Quarterly Client Letter: Q2 2024

Quarterly Client Letter: Q2 2024

When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.

-Warren Buffett

We were pleased to see that the five most profitable companies of the Fortune 500, based on profits generated in 2023, were, in descending order, Apple, Berkshire Hathaway, Alphabet, Microsoft and JP Morgan Chase. We initiated positions in all of these in our Model Portfolio* as recently as three years ago, and in a couple of cases more than fifteen years ago, and they have thrived ever since. As Buffett said, they have enabled us to relax about, if not entirely forget, mediocre decisions and one outright mistake. The mistake, VF Corp, was generated by yours truly after watching the stock drop from 100 to 26. At that point we bought it, convinced that the maker of North Face outdoor wear and Vans footwear had reached a bargain price and had become a desirable investment. However, it continued to drop relentlessly until, at $13 per share, we decided to cut our losses and eliminate the position from our Model. VF Corp demonstrated once again that you learn the most about a company when it drops by 50% from your original purchase price. But it does greatly ease the pain of a mistake to own a number of wonderful businesses that continue to perform over the long term.

Another strong boost has been the returns we have been accruing in our bond portfolios. After more than a decade of near zero interest rates it is very positive to be able to count on our safe money pulling its weight once again. Much of the credit for this goes to Jay Powell and his Federal Reserve, as he has so far resisted the temptation to loosen the reins on the economy by lowering interest rates. The Fed remains adamant that it will not allow inflation to creep back beyond its stated goal of 2%. Powell, with his careful and flexible leadership, is trusted by investors and economists alike, who are assuming there will be a soft landing with only slight odds of a recession.

Jamie Dimon, the head of JP Morgan Chase, is not so sanguine, however, and for the past couple of years has been predicting a far more difficult scenario. He reflected recently on the invasion of Ukraine, the wretched conflagrations in the Middle East, an economic tug-of-war with China and political polarization here at home. In his annual report Dimon wrote, “we may be entering one of the most treacherous geopolitical eras since World War II.” He does not rule out the possibility of stagflation in the U.S. as a result of persistent inflationary pressures that could last for many years.

It remains important to us at such times to continue focusing on what we can control rather than trying to predict what is outside of our sphere of influence. It is natural to be influenced by the headlines in print, on TV and online, which focus heavily on the negative, since that is what sells. But it is vital to remember that the managements of the great companies we invest in continue to be hard at work doing what we as shareholders have counted on them to do: concentrate on growing earnings, improving balance sheets, and making regular and even increasing dividend payments.

Much has been written about artificial intelligence (AI) recently, and it has been a regular topic of conversation in our weekly Investment Committee meetings. Speculation about the potential for AI to change everything in the near future reminds me of the early days of the Internet. There was a huge amount of money to be made by some but by no means all Internet-related businesses, but we did not know how much influence it would eventually have over the lives of nearly everyone. Today, the chief executives of our five great companies mentioned above are all aware that AI has the potential, as Jamie Dimon says, to augment virtually every job while reducing or eliminating many job categories entirely, as well as creating others at the same time. This also involves spending a large amount of money hiring machine learning experts and data scientists and sometimes making direct investments in such enterprises as OpenAI and Snowflake. We are believers that the companies in our Model such as JP Morgan Chase, Apple, Alphabet/Google and Microsoft will participate in, and hopefully profit from, the artificial intelligence revolution in ways that even their top executives may not fully anticipate at present.

We appreciate the trust you have placed in us and will continue to work hard to earn it. Please consider passing our contact information to anyone you know who needs help in building and maintaining financial security. We are happy to share our perspective with them and to explore if there would be a good fit for working together.

 

Best regards,

Noel F. Bennett

 

*The Model Portfolio is not a real cash portfolio. It represents the core direction of our portfolio management strategies. Individual client portfolios are managed in accordance with the clients’ specific objectives and constraints. Historical information is available upon request.

Advisory Services offered through Peak Asset Management, LLC, an SEC registered investment advisor. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This content is developed from sources believed to be providing accurate information and may have been developed and produced by a third party to provide information on a topic that may be of interest. This third party is not affiliated with Peak Asset Management.  It is not our intention to state or imply in any manner that past results are an indication of future performance. Copyright © 2024 Peak Asset Management

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