Dock Street’s Letters

Sometimes customers end up choosing both competitors Most of the time, when businesses compete for customers, one business gets the sale and the other doesn’t. Buying diapers exemplifies this typical transaction. I either buy Huggies or Pampers. I...

It’s not magic or an accident Given the mostly terrible news reported in 2023, add in the 2022 bear market and most investors have been in a bad mood since 2021. Here’s a quick sample: The war in Ukraine continues, resulting in a slow but steady...

Investment returns are measured in percentages, but dollars make an impact On a recent earnings call, one of our companies’ CEOs said “we bank dollars, not percentages.” Often, financial numbers like margin and rates of growth are shown as...

How we find great businesses Our portfolios are stuffed with companies that possess durable advantages over those who would compete for their customers. We identify these businesses in two steps: 1) we filter for extraordinary profit margins and...

There is now an alternative to stocks It’s back to normal for the 10 year Treasury Bond, as the chart below illustrates. In fact, with the bond yielding just over 4%, it is trading at its average yield since World War II. We think this approximates...

Quality Investing and Advice without Compromises All customers want great service & reasonable prices. But the financial services industry has typically only offered one of these options at a time. If you want strong financial returns, you’re...

Without crashing the economy Last year the major financial story was stubbornly high inflation. In 2023, we’ve seen continual improvements as inflation gradually returns to more normal levels (as we anticipated last November). The most common...

It’s easier when you already have customers There’s tremendous excitement about the possibilities for AI in business. One of the most common questions I hear is “what’s the next great business that will get created because of AI?” The direct answer...

Nvidia drives a new wave of infrastructure investment.
When we first bought Nvidia in 2017, the catalyst was that large companies started buying Nvidia Graphics Processing Units (GPUs) for processing data for artificial intelligence (AI) calculations (see more here in our 2017 letter). Since the company’s products had traditionally been used for video games…

Riding out the bumps and valleys
What’s the “cost” of investing in stocks as a passive partner in a business? Passive, in the sense that we can buy and own a small percentage of large businesses, while the employees work and create for our benefit.

Using Artificial Intelligence to Get Things Done
There’s a lot of hype around Artificial Intelligence, particularly lately with OpenAI’s ChatGPT. Whenever there’s hype, there’s often a backlash. The main criticisms I’ve heard are either “it gets things wrong, so it’s useless” or “robots will take everyone’s jobs and kill us all!”

They benefit long-term owners of great businesses
Everyone loves dividends. Buybacks don’t get the same affection—but they should. This is probably because they’re a bit misunderstood.

Stocks go up 3 years out of every 4
The majority of people who could invest in stocks don’t do it. They perceive that the risks are too high and they settle for lower returns that promise a smoother ride.

What do Banks, Custodians, and Brokers actually do?
The last few weeks have brought heightened scrutiny of the companies we trust with our money. Each time there are high profile bank failures – today, 2008, the S&L crisis – savers, investors, and regulators are forced to ask questions about how our system is organized, regulated, and insured. 

Two extremes don’t equal balance
The Federal Reserve has been implementing emergency policies for over a decade now. In plain terms, they kept short term interest rates extremely low and made it easy to borrow. 

They often have
Last week Evan McGoff made the reasonable argument that a recession is unlikely when so many economic indicators trend higher, not lower. The bearish (pessimistic) view is that these same indicators will result in higher inflation readings and the Federal Reserve will keep raising rates until there’s a recession.

Ed Yardeni’s “No Landing” Scenario
Over the last several months, we’ve written a few letters about the resilience of the economy, despite the many concerns about a recession – “No Recession in Discretionary Spending” and “Recession Watch”.

Big tech gets leaner
For the first time in years the big news out of Silicon Valley concerns large scale layoffs. Layoffs normally result from falling sales or profits, but that’s not currently the case in most large technology companies. Sales are up and so are profits, just not as much as they enjoyed in the last few years.

The most well advertised recession in history
The consensus in the stock market appears to be that a recession in 2023 is a near certainty. We agree, but will it be an economy-wide recession or one that is confined to certain sectors of the economy, such as housing?

Tech is always in its own world
Several large tech companies have been making headlines about layoffs. They’ve used lots of scary language about recessions and upcoming weakness.

