The broad markets are experiencing a sharp sell-off which started yesterday (September 3, 2020) and has continued today, prompting many market observers and pundits to declare that the long-anticipated “bubble bursting” from the market’s “fevered rally” had finally arrived (to use quotations we have seen in actual market commentaries this week). One comment we saw a few days ago applied a quotation from Ludwig von Mises to the current situation, who said: “there is no means of avoiding the final collapse of a boom brought about by credit expansion.”
Those commentators who have been saying for months that the positive price action of the past several months is nothing more than a “boom brought about by credit expansion” (or, as the pundits at Zero Hedge have lately been calling it, a “gamma melt-up”) are now understandably saying that their views are being vindicated and taking a victory lap. Meanwhile, the many investors who have been hearing those same views (that this is all a “melt-up”) for several months and have been growing increasingly more nervous are suddenly thinking that those voices must have been right and the day of reckoning must have finally arrived.
We ourselves are asset managers, not market commentators, and we don’t try to predict markets and we never have. We concern ourselves with predicting businesses. We have certainly formed some opinions over the past thirty-plus years of being professional asset managers running portfolios for investors, and we don’t disagree that many names as well as the market in general have probably been due for a pullback for some time, but we don’t try to predict when those will hit or how long they will last. But we are sure of one thing: well-run businesses with truly necessary technology or other innovative products and services such as the companies we own for our investors are not the result of any “gamma melt-up” or “excessive credit expansion.”
For example, just this week we were reviewing the technology of one of our microcap holdings, Transphorm, Inc. (TGAN), a pioneer in the design and manufacture of Gallium Nitride (GaN) power conversion products and the only company right now capable of producing 900V GaN transistors for commercialization. That technology is real technology: it is not the product of financial engineers on Wall Street or at the Fed, but rather of real engineers in Goleta, California led by some of the most respected names in semiconductor materials science.
Another company we own for clients is Compugen (CGEN), which uses scientific modeling and computing power to predict and discover new target pathways for the development of oncology treatments. Results of clinical trials thus far suggest that some of their discoveries are showing promise for patients with recalcitrant forms of cancer which have resisted all previous forms of treatment.
These kinds of real innovation and real industry are not the product of “credit expansion” or “market melt-ups.” We don’t deny the possibility that melt-ups have taken place and that those melt-ups will eventually have to come out of the market, and we know from experience that there will sometimes be extreme volatility (including to the negative side) when that takes place – and that this volatility will impact our companies along with the rest of the market. But our approach is to put our money into companies where we have a good idea that in five years the world will be using more of their product, not less. And we sometimes use sell-off situations to buy more of those kinds of companies, adding to existing positions or adding new positions in companies we have already researched and whose story we already like. We think too many investment professionals and market pundits have lost sight of that perspective on investing.
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