First Quarter 2021 (January - March)

As the first quarter of 2021 comes to an end, the government stimulus continues.  The federal government recently passed a $1.9 trillion stimulus package, and the Biden administration just announced a $2 trillion infrastructure investment program – with an additional $1 trillion rumored to be on the way.  In addition, the Federal Reserve remains committed to keeping short-term interest rates near 0% for an extended period of time.  This stimulus coupled with the rollout of the COVID vaccines is allowing the economy to reopen at an increasing rate.

As we have indicated in past letters, we feel that better economic news combined with massive amounts of government stimulus will cause interest rates to move higher albeit from extreme historical lows.  Since the beginning of the year, we have seen interest rates move up, but not enough for us to invest significant amounts into the bond market which we view as very risky at this point in the economic cycle.  Therefore, we continue to hold larger amounts of cash in your accounts than usual.  We will look to deploy more of the cash earmarked for fixed income investments if interest rates continue to move higher as we expect.

The stock market continues to hang in a delicate balance.  On one hand, the economic outlook is extremely positive as we recover from the COVID pandemic and return to normal activity.  Corporate earnings should be strong throughout the year which would support higher stock prices.  On the other hand, the stock market has done extremely well since the pandemic lows, and many stock prices reflect this positive outlook.  We will continue to actively monitor our stock holdings – adding where we see opportunity, but also taking some profits in holdings where we feel future gains are more limited.

If you have been following the financial news recently, you have probably heard about hedge fund Melvin Capital losing a massive amount of money in a company called Gamestop.  More recently, a family office called Archegos caused a large selloff in several media and Chinese stocks.  Beyond the losses directly incurred by Archegos, Nomura Securities and Credit Suisse have warned of significant losses, possibly in the billions of dollars, due to their exposure to Archegos.  Unfortunately, stories like these can be found in many of the past bull markets.

We intend to continue with the same investment philosophy that has treated our clients well for 40 years.

All investing carries risk, but the examples above stand out because they can be confusing and frightening to the average investor.  Massive losses like those Melvin Capital and others suffered typically occur as the result of two risky strategies:  making very large bets on a small number of securities and borrowing massive amounts of money to make those bets.  While concentrating your investments in a small number of securities is not inherently bad, it can have dire consequences when those investments are made with borrowed funds, also known as “margin.”  When you use margin, you can boost your returns if you are correct, but your losses are amplified if you are wrong.  Some of the funds mentioned above borrow 5 to 10 times the amount of money they have and, when things move against them, massive losses result.

At McRae Capital, we do not go on margin when we invest for our clients.  You own your stocks or bonds, 100% with your own money.  We also spread our investments over a variety of stocks, in a variety of different industries.  We focus on the fundamental business of the stocks we own.  We look for companies which have a history of profitability and growth and compound their returns over time.  We look for companies that have durable business models, produce profits and cash flows over the long-term, reinvest prudently in their companies and have strong management teams with proven track records and are not heavily in debt.

As prices of assets increase, it can be tempting to stray from your investment philosophy for fear of missing out.  However, we intend to continue with the same investment philosophy that has treated our clients well for 40 years.  It is our belief that remaining disciplined and true to a sound, long-term investment strategy will assist in not getting caught up in these “financial accidents”.

We hope this letter finds you and your family safe and healthy.  If you have any questions or wish to discuss your portfolio in more detail, please do not hesitate to call us.

Connect your finances to what matters most

This article can provide only a general understanding of sometimes difficult financial concepts. For for a more thorough explanation, or if you have questions about your own portfolio, please feel free to reach out to us here at McRae at (973) 387-1080.