Steve Romick's Q3 Commentary

We would prefer that some of the lunacy we see out there translate into fear as that generally causes investors to sell assets without regard to value. Many of you would probably agree that people nowadays are anxious about both the economy and federal governance. And yet, the Federal Reserve’s QE (Quantitative Easing) policies continue to support asset prices, despite slower economic growth and myriad other uncertainties.

This can be seen in the returns of more speculative stocks. As a proxy for shares of that ilk, we turn to the most heavily shorted companies at the start of 2013. The top 100 most-heavily shorted stocks in the Russell 3000 returned 44.6% for the nine months ended September 30, dwarfing the index’s return of 19.52%.

With a reluctant nod to obliging central banks, the stock market seems to be the only game in town so equities continue their unabated rally, regardless of quality. It seems a lot of people share CNBC’s Jim Cramer’s view that, “We all know it’s going to end badly, but in the meantime we can make some money.” If you believe this trend will continue, you will most likely be better served having your capital with a manager who is more fully invested. As Morningstar analyst Dan Culloton observed in his most recent commentary about Crescent, “The past 10 years included two bear markets and were fraught with volatility, which plays to the fund’s strengths.” Absent volatility, we are like an automobile whose gas gauge is nearing empty. That doesn’t mean we are stuck in idle. We continue to read, speak to executives, visit companies, and then read some more. We’d like nothing more than to shift to a higher gear and increase our exposure, but given the lack of securities offering a genuine margin of safety, we’re content to stay out of the fast lane for now.

In the meantime, we’ve taken advantage of the kindness of others who seem to have plenty of petrol and have bid up many of our investments to a point where we find the risk/reward unattractive. To remain intellectually honest and clinically dispassionate, we have found ourselves with little alternative but to make some sales.