "on the fly," almost instantly.

The major drawbacks to the digital approach have been quality, including the lack of ability to print on various fabric types or colors, as well as the number of machines and printing steps involved in the digital process itself. Kornit Digital's innovations include designing printers which combine the multiple steps that would otherwise require numerous machines and production steps, saving both time and money in the process. Additionally, Kornit's printers are able to handle types of fabric which other digital printing manufacturers cannot satisfactorily print.

We believe that Kornit is an example of the kind of well-run business positioned to take advantage of major "currents" that are driving the future of retail, and thus an excellent illustration of the kind of company we look for in our investment strategy. 

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* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Kornit Digital (KRNT).

** At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Amazon (AMZN).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Investment Climate July 2018: The Nonsensical Capital Gains Tax

Investors in Taylor Frigon Capital Management’s growth investment strategies enjoyed the best quarterly performance they have had in the last few years.  All portfolios ended the quarter with YTD performance that was well in excess of the general market, and the performance was broad-based, across a number of industries and sectors.  In our last quarterly commentary, we outlined a major change that is brewing in computer architecture for which we are positioning our portfolios. Some of those themes have already started to produce. And even some of our “older theme” positions have taken off, as well. It is particularly notable that we believe we are seeing the beginning and by no means the end of certain trends.  Thus, there is no one aspect of our portfolio management process to which we can attribute the performance.

We also noted last quarter that we transitioned out of a number of very long-term holdings that resulted in significant realized gains.  This transition has evolved over the last couple of years and we are pleased that we are much closer to completing that process than beginning it.  Needless to say, this results in the realization of long term capital gains and, therefore, the payment of capital gains taxes.  We will do everything we can to mitigate the impact of capital gains in our strategies, and considering we generally hold positions in our portfolio for many years exemplifies that approach, in contrast to management styles with higher turnover.  However, there comes a time when we have to realize our gains and reposition our capital in places we think can provide better returns in the future.

This necessity provides an excellent opportunity to reflect on tax policy and its impact on business and investment.

Anybody who is facing the hard, cold facts of paying taxes on capital gains understands how annoying, and even painful they can be.  In high-tax states like California and New York it is simply excruciating!  This allows those payers to understand that taxation affects behavior.  It often affects actions so much that people will make very bad investment decisions just to avoid taxation.  One example happens when investors blindly look to realize losses in companies that may be very solid long-term investments just so they can offset capital gains.  In other words, incentives matter, and tax incentives can lead to self-damaging decisions.

We struggle with the fact that tax law is inept, demonstrated by the fact that long term investors in real estate are given a favorable way to avoid capital gains taxes (1031 tax free exchanges, or “Starker Exchanges”) for “exchanging” (another word for “trading”) from one “like-kind” property to another, if done using a proper intermediary.  However, if one were to “exchange” (or trade) shares of Home Depot common stock for the shares of Lowes common stock (a like-kind exchange if there ever was one!) and did so by selling the Home Depot shares at a higher price than they had originally paid for them, he or she would have to pay a capital gains tax on the profit.  This creates a disincentive to making the trade, and a disincentive to investing in stocks altogether.  It favors investment in real estate over investment in the equity of a corporation.  It also incentivizes the real estate investor to over-pay for property just to avoid the tax (under 1031 exchange rules, the investor must identify a new property within 180 days) thereby driving the prices of properties higher than they would have been if the playing field were level.

None of this activity is grounded in sound economics.  It ultimately results in distortions and misallocation of capital, all of which hurts the economy, and ultimately costs us all in the form of lost jobs and even failed business.  With all the talk about taxes in the last year (and we would add that we believe there were some very positive aspects of the new tax law), we would’ve hoped the “un-economic” aspects of taxation would be addressed.  But they were not.  In many cases, taxes just got more complex, or at least were not made any simpler.

