Volatility has returned. Nick has lots of thoughts to share in his note below, but this is the highlights from my vantage point:

1. Inflation is here and we were uncannily positioned to reap the rewards.

2. Interest rates have soared to the detriment of those that need money to sustain ridiculously high valuations and growth.

3. We love volatility and times like this! We continue to outperform the market so far and remind ourselves that this is when we sew the seeds for future returns.

Let me first begin by offering that the humanity of the current developments in Ukraine are not lost on us. While we have been deeply focused on portfolios and the risks and opportunities that we face due to the current conflict, we are saddened for the people of Ukraine and that we find ourselves in this situation. As a global community, I wish we could learn from our past mistakes. My youngest son asked me this morning "how does killing each other solve problems?" To some questions, I do not know the answers.

It has been quite the past 12 months on all fronts. On the personal front, this time last year my family and I were finishing up our home remodel, living in a tiny rental, and helping our kids through online, remote learning. The pandemic had slowed the economy but was starting to come back. Nick and I would Zoom each other discussing the insanely high valuations on technology companies while betting the farm that inflation would impact more than just lumber and construction costs. As we begin 2022…

This time last year, I was enjoying a few bluebird days at Bandon Dunes Golf Resort with some dear friends. Little did I realize what would soon ensue. The past 12 months have brought us a global pandemic, wildfires throughout the west, mass unemployment, an upended business environment, huge government financial intervention, social unrest, and a quickly changing landscape on nearly all fronts from healthcare to education to shopping.

Election day is finally here. And regardless of outcome, today feels like one of the final chapters in what has proven to be one of the crazier years in modern history. To say we are living through strange times is a gross understatement. Wildfires throughout the west. Global pandemic. Mass unemployment and an upended business environment. Huge government financial intervention. Social unrest. Quickly changing landscape on nearly all fronts from healthcare to education to shopping. 2020 has at times been exhausting, polarizing and can feel like we have lost control.

Investing is very similar to golf: both are ultimately a test of patience. The greats practice their craft religiously. And the best are defined not by how good their best shots are, but by how good their bad shots were. The game is ultimately played over 18 holes and rewards consistency and not heroics. Here we see Jason’s oldest son, Christopher, teeing off…and learning that a round of golf is more than just one shot.

We have written extensively about risk, volatility, and valuations over the last several years. From our perspective, it’s important to continually talk about the fundamental values that drive our decision making.

Along those lines, we wanted to share a bit more about the process of evaluating a company and the decision to invest. This quarter, our portfolio manager Nick Fisher walks through his in-depth analysis of Peyto Exploration and Development and why he recently decided to add it to portfolios. Meanwhile, Alex Bridgeman, our newest employee, highlights why a modest allocation to a company like Peyto is a good idea that not every investor is able to make.

2018 had a little bit of everything. The beginning of the year got off to a roaring start with the fresh excitement of the new tax law and corporate tax cuts. But the party was short lived and concern creeped in around both trade and monetary policy. By the end of the year, 90% of global assets had a negative return.

It used to be so simple and straight-forward: republicans believed in free trade; Trump and the Clintons were friends; my car took regular gasoline; and the market always went up.

Now the republicans sound like democrats. The democrats sound like republicans. The Clintons won’t ever be invited to another Trump wedding. My next car will plug into the wall. And evidently markets go up AND down. Next thing you know, dogs and cats will be living together.

The first three months of the year have reminded everyone that volatility is not just a myth: it actually exists. January opened the year on a tear, only to erase nearly all the gains in February. March saw the S&P 500 turn negative on the year.

This quarter, Nick goes wildlife tracking. In addition to searching for the proverbial lion in the grass, he’s noticed some subtleties in the investment environment that have shown themselves in the evolution of our portfolios. We are feeling great about our current stance and highlight how a conventional 60/40 portfolio with US growth stocks and interest-rate sensitive bonds is actually incredibly risky.

2017 was a great year for our portfolios. And while the rising tide should hopefully raise all boats, we feel exceptionally proud of what we owned last year and where returns came from.

But change is on the horizon and an evolution is beginning in the portfolio that we are both excited about and preparing for. Jeremy Grantham, the co-founder of GMO, highlights this change that Nick will dive into much deeper in his report:

“Be as brave as you can on the EM (emerging markets) front. Be willing to cash in some career risk units. Bravery counts for so much more when there are very few good or even decent alternatives.”

We are preparing our portfolios to respond well whether we continue to muddle along or see inflation rise quicker than most are forecasting.

Often times in this business, firms and individuals spend an incredible amount of time and resources trying to sell and market to prospects. And completely overlooked is the actual research: the foundation of a thesis and the guideposts to build a portfolio. This isn’t to say that nobody does the heavy lifting in this industry, but more and more often, we see "really smart people” with “complex portfolios” who, at the end of the day, are simply passive investing. In other words, they are tracking an index. Whether it booms or busts. Ignoring the future prospects.