In the 4th quarter, the S&P 500 returned 2.4%, the Aggregate Bond Index returned -2.6%, and our Compound Kings strategy returned 6.2%
Goodbye Compound Kings
On Monday, we closed the fund and are in the process of returning proceeds to investors. Managing the fund was a wonderful outlet for my curiosities and competitive spirits. But it’s been a limiting activity for building a real business.
Labor Intensity
On most measures, the US economy looks good. But it doesn’t feel good. That’s because our labor supply isn’t growing. Historically, labor supply growth has hit 0% only during periods of financial panic. Even if the US economy keeps growing, living will keep feeling tight.
One of our requirements for equity investment is businesses must generate at least $400,000 in annual gross profit per full-time employee. A tight labor market will require us to keep revising this requirement higher.
Boring ‘ole Bonds
In the nearly six hundred months since 1976, the aggregate bond index (“AGG”) has outperformed the S&P 500 41% of the time. In last two years, the AGG has outperformed just 31% of the time.
Most bonds today promise a 4-5% return, across any time ranging from 0 to 40 years. The hardest part about bond investing isn’t picking the rate. It’s in choosing how long you’re willing to lend the money for.
Most of the time, short term loans earn a lower rate than long term loans. Sensibly, more time means more risk. Lately, this hasn’t been the case. Right now, you can lend to the US government at the same rate for 2 years as you can for 20:
Promising a rate of 4.3%, 2-year treasuries are the best risk-reward investment we see across the entire universe of securities at present. If we lend for longer, we’d like to earn more premium for doing so.
Social Impact
Donating to existing higher education institutions is one of the worst ways to expand access to education. This quarter, we again supported Khan Academy.
Robert
Disclaimer
This letter is for educational purposes only. It is not a recommendation to invest in any particular security or strategy, since anything mentioned herein may be unsuitable for some investors. Speak with your financial adviser before investing. Upholdings cannot guarantee investment results. All investing involves risk, including the complete loss of invested principal.