When we address this topic, we are often asked about a solution.  We have long stressed the solution is in true simplicity and a broadening of the tax base.  Here, we would argue for the lowest, flattest tax rate applied across all forms of income such that the incentives are all equally aligned to foster economic activity, favoring no one group or industry, and giving everyone a stake in the system.

Does that sound simple enough?

It is.

Do we think it will happen?

No.

Why?

Because politicians make the rules.

Meanwhile, we will continue seeking out companies that make it possible to, as Dick Taylor would say, “get by in spite, ”  and preferably “THRIVE” in spite!
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Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Have you heard of this company? Carvana (CVNA)

image: Carvana website (link).

From time to time, we highlight specific companies which we believe fit the profile of a classic Taylor Frigon growth company. These are companies which meet specific criteria which indicate that they are well-run businesses operating in fertile fields for future growth, as discussed in previous posts  (such as this one) describing our investment philosophy.

Fertile fields for future growth often involve a paradigm shift in a business or industry -- and while companies involved in the technology industry may be the first that come to mind for many investors looking for paradigm shifts, transformative paradigm shifts are taking place in other industries all the time. Sometimes these shifts involve the application of new technologies to industries that might seem to have little to do with traditional "tech names" at all. Investors looking for growing businesses should be alert for such opportunities.

One industry that might seem to be far removed from the transformative power of technology is the used-car business. Over a trillion dollars a year are spent in the US alone for the purchase of used automobiles, but it is an enormously fragmented market, with many of those transactions taking place between private individuals or at small used-car dealerships, and some of them at new-car dealerships. The market is so fragmented that the largest used-car seller in the country, CarMax, makes up less than 2% market share.* An even more revealing statistic pointing to the extreme fragmentation of the market is that the top 100 players account for less than 10% total market share.

Into this trillion-plus-dollar marketplace, Carvana brings an entirely different approach, with the goal of transforming the car-buying experience using technology and a scalable logistics operation which enables them to cut costs, lower prices, and (perhaps most importantly) eliminate some of the biggest pain points in the used-car buying experience for their customers.* 

Carvana's approach is to use technology to eliminate the physical dealership and the used-car salesman altogether, enabling the buyer to shop for and purchase the vehicles entirely online, similar to any of the other e-commerce business models which have transformed retail. However, because an automobile purchase is so much larger than the typical e-commerce purchase, the auto-sales industry is not easily disrupted by the same forces that have so radically transformed (and continue to transform) other areas of retail. Among other reasons, auto purchases are very high-dollar (typically the second-most expensive purchase for any household), the sheer range of products is overwhelming (in terms of make, model, body style, year, mileage, special features, etc., about which different potential customers will have very different feelings, often strong feelings), the purchasing process itself is complex (and often involves the trade-in of another vehicle), and an automobile is obviously too large to send through the mail or leave on your doorstep in a cardboard box.

In order to create a buying experience which enables the purchase of something as complex, personal, and challenging as an automobile, Carvana has built a well-planned logistics infrastructure to enable them to acquire, stage, and deliver used cars to buyers all over the country. From the buyer's perspective, the process is extremely simple -- they can go online to Carvana's website, choose from an inventory of nearly 10,000 used cars and trucks, select the one they want, obtain financing if necessary, and buy the vehicle without ever setting foot in a dealership. The buyer schedules delivery, and Carvana then delivers the vehicle to the buyer's home or business, on a single-car carrier, as soon as the following day (depending upon the location of the vehicle they selected). Carvana also picks up the trade-in vehicle (if any), and takes it away to sell at wholesale auction (Carvana is not re-selling trade-in vehicles).

The purchased car comes with a warranty, and the buyer can return the vehicle to Carvana within seven days if they change their mind or find something about the car they didn't like.

The entire process is designed to be superior to other methods of buying a used-car by offering better selection (nearly 10,000 vehicles, with greater variety than can be found in a single local market or at a single physical dealership), better value (due to the elimination of traditional dealership costs, including the cost of real estate and the cost of paying a salesforce), and a better experience (making the purchase of a car as easy as other e-commerce purchases, and eliminating the pressure and haggling that is typically associated with buying a used car, whether from a dealership or from a private individual).