A lot can happen in a week, but is it important?
Last week offered an extreme example of the futility in trying to trade on headlines. At the start of the week, the election dominated headlines, and a red wave was assumed to be incoming…

Pictures tell the story best
Inflation is the number one topic on the minds of nearly everyone right now. 

Being greedy when others are fearful
Our timing might not be ideal, but we do believe that the fall of 2022 will turn out to have been a very good time to put cash into the stock market. Recommending stocks at a time like this is hardly revolutionary. In October of 2008 Warren Buffett wrote a New York Times op-ed entitled, “Buy American, I Am”…

What does history tell us?
We don’t know when the current bear market will end, but we do know that it will end. When it does, the stock market will recover, so the question then becomes, how fast and to what levels?

Investing for the long-term isn’t always exciting
When talking to a client about venture capital investment, and the excitement of being involved in the startup world, I was reminded of a story from Jon Krakauer’s book Eiger Dreams. 

This is not our first bear market and it won’t be our last
The Federal Reserve and the stock market have concluded that the only way to bring inflation down is to engineer a recession. With 20-20 hindsight it is clear that the Fed screwed up in 2021 by failing to begin a measured increase in interest rates back to pre-Pandemic levels.

Despite increasing global concerns
Inflation erodes consumers’ purchasing power. But the most recent data shows that consumers are still purchasing discretionary items that they would choose to cut if they were feeling constrained.  

There is no alternative country
The world is a mess right now and the US economy is not escaping pain free. But compared with the rest of the world, the USA looks pretty good. 

Time is on the side of the patient investor
The portfolio management system we began using two years ago yields some interesting information about client accounts. Below are two charts that illustrate why investing for the long-term can be rewarding. More importantly, the charts show that accepting the risks of investing is necessary if clients are to achieve financial security. 

So far, so good
Looking back it is clear that several important turning points were reached in June: inflation peaked, interest rates peaked, and the stock market (probably) hit bottom for this cycle.

Cutting out the middleman
We read a lot. But we’re selective about what we read. Starting about 7 years ago, I cut down my news consumption and started reading more from primary sources. For example, instead of reading an article about the GDP report—read the actual GDP report.

Why we start with the financials
Everyone has heard of Twitter. Few people have heard of Cadence Design Systems. You could call both companies “Technology companies” and their annual revenue is comparable (Twitter’s revenue is about 5.2B, Cadence’s is about 3.3B). But that’s where the similarities end. 

Cryptocurrencies collapse
Bear markets reveal economic mistakes. In 2000 the mistake was investing too early in the Internet, resulting in the Dot-Com bust. In 2008 it was loaning too much money on easy terms to home buyers. This time the mistake was leaving interest rates too low for too long.

Another asset class suffering permanent value destruction
In another note we introduced the idea of permanent value destruction vs the temporary variety. Hundreds of Cryptocurrencies and recent IPOs without earnings were examples. But these markets are relatively small when compared with the bond market.

Demographics as Destiny
Nobody is born knowing anything. As a consequence, each generation tends to learn the same lessons as the prior ones, but under some different circumstances. 

Consumers aren’t hunkering down despite higher costs
Nobody has to go to a restaurant. It’s a choice. When times are tough and you need to be more cautious with spending, going to restaurants is a simple thing to cut out of your budget. 

Business continues as usual
The beginning of 2022 has been a tough start for the market—and it’s not even half over. There’s a laundry list of things to worry about, and prognosticators are tripping over themselves to warn you about how it’s all about to get much worse. 

Cash profits are the tell
In every bear market the value of some businesses are destroyed forever. (And yes, this is a bear market.) In the 2000-2002 bear, it was the Dot-Com stocks without business profits that never recovered. In 2008, it was the financial stocks that had “pretend profits”— Citibank fell from $550 to $10, and is now trading at $45.

So far this is a “normal” year for stocks, even though it doesn’t feel that way
The chart below helps us put this year’s nasty stock market in perspective. The green dots mark the gain or loss for the full year, while the gray bars indicate the largest loss during that year. 

Getting through to the other side of the valley
This is the third time in four years that the market has fallen this hard: the fall of 2018, the winter of 2020 and now this. Do those past corrections tell us anything about what to expect this time?

