As another New Year’s Eve has come and gone, the punch bowl filled and drained, the S&P 500 continues to unspool ever upward. Market participants drunk on easy money and the belief that, somehow, this time is different have placed all their chips on black, reasoning that today’s high flying stocks won’t be showing red (or even a cautionary yellow) any time soon.
We at Marshfield, however, eschew such revelry in favor of our customary wariness of excess and credulity. Valuations run amok (or, perhaps, not even run) and exuberant claims of not-to-be-missed opportunities only lead us to double-check the latch on our wallet. For tucked into that wallet is the cash that we’ve accumulated and that our discipline has taught us not to spend lightly. It’s at times like these that instead of resorting to the punch bowl, we pull our punches. Just as a company like Arch Capital writes less business when insurance pricing is inadequate or like Expeditors refuses to take on unprofitable business even if it means relinquishing market share, we refuse to buy stocks at what we believe to be unjustifiably high prices. The result is that we have been selling more than we are buying and, as a derivative of that, piling up cash. As it did this quarter, that cash can act as a ballast, holding performance back even as our stocks essentially kept pace with the market. But that cash also serves as a buffer when the party’s over and, of greater importance to us, a reserve to be tapped when prices sober up.
After all, in the immortal words of Van Halen’s song Jump, “you got to roll with the punches and get to what’s real.” For us, reality begins and ends with our assessment of company quality, industry structure, and valuation. We’re ready to absorb any punches as we exercise discipline around those critical realities.