The entire online purchasing process takes about twenty minutes -- and some customers go through the process in as few as ten minutes. Additionally, by eliminating the costs associated with the traditional model, Carvana can save the buyer an average of about $1,400 versus the conventional used-car model. 

Carvana's logistical network consists of staging lots which do not have to be located in prime retail locations (they can be located "out in the woods" somewhere, in order to save on real estate costs, since customers do not come to these lots), as well as a fleet of multi-car carriers to move inventory between different staging areas around the country, and a fleet of single-car carriers to deliver vehicles within each selling region (each local market in which Carvana presently operates needing only two such single-car carriers, to take the purchased vehicles from the staging lot to the customer's home). 

Because Carvana owns their own trucks, and knows how long it takes to get a vehicle from one part of the country to another on its trucks, it can confidently tell a buyer when that buyer's vehicle will be delivered to them, and control the process to ensure that the car is delivered on time.

Carvana acquires (or "sources") their inventory at auctions, using their own proprietary algorithms based on what characteristics and features they believe will be the most marketable, and what they learn from the data they accumulate from their own business records. Unlike other buyers at auction, Carvana saves money by not sending human reps to these auctions, but instead relies on their algorithm, and then sends the acquired vehicles to centers where they will be inspected and reconditioned before being put up for sale. 

At the heart of this logistics system are these inspection and reconditioning centers, or IRCs -- a concept pioneered by CarMax and adopted by Carvana as well. At the IRCs, the vehicles acquired at auction are prepared for sale, and they are photographed from all angles, inside and out, so that they can be displayed online. Any flaws or dings are noted and listed, so that potential customers have a level of confidence and transparency that rivals what they could see in person at a dealership. 

Carvana's logistical network constitutes a barrier to entry for competitors trying to duplicate their system -- particularly the large-scale inspection and reconditioning centers that create the capacity to power a national used-car brand. It is important to recognize that the used-car market has previously been a local market. By creating the logistical backbone necessary to sell cars online nationwide, Carvana has created a scalable business -- one in which the number of potential buyers for their entire 10,000-car inventory grows with each new local region that they enter. 

Because they do not have to purchase or rent expensive real estate or pay expensive salespeople the way a traditional dealership would, it is relatively inexpensive for Carvana to open up operations in a new region -- they just need a staging lot to receive vehicles, and two single-car carriers with local customer-service personnel to deliver vehicles to their customers.

Instead of having a vehicle delivered to their door, the Carvana customer can also opt to pick up their purchased vehicle at one of Carvana's signature "vending machines," which they have built in selected markets. These machines are fully-automated (see this video) and are stocked with vehicles that have already been purchased by customers who choose to pick them up there instead of having them delivered. The image at the top of this post shows Carvana's newest such machine, a nine-story platform in Phoenix, Arizona -- their largest yet, capable of holding up to thirty-four vehicles at a time.

If you want to buy a vehicle from Carvana but live in an area where they do not yet have local deliveries, you can fly to a city with a vending machine to pick up your car and drive it home -- and Carvana will pay $200 towards the cost of your airline ticket (as well as pick you up at the airport to take you to your car, where it will be waiting inside the machine).

The vending machines are largely a marketing tool -- but they are a cost-effective form of marketing, usually built in a high-visibility location, visible from major freeways, and they help build awareness among the car-buying public of the Carvana brand.

Of course, any company involved in the auto industry will be subject to changes in market sentiment surrounding the perceived outlook for auto sales. However, investors should realize that when prices go down, Carvana is able to acquire vehicles for lower cost as well (and the opposite holds true in an up market). As we have written in other previous posts about our investment philosophy, we believe in owning a business through the market cycles, if it is a well-run business which is positioned in front of fields for future growth.