History can teach us something about investing
The war in Ukraine has revealed a truth about history largely ignored for a couple of generations—individuals matter and individuals make history. Vladimir Putin and Volodymyr Zelensky prove the point.

War divides the world, threatening prosperity
The invasion of Ukraine is a human catastrophe and threatens to be a serious problem for the world economy. The price of crude oil is up 60% this year and might be on its way to a record above $150. More than one recession has been associated with high oil prices, so we need to rethink some of our assumptions about the economic environment. 

Tom Joined Dock Street in 1995—the best partner anyone could ask for
When Dock Street really came together in the mid 1990’s, the Greenwich office was filled with highly experienced investors. So on days like today I often ask myself what would Stillman Rockefeller, Jack Howell, and Jon Old be doing with their stock portfolios? Not to mention Tom Hodgman.

No, it’s better, because the odds are in your favor
After watching Super Bowl commercials this weekend, it’s pretty clear that there’s a lot of gambling going on. Several commercials highlighted apps that allow you to trade crypto-currencies & stocks in the same app. And several others were about apps that let you bet on sports. 

A correction can take the good with the bad

January has been a nasty month for stock investors, but it should not have come as a surprise. Charlie Bilello says it well

Not all growth companies deserve the name
Along with much of the stock market, Dock Street portfolios have suffered in the last week as active traders focus on the threat of rising interest rates.

The signal in a sea of noise
In September we wrote about how despite all the bad news, estimates for future earnings continued to rise. Now that we’re rounding out 2021 and there’s even more bad news, what are the prospects for 2022 and beyond? 

Investment advice from the wrong people
Toward the end of every bull market there are signs of speculation—as opposed to investing. Earlier this week Evan McGoff was treated to several minutes of cryptocurrency advice from a gig driver, the modern version of a taxi driver.

Fewer stocks are pushing the market higher
Most of the stocks we own in portfolios happen to be larger companies. This is not a criterion for investment at Dock Street, but it is the result of 1) holding great businesses for many years as they get bigger, and 2) finding more of the financial advantages we value in larger companies.

Stock prices anticipate future corporate earnings
The stock market has had a near vertical ascent for about 18 months. This has surprised many people as there has been no shortage of things to fret about. But the stock market is a forward looking indicator, and it correctly anticipated a sharp recovery in corporate profits.

Trimming expectations in the short-term
The chart below illustrates the 18% gain for the stock market so far this year. At this rate the market will be up over 30% in 2021—an outcome we find unlikely.

The stock market saw this coming
Another historic chart, but this time it’s good news. Business sales in April were up 40% from the Pandemic year before. A normal good year would show a 15% gain in sales.

Defending an argument, or trying to learn? 
Everyone’s talking about inflation these days. That makes sense—prices for all kinds of things are increasing at higher rates than we’ve seen in years. 

Investment opportunity, disrupter, fad?
Twelve years ago, in the depths of the financial crisis, a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published under a pseudonym.

How to protect our investments from inflation
A couple of weeks ago we discussed the current economy and concluded that we are in the midst of a massive boom in activity. But is the economy running too hot? Is this a real economic expansion or one only fueled by massive cash creation by the Federal government?

Sharing some of what we read
We like communicating our thoughts in writing. But sometimes someone else says it so well that it’s better to just share what they wrote. 

But Owning Multinationals
Nearly every business we own is based in the United States. But that doesn’t mean these companies don’t benefit from the growing global middle class. To the contrary, many of the larger US companies are “multinationals” that do a majority of their sales outside the country. 

And once you found them, don’t let go
There are two fundamental ideas that guide our process at Dock Street

One year ago the market crashed—who sold and who didn’t?
Simply buying a broadly based stock index rather than a portfolio of individual stocks is a rational plan. But there’s a catch.

Why not just buy what’s working?
Since early February some of the stocks in Dock Street portfolios have fallen in price, while other sectors of the market have reached new highs. Given the outsized gains in our portfolios in 2020 this shouldn’t come as a surprise, but when markets move in a hurry, it’s always a little surprising.

The latest pullback in stocks
In the last few days stock prices have fallen modestly, with most of the damage in the types of stocks we own in our portfolios. The reason for this might be lurking in the following two charts. 

