Dear Fellow Investor,
Due to the circumstances and panic the world is facing today, it seems adequate to summarize our recent actions and view of 2020.
In previous communications, I've always stated my opposition to periodically communicate the performance of our portfolio over short-term periods. Emotion is the biggest influence during business decisions, especially those involving the sale and purchase of securities ( such as stocks). If you cannot stomach seeing a drop in price over a stock during a short-period of time, then you are in the wrong business. You don't check the value of your home every day and neither should you check your investment portfolio. Dealing with emotions is one of the biggest learning so far. It humbled me during 2017 where emotions took over the rational part of my brain and luckily due to strategies in place, my actions triggered alerts which allowed me to make changes and avoid heavy losses. It is human nature and even the most savvy investor is susceptible to it.
Sonoman Investments' portfolio ended 2019 on a strong note. We capitalized on a series of investments that in combination with other factors helped us capitalize on our position. The average of your investment accounts showed a gain of 31.34% during 2019 vs the S&P500 of 31.49%. Despite this double-digit performance, Sonoman Investments performance vs the overall market has laggard mainly because of 2017.
The overall approach of the markets has been heavily fueled by low interest rates and lack of volatility. In bullish markets, a higher rate of return will be harder to achieve. During the second half of 2019, we became a seller of securities to what I believe the majority of companies started to fully reflect their underlying value and stock prices skyrocketed to levels beyond a reasonable valuation.
We usually retained approximately 20% of our cash in any given day. By October 2019, this number was close to 50% and near the end of December reached almost 90% liquidity. This approach is highly controversial because the lack of returns cash generates.
The value of an investment is unrelated to the fluctuations or blips we see on TV. It is not EBITDA, the next quarter or yearly estimate. Short-term movements due to supply and demand of shares should be of littler importance to us. People buy and sell securities for a number of reasons; greed and fear are the lead denominators. This type of behavior drives markets such as our current situation where 2020 gains have been wiped out due to fear. This massive selling we are seeing, I believe is driven by fear and index funds trying to save every available penny from their portfolio. Index funds have added capital ($6 trilling) which leads them to the purchase of businesses due to inflows rather than their underlying value. The Wall Street Journal reported that nearly 40% of listed companies had no earnings in 2019 despite their increase in share price. Index funding influences the price of individual securities by buying or selling depending on the tide. Apple and Microsoft alone increased 15% of the S&P500 and the 10 biggest gainers out of 500 are the main reason for one-third of the index performance.
I would raise caution to popular stocks such as Tesla, Netflix, Uber, Lyft among others. Many of these companies are profitless and entices others to follow their model with an ideal of riches while bearing heavy losses. Wework is a perfect example that greed beats common sense while its founder walks away with $1.7 billion in CASH on a company that was burning it 10x faster than it was producing. Theranos health technology pushed for an IPO while defrauding potential investors and selling a fake technology. This is Wall Street and you should do your due diligence before putting your money in any company. The stock market has plenty of opportunities and contrary to popular belief, it is not a casino unless you treat it like one.
Thanks to the decision of liquidating investments during December, we were not affected by the current market turmoil we are facing. By no means I have a crystal ball and my actions to liquidate overvalued investments while I looked for undervalued investment options could have led me to under perform in 2020. Prior to this crash, I believe stocks were not trading at low levels and even so today, but this market decline has made it easier to find investments compare to three months ago.
The decline of the S&P500 by -25.5% and our actions during 2019, has brought us back to a playing field. While the index is down double digits, Sonoman Investments only suffered a decline of -3.53% in 2020 YTD. We are currently outperforming the S&P500 by +4.65%. Below is a comparison table:
We appreciate your value and your long-term relationship with Sonoman Investments.
It is a privilege to oversee the assets of family and friends and my sincere gratitude for your confidence and support.
Please let me know if you have any questions or comments.
Alex Lopez O'Bryan
Sonoman Investments LLC
(305) 934- 9069