We believe that customers are becoming more comfortable with making even major purchases online, and that Carvana has created a well-conceived model to enable the online purchase of used cars -- a model which could transform the way many people buy cars. For this reason, we believe it is the type of company that investors should be looking for, and that it fits the definition of a Taylor Frigon growth company -- which is why we own it for our investors, as part of a portfolio of other companies from many different industries and sectors, in our Core Growth Strategy.

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* At the time of publication, the principals of Taylor Frigon Capital Management owned shares of CarMax (KMX) and Carvana (CVNA).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

What Would Happen If We Were All Passive Investors?

Gerry Frigon, CIO of Taylor Frigon Capital Management, wrote this article which was recently featured in Forbes, "What Would Happen If We Were All Passive Investors?".  It discusses how "...the perception that ETFs are safe, liquid, inexpensive and easy for the average investor to own is a dangerous trend that could have unforeseen consequences for the market and economy." READ MORE

Have you heard of this company? Cryoport (CYRX)

Cryoport is a logistics company specializing in solutions for the life sciences industry. The company provides a complete range of solutions for the unique needs of the nascent regenerative medicine field, including CAR-T therapy (discussed below). Cryoport currently has a market capitalization of $225 million and is headquartered in Irvine, California.

Cryoport's customers include biotech and pharmaceutical companies, medical research laboratories, universities, as well as fertility clinics involved in reproductive medicine, and veterinary companies involved in animal health. 

Of the company's revenues over the last four reported quarters, 76% came from biotech and pharma customers, 14% from customers involved in human reproductive medicine, and the remaining 10% from customers involved in the animal health industry. The company saw revenue growth in each segment over the past year, at a rate of 11% growth in revenues from the reproductive medicine segment, 34% growth in revenues from the animal health segment, and 72% growth year-over-year in revenues from biotech and pharma segment.

The astonishing growth in the biotech and pharma segment can be attributed primarily to the advent of a new paradigm in regenerative medicine, requiring patient samples and especially manufactured treatments to be shipped at temperatures below -136 degrees Celsius, much colder than the temperatures achieved with dry ice. Dry ice has a temperature of -79 degrees C, which is cold enough for the safe shipment of some types of treatments, but not for the new CAR-T and related treatments described below, which have only just begun to be approved for use with patients outside of clinical trials (the first two such treatments were approved by the FDA for patients in the US as recently as fall of 2017).

This relatively new field of regenerative medicine uses the body's own defense mechanisms, specifically the T-cells of the patient's own immune system, to fight diseases (especially cancer) which would otherwise be able to hide from the immune system. The video below gives a broad overview of the concept:

"Immunotherapy" is the term for treatments which use the patient's own immune system to fight a disease such as cancer, typically by adding information to the immune system to enable it to fight the problem that it otherwise would not be able to detect. Among the first types of immunotherapy to make it through clinical trials have been therapies using a technique known as CAR-T, which stands for "chimeric antigen receptor" in the T-cell, because these therapies use T-cells which have been altered to express a protein which otherwise would not be present, which is referred to as a chimeric antigen receptor.

In order to help the T-cells in the immune system of a patient fighting a specific type of cancer, CAR-T therapies take the T-cells from the individual patient to be treated, and then use a retrovirus to write new code to the T-cells causing them to express new antigen receptors which can defeat the "masking" capabilities described in the video above. The patient's own T-cells, modified with the chimeric antigen receptor protein, are then shipped back to the patient and introduced to the patient's own immune system, in the hope that they will enable the patient's own immune system to defeat the disease.

So far, some of the results for achieving complete remission from certain types of cancer have been extremely promising, with one CAR-T therapy for a type of leukemia which primarily affects children yielding complete remission in just over 80% of cases, versus chemotherapy alone, which achieved complete remission in less than 10% of cases. In another type of cancer afflicting primarily adults, complete remission was seen in nearly 40% of cases, versus only 8% for chemotherapy alone (some light chemotherapy is typically used on the patient prior to the re-introduction of the modified T-cells). Also, unlike other types of treatments, CAR-T therapy is typically a one-time treatment.