Cases are down and vaccinations are up
We present the following charts without much comment. Never before have we seen an event where the same facts can be interpreted in so many different ways. So rather than interpret the facts, these charts attempt to show what is happening.

A different kind of recession and recovery
The strength of the US economy (and stock market) remains a mystery to many given the high levels of unemployment and remaining lockdowns in several large states.

A year full of worries, and great returns for stock investors
Last June we sent out an email entitled: “No More Lockdowns” (attached). Six months later it’s obvious that our prediction was wrong. In spite of that Dock Street clients enjoyed one of the best years in decades.

Keeping an eye on our most successful investments
A couple of weeks ago we promised an answer to the following question: “Is the technology rally for real or is this a replay of the DotCom bust of 20 years ago?” Since asking that question, tech stocks have fallen into a quick correction. Is this September weakness the end for tech stocks?

Generating income in a world of low interest rates
The headline above asks a reasonable question, but not one with a satisfying answer. In today’s world the answer is “Next to nothing.”

Taking reasonable risks
Over the last year or more, the stock market has split into two types of businesses: those benefiting from the Internet and those threatened by it. Our headline is another way of saying the same thing.

The bull market will continue, but prices are moving up faster than we’d like
As we indicated last week, there is no sign of a recession in the US economy, which is good news for the stock market. This week we take a quick tour of what we see in the stock market and make an educated guess at what we might expect in the next six to twelve months.

A quick survey of the US economy
We attempt to track the US economy since a recession is the most common cause of an equity bear market–something we’d like to avoid if possible. Within the US economy we are focused on consumers, both as job holders and spenders. If jobs and spending hold up, a recession is unlikely.

Don’t buy it
Whenever stock prices move to the downside you’re going to hear about it. The newspapers and the TV news channels trip all over themselves to tell you what’s wrong and why it’s so very bad.

The odds favor new highs in stocks prices
As we indicated earlier in the week, there is no sign of a recession in the US economy, which is good news for the stock market. Below we take a quick tour of what we see in the market itself and make a guess at what we might expect in the next six to twelve months.

A quick survey of the US economy
It’s been ten years since the last recession in the United States so maybe that’s the reason there’s so much speculation about the next one. But at this point there’s no sign of one in the numbers—especially those concerning jobs and consumer spending.

There’s no such thing
Everyone wants the following—a stock that only goes up and never goes down. We all know that’s a fantasy, but many investors still expect something like that to happen. 

Which is more important? The business or the price you pay for it?
As we have argued before, just about any investment style can be successful, as long at the investor sticks with only one approach. “Style Drift” is one of the deadly investment sins.

What we expect in 2019
Technically the Panic of 2018 qualifies as a “correction” rather than a “bear market” because the S&P 500 fell “only” 19.8% instead of 20%. For those of us with real money on the line, the fourth quarter of 2018 was nasty no matter what we call it.

Are crypto investors being forced to sell?
When you’re going broke you sell wonderful things. You have no choice—or rather you only have a set of bad choices. 

Recessions and falling corporate earnings kill bull markets
This week the current bull market will become the longest on record. But instead of celebration, this event will most likely trigger multiple headlines warning of a stock market top. Investors should resist the urge to sell this market.

And for the right reasons
Technology stocks make up about 25% of the S&P 500, making it the market’s largest sector. The last time tech was so big was about 20 years ago, during the roaring dot-com mania. 

Dealing with the apparent chaos of the stock market
Stock investing is an intensely psychological game. Short-term price movements create stress and a constant desire to understand why the market did what it did today. For most people the stress of watching the value of a portfolio fluctuate daily or hourly is simply too high a price to pay for the opportunity offered to stock investors.

Therapy for frayed nerves
When the market goes nutty, as it has since last week, we are reminded of what Warren Buffett wrote in early 1987. His point was that the stock market could be thought of as a manic/depressive institution. Not that much has changed since 1987, except that we keep inventing ways of speeding up the transition between manic and depressive behaviors.

And why should we care
Our best new investment for 2017 is Nvidia. Their traditional business is designing and producing graphics processing units (GPU), used for rendering the highly realistic images used in video games. 

Rational competitors can innovate together
Last winter we wrote about our investments in Visa and Mastercard. Today we revisit the topic of owning two dominant companies in the same type of business.

