Inside Broyhill – July 2017

Earlier this year, we launched a new publication titled Inside Broyhill to pass along news and information related to portfolio holdings and other areas of interest. In contrast to our investor letters which are published every six months (give or take), Inside Broyhill will be shared more frequently for investors who enjoy following the companies we own and perusing the information that shapes our views. Given the feedback we’ve received from investors to date, we decided to begin disseminating this piece more broadly.

Cash is King: Part I

With interest rates at historical lows and stock prices at historical highs, we’ve allowed cash to accumulate across portfolios. For some, this is counterintuitive. Why keep a large chunk of the portfolio in an asset earning next-to-nothing? Historically, bonds provided adequate diversification from equity risk. But in today’s low-return world, downside risk to bonds may be significant and excess returns over cash are debatable. Due to lower volatility, lower correlation and similar long-term expected returns, we think cash may provide a safer cushion in the current market environment. Check out this article from Reuters to learn more.

Cash is King: Part II

Something is better than nothing. And as noted above, cash earns next to nothing today. So, to get something from nothing, we’ve parked a portion of our cash cushion in high-quality individual bonds to earn slightly more than cash. To be clear, we have little interest in taking credit or interest rate risk in this portion of the portfolio. We’ve laddered maturities out a year or two to ensure we have liquidity when we need it. In this article by the Wall Street Journal, the author spoils our “fun” and shares this unexciting but useful tool we’ve taken advantage of in recent years. Note: we are not suggesting you go out and buy short-term bond funds or ETFs. We are buying individual credits where we are (near) certain of receiving our principal back.

Today’s Only Cheap Asset: Insurance

Buying put options is like buying insurance. It can be a good idea if you don’t pay too much for it. Most of the time, in investing and in life, we don’t “need” insurance. But occasionally, it’s so cheap, it’s worth the upfront cost. Insurance is cheap when buyers are complacent. This piece explains that when complacency is high, stocks typically see big corrections. Why, you might ask, is complacency so high? One reason is that volatility has seemingly vanished from financial markets. The Financial Times and Bloomberg help explain the factors that have (temporarily) compressed volatility. Bottom line: low volatility means cheap insurance. If you’re still curious, check out this and this to better understand why hedges help us sleep better at night.