Logistically, these new types of regenerative medicine require the treatment (consisting of the  patient's own modified T-cells) to be kept in cryogenic suspense between the manufacturing facility (the lab where they are altered using a retrovirus to express the chimeric antigen receptor) and the hospital or other facility where they will be reintroduced to the patient. Additionally, if the sample does not stay below -136 degrees C the entire time, there is no easy way of knowing that just by looking at the sample -- it does not change color or appearance, and it does not change smell. Thus, keeping it at cryogenic temperatures, and knowing for certain that it has been kept at cryogenic temperatures the entire time, is extremely important.

It goes without saying that the logistics side of these treatments is extremely critical. Someone's life is depending on the treatment, and the effectiveness of that treatment is dependent upon keeping it cold enough the entire time until it is given to the patient. Additionally, the treatment itself tends to be very expensive, as it is a new type of therapy, it is manufactured specifically for each patient individually (using that patient's own T-cells), and it takes about eighteen days to manufacture each patient's individual treatment.

In other words, there is a lot riding on the integrity of the logistics solution in these treatments.

Cryoport's unique value proposition is a logistics solution which not only provides the containers which can keep a sample at temperatures below -150 degrees C, but which is also equipped with numerous sensors to track and record the temperature throughout the shipment, as well as to monitor other important readings which can help catch and correct problems before they lead to a "temperature excursion" which would compromise the treatment.

Cryoport designs their own cryogenic dry vapor dewars which are charged with liquid nitrogen and capable of keeping temperatures of the contents below -150 degrees C for up to ten days. Their dewars and related shipping containers (some of which are shown in the photograph at top) have certain patented features which distinguish them from others available in the logistics world.

However, the real differentiator of the Cryoport logistics solution is the ability to monitor the shipment throughout its entire journey on Cryoport software which enables both Cryoport and the customer to see where the product is at any given time, as well as to see the container's internal and external temperatures, the dewar's angle of tilt (if the dewar stays tilted too much for too long, its cryogenic temperatures will be compromised), the barometric pressure, the humidity and moisture levels present, the time and location of any "shock events" such as from accidentally dropping the container, and (using a light sensor) how many times the container is opened (which must sometimes take place if going through customs, for example).

Cryoport's software incorporates custom algorithms to help them manage the shipment very closely, and sends alerts if a shipment appears to be hung up in customs, or if conditions indicate the potential for a temperature excursion. Cryoport can then send personnel to remedy the problem, correcting the tilt, or recharging with liquid nitrogen, before cryogenic temperatures are ever compromised.

Cryoport's solution has been selected by all of the biotech and pharma companies who are active in developing immunotherapy or regenerative medicine treatments, including Novartis, MesoBlast, Atara Bio, bluebird bio, Bristol-Myers Squibb, Juno Therapeutics (now part of Celgene), and Kite (now part of Gilead). These and other companies currently have over 200 therapies in clinical trials which are using Cryoport for their logistics (214 in total).

The first two CAR-T therapies to make it through clinical trials were approved in the second half of last year: Kymriah from Novartis and Yescarta from Kite (now Gilead). Logistical requirements typically grow steadily as a therapy moves from Phase I to Phase II to Phase III of clinical trials. However, once a treatment is approved for commercial use, logistical requirements can increase significantly, as patients will then be located in many more locations, and their T-cells will have to be shipped to the pharmaceutical company's manufacturing facilities (laboratories) and the personalized treatments sent from there back to the patient's location.

In addition to the first two treatments to make it to FDA approval, there are now 26 therapies in Phase III clinical trials whose companies use Cryoport for their logistical solutions. If only 50% of these therapies make it to final FDA approval (which is an approximate estimation for therapies in Phase III trials, although there is no way to predict for certain, especially since this area of medicine is very new and there have been some treatments which have had severe problems during clinical trials and had to be discontinued) then that would suggest that Cryoport could have 12 to 13 additional therapies to service in the relatively near future.