Neither one
Warren Buffett is famous for many reasons, but one stands out as we learn of his massive buying of Apple stock late last year . He’s always said he would avoid technology companies since the industry is so competitive. He now owns over $7 billion of Apple stock making it the 8th largest holding for Berkshire Hathaway—so what gives?

What’s better than a monopoly?
For more than three years, we’ve owned the stocks of Visa and Mastercard, the two dominant payment processors in the credit card industry. The chart below shows how they’ve performed over the last two years, both doubling the market returns for that stretch.

Staying home makes the most sense for US investors
World trade figures point to weakness worldwide. And it’s not just oil and other commodities driving the numbers down—China’s export volume is down in the last year and so is Korea’s. Non-energy imports into the US are falling. Now the Federal Reserve is focused on international weakness instead of just attempting to manage the US economy. How does the world look?

Technology changes everything
For months now we’ve focused our attention on the problems faced by stock investors, but problems like these create opportunities. If stocks are sold off, as we expect, excellent companies will be offered at reasonable prices, a combination that happens rarely.

How bad are bear markets and what we might expect this time
In spite of recent market strength, the evidence that we entered a bear market in 2015 continues to pile up. We thought it might be helpful to take a look at the past for clues about what to expect this time.

Cash is flowing out of Emerging Markets and China leads the way
The following collection of charts illustrates the dramatic change in the flow of funds in and out of Emerging Market economies.

Less than is sometimes reported
We like to keep these notes short, but that might be a challenge as Greek turmoil, the China crash, and renewed commodity weakness casts doubt on our positive outlook for the world economy. Jumping to our conclusion—these are somewhat unrelated market moves that have little to say about the economic health of the major world economies.

How these client emails help the investment process
What purposes are served by these notes to clients? We write to make clear what we are thinking, both to our clients and ourselves. During informal conversations in the office, we are constantly testing ideas, and asking questions, so these notes are the refined version of those conversations.

All Central Banks on the same page—US, Japan, Eurozone, and China
One of the oldest investment rules cautions investors to not “fight the Fed.” In other words, when the Federal Reserve is making money cheaper, or keeping it cheap, don’t bet against the stock market.

The former need to be avoided, while the latter create opportunity
Last week we wrote about the need to avoid permanent losses when investing. The problem with temporary losses is that they can feel very permanent during the process. So how do we tell the difference?

The former need to be avoided, while the latter create opportunity
The pain of loss is much more powerful than the pleasure we get from gain. Maybe this widespread trait developed over hundreds of thousands of years worrying about famine while huddled in a cave.

Buying or selling an investment based on last year’s performance
Over the years, numerous studies have shown that moving in and out of investments, funds, or partnerships based on recent performance nearly guarantees mediocre results.

Tremendous sales growth with a growing competitive advantage
Amazon.com is the single biggest force in Internet commerce. The company’s product catalog runs the gamut from diapers to digital media, with new products and services being added all the time. Visionary founder Jeff Bezos continues to expand Amazon’s reach by delivering value and convenience to its customers. 

What is it and why we believe in it
How do we find the individual stocks we own in Dock Street portfolios? 

Three digit stock prices have become a status symbol in corporate boardrooms
We have never thought that stock splits made much difference, but it is interesting to watch corporate treasurers reach the same conclusion. Stock splits seem to be going out of fashion.

These tech giants aren’t slowing down
Several years ago, Jim Cramer of Mad Money fame christened the Four Horsemen as the tech stocks every investor needed to own: Apple, Google, Amazon, and Research in Motion.

A wide, shallow river
With the Federal government partially shut down for two weeks and Washington politicians playing chicken with the country’s credit score, it is easy to conclude that our best days are behind us. We beg to differ.

We switch from Windows to Apple computers
Our computers were getting slow and Microsoft recently announced that our operating system would no longer be supported a year from now. It was time to upgrade.

We think there’s room for both
Last month a client asked about an interview with the Chairman of Google, Eric Schmidt. During the interview Schmidt referred to Apple’s “closed” system in contrast to the Android mobile operating system offered by Google. He also suggested that Google was more in tune with the “Cloud”, which is the biggest trend in technology.

