approach as Nicholas Financial is classified as a micro-cap with a market capitalization of approximately $150 million, and Berkshire Hathaway is at the other end of the spectrum with a market cap in excess of $200 billion. We are not restricted by size, and will buy in any market where we can identify undervalued securities. The larger the universe of available securities, the better it is for us.
Our recent activity has involved a little more selling than buying of equities. This is in part due to the aforementioned strong rally in prices, and the concomitant conclusion that some of our holding are no longer significantly undervalued. The net effect has been an increase in cash. For us, having cash on hand plays a vital role in portfolio management. As a tool, it represents opportunity money. From time to time, price dislocations occur- either with individual securities or collectively (market crash) – and there is no substitute for having cash on hand with which to buy. Since one can never predict with any precision when these price disruptions will occur, it makes sense to us to sell some securities when they are fully priced with the expectation that better priced opportunities will emerge.
Earlier we alluded to the developments in the sovereign and municipal bond markets. U.S. treasury securities have thus far been immune to credit concerns. Despite running a budget deficit of close to ten-percent of GDP, the Treasury is able to effortlessly sell bills, notes and bonds of all maturities at exceptionally low yields. To mistake this benign environment as something permanent brings to mind a quote from the late economist Herb Stein, who famously stated “If something can’t go on forever, it won’t.” At some point, the unprecedented monetary stimulus will end and yields will rise. If no progress is made on the budget deficit, the rise in yields and corresponding drop in bond prices could be material. Paradoxically, the securities often billed as being the safest instruments may turn out to be among the riskiest.
In closing, we will continue to invest the way we always have; by identifying and purchasing securities that are safe, easy to understand and undervalued. We can’t promise that future results will continue to out-perform in the same way as they have in the past, but we can promise to do our homework. When it comes to analysis and judgment, you can be sure we’ll be motivated by what is best for the client and not by what happens to be popular or trendy on Wall Street.
Please feel free to contact us with any questions or comments. As always, we thank you for your trust and patience.
Very truly yours,
Eckart A. Weeck
Senior Managing Director