The area of regenerative medicine is still in its infancy, and there are issues (particularly the cost of treatment) which will have to be addressed in the future. However, as noted above, there are some very promising indications that immunotherapy can become a new tool in helping the body's own immune system to fight disease, producing success rates well beyond the current treatments.

We believe that Cryoport has a logistics solution which addresses the unique needs of this exciting new field of medicine, one which is trusted by the major players in the industry, and one which is eminently scalable and can grow to meet the needs of patients and providers as the industry grows. Further, we believe there may be advantages to investing in Cryoport rather than trying to predict the clinical success of any one specific experimental treatment or any one specific biotech or pharmaceutical company participating in the regenerative medicine market.

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At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Cryoport (CYRX). At the time of publication, the principals of Taylor Frigon Capital Management did not own shares of any of the other companies mentioned (including FedEx, UPS, Novartis, or Gilead).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

What Will The "Wizards of Wall Street" Think Up Next?

image credit: ZeroHedge.

Well, that was fun!

The largest point drop in the Dow Jones Industrial Average (DJIA) in history on Monday February 5, 2018.  Of course, the financial news media had a ball reporting on this historic day, regardless of the fact that when prices go higher, the impact of a higher price movement is, of course, relative (the percentage drop was not even close to historic).  Nonetheless, even we, who have been watching market moves for decades now, were somewhat taken back by the violent swing in the DJIA when at one point we observed about a 1000 point swing in a matter of mere seconds!

We have come to virtually ignore such actions despite the awe they inspire in the moments when they are happening.  Frankly, such events have become great "educational moments" for those of us who adhere to a discipline of considering the investments we make in publicly traded companies as investments in businesses.  Yes, we mean investments!  Does anybody remember that word?  Webster's defines it as follows: the outlay of money usually for income or profit : capital outlay; also : the sum invested or the property purchased.

We suggest that this is somewhat limiting because it does not give any reference to time.  We have always viewed investment in a business as something that requires time, some length of time, maybe years, to fully reap "income or profit" with any level of certainty.  At least Webster references "property" in the definition as this can in some way be connected to time.  Does anyone invest in property for a few seconds, even days, weeks, months, quarters?  Surely, years?  Of course it is possible to invest in property, and in this instance we mean "real property", or what is commonly known as "real estate" for any amount of time, even seconds, we suppose.  But in reality, most "investors," when investing in property, think of it as "long-term," measured in years, usually, as the time frame for which they will be invested.

How does this discussion of property ownership relate to Monday's wild stock volatility?

Well, referencing back to the action of the market on Monday past, it occurs to us that investing in businesses should be considered similarly to the way people invest in property.  But this is not the case in the stock market today.  And this lack of patience is exacerbated by the financial engineering that has been propagated by the illustrious "Wizards of Wall Street," who dream up complex "financial products" which have little to nothing to do with the allocation of capital to actual businesses.

In this recent article in the Wall Street Journal, "Born To Die: Inside XIV, The Busted Volatility ETN" author Charles Forelle describes the Credit Suisse creation called "VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note".  Huh?

This derivative instrument is a way for traders to "invest" in the lack of volatility in the market.  This does not sound like anything remotely resembling investing in businesses -- more like speculation or even gambling.  Especially when you follow the path of progression for this instrument that ultimately ensured that it would race to "zero" value in the future. Forelle notes that the instrument's prospectus even noted that it would ultimately result in zero value. However, along the way, it appears to have created a level of volatility in the shares for real businesses which happen to be traded on the public markets, and can therefore be connected to the reason we witnessed such wild swings in the market on February 5, 2018.

This is just the latest culprit.  There have been plenty of others over the years.  We recall the infamous "portfolio insurance" products of the 1980s that aided in the over 20% drop in the market averages on October 19, 1987.  Forelle references that disastrous day in his article as well.