Is it the “Smart Money” or the other kind?
“We simply attempt to be fearful, when others are greedy and to be greedy only when others are fearful.”– Warren Buffett.

What’s wrong with Apple? Not much.
Apple stock has been giving us heartburn since September. But rather than try to explain why the stock behaves in certain ways for short periods, we’d like to focus attention on 1) the underlying business and 2) the current value compared to what we first bought in 2007.

The Robotics Revolution
Ever since steam was efficiently harnessed to power factory machinery, most technological advances have been greeted with fear rather than celebration.

We still live in an age of technological miracles
Even though we expect very little from the stock market over the next year or two, we remain very optimistic about the long-term potential for our economy. Revolutionary technology is the main driver. The Internet is the primary tool, but the technologies we find most interesting will change our physical world and might create a renaissance in US manufacturing.

Slowing growth and a strong stock market—not our favorite combination
Long-term, we remain optimistic about stock investing. However the evidence of trouble in the short-term continues to pile up.

We have no plans to sell now, but there will come a time…
In the last 3 1/2 years Apple shares are up 740% as the chart below illustrates. The second chart shows what happened to the largest holding at Dock Street in the late 1990’s: Cisco advanced 751% in 3 1/2 years.

Even Apple was punished for only selling 26 million iPhone
The following question was raised by a client in a recent email. 

And now corporate earnings stop growing
If your kid comes home with a C-minus on his report card you may be relieved to know he isn’t failing, but there’s no reason to be really happy either.

Apple’s China business today is bigger than the entire company in 2007
Since the turn of the 21st century a smart portfolio owned what China needed and avoided what China made. That meant owning commodities and avoiding a long list of consumer products.

“I think there’s room to expand,”  Jim Cramer
Apple has 51 new stores on the drawing board, adding to the total of 361 stores worldwide. Of those 51 new locations, 28 are scheduled to open in China and Hong Kong. At the moment there is one Apple store in Hong Kong and 5 in mainland China.

When is a $500 stock cheaper than an $82 stock?
This month Apple’s stock closed above $500 per share and CNBC announced its “market cap”, or total value, had reached $475 billion. That number rang a bell, and sure enough, that was the peak in market value for Cisco Systems in early 2000.

Price/Earnings ratios recover from last year’s correction
There are only two ways to make money in the stock market—slow and fast. The slow money comes from an increase in earning power over time. The fast money comes when investors change their minds about the future of that earning power.

Every major central bank is making money easier to borrow
There’s a very old rule in the stock market: “Don’t fight the Fed”. It works in both directions—if the Fed is making money more plentiful and cheaper to borrow, stock prices have a tail wind. The opposite is true when the Fed is making money tighter—stock prices will struggle, or worse.

Policy errors remain the biggest risk for investors
The term “policy error” covers a lot of ground and the errors take many forms.

We think it’s Europe, but in the meantime we need to keep our guard up
We won’t know for a while who is going bust, but our best guess at this point is a major European bank (or two). We are faced with the highly uncomfortable prospect of waiting for the world’s central banks to do something to back-stop the system. 

Ignore the headlines (from Washington) and read an earnings report
Below is a list of 10 stocks owned by Dock Street clients showing the percentage increase in earnings over the last 12 months and next to that the increase in stock prices since last July. Not every stock on the list fits the pattern, but the average for the list shows an increase in profits of nearly 50% and a stock price increase of 37%. 

The Debt Ceiling mess will not change our investment strategy
Should we be worried about a default by the US government? We don’t think so and the chart below is the reason why.

Investors with cash may be getting nervous
This week illustrates the dangers of getting too worked up about market corrections and also investing while reading headlines. Missing a week like this one is the most common reason for mediocre investment performance.

Not the beginning of a bear market
Since the middle of February the stock market has gone nowhere and many investors are worried that this could be the beginning of a major drop in stock prices.

Dan’s Travels – Part II
Ray Yang runs his travel agency out of a 10 by 15 office with two desks and a couple of laptops. When I walked in with my guide Rocky, there were four guys sitting around a coffee table smoking and playing cards—but I’ll get back to them later.

Dan’s Travel – Part One
T-shirt for sale in Beijing: “Money is not a problem, no money is a problem.”

Look out above – this recovery is for real
In our reading this week we came across the following (astounding) comment