When and where does this stop?  Perhaps nowhere and never.  As long as the focus is short-term in nature, and purports to give people better mouse-traps for making money (particularly the financial industry), then this stuff will continue.  We can only plead with those that care about their asset value over time that they avoid getting caught up in such schemes.  That they recognize there is no magic to making good returns investing but disciplined, hard and tenacious due diligence in choosing companies in which to invest.  And that the best way to invest is to stick as close to "real" investing as one can.  We have preached about this, and we have delivered this as professionals over the decades.  But we are often lone voices in the morass of the financial world in making this case.

Hopefully, days like Monday February 5, 2018 and follow up articles like the one Charles Forelle has written, will teach the world a lesson!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Active vs. Passive Redux

As investment managers who have espoused the value of actively managing a portfolio to try to beat average market returns, we have consistently brought investors' attention to those arguments in favor of such an approach.  We are particularly attentive when we see others making the arguments for us.  We have referenced the topic in many posts such as this one and this one.

The active vs. passive debate can be complex for the typical investor to adequately evaluate.  Nonetheless, the bias towards passive investment as a superior strategy has grown dramatically in recent years, particularly since the 2008-9 financial crisis.    Financial media pundits have wholeheartedly embraced the passive form of investment, and both individual and institutional  investors have voted with their funds in pouring assets into passive strategies. 

Interestingly, it appears that the almost decade-long march towards more passive strategies is changing.  In a recent article in the Financial Times, "Hungry Funds Look To Switch To Active Equity", the case is made that many institutional investors are looking to reverse that trend in the coming years.  While the article suggests that more than simple equities are on the radar of these institutions, the point is clear that a change in trend may be happening.

Frankly, we believe the rush to passive over the years has become a major danger for the market and economy, in general, because of the affect such strategies can have on adequate price discovery.  Essentially, if everyone were passive, how can companies be appropriately valued?  What does such lack of reliable valuations mean for the economy?  How can capital be effectively allocated in an environment where investors can't clearly determine value, ie., where are the good companies who deserve capital allocations?

We are proud that in this desert of active managers, our equity strategies have outperformed their benchmarks over the long term.  So, apparently, we have bucked the trend.  Yet, it doesn't give us comfort that the impact of passive investing may be much more significant than the effect the phenomenon has on the active investment management business.  In the December 7th, 2017 article in   "Chief Investment Officer" magazine entitled "Back to the Future", the author Vishesh Kumar gives a general overview of markets and touches on a number of investment trends.  However, we found the key point in the article was a reference Kumar made to a Neuberger Berman research piece that discussed the type of market we have been in since the financial crisis of 2008-9 (a largely passive-dominant market) and what has driven it:

“Fueled by extraordinary global central bank intervention, equity markets have soared since their 2009 trough, leading to conditions unsupportive of traditional capitalism and active management, including high levels of correlation and low levels of dispersion,” Joseph Amato, Peter D’Onofrio, and Alessandra Rago from Neuberger Berman wrote in an October research report. “Stock correlations within the S&P 500, for example, have spiked nearly 20% since May 2009, depriving active managers of the opportunity to distinguish winners from losers through fundamental research. Post-crisis market conditions also suggest that the past decade is not an ideal timeframe over which to gauge an investment’s potential for long-term success across market cycles. We think central bank policy normalization could inspire a normalization in market dynamics."

Setting aside the change in trend back towards active management, it should concern every investor who believes in free enterprise capitalism and bases their investment decisions on finding the best companies in which to invest that recent government policies have served to stultify "traditional capitalism." It underscores what we have been saying for years about the heavy hand of government and its effects on the economy and capital formation.  Too much government starves the economy and markets from the capital it needs to expand and redirects it towards, most often, inefficient government projects (a "Bridge to Nowhere" anyone?).  Is it any wonder the number of public companies has been almost cut in half?

We really don't concern ourselves with whether or not the "trends" are in favor of active management or passive management: we will continue to seek out great businesses in which to invest capital.  However, if the trends favoring passive over active are symptomatic of damaging policies which impede the proper allocation of capital, then we all should be concerned, professional investor or not.

Disclosures: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.