When Markets Fall
To my partners,
It has been an impressive week in financial markets. As I write, the Dow Jones Industrial Average closed down 2,200 points or 5.5% and the S&P 500 is down 10% just in the past 2 days. The NASDAQ dropped 5.8% following an almost 6% drop yesterday. As I have stated before, anything can happen in markets. A quick backstory: President Trump introduced a comprehensive tariff strategy targeting major U.S. trading partners, aiming to stimulate domestic economic growth and safeguard local industries. This move was part of a broader effort to reconfigure the country's trade policies and promote American competitiveness.
During periods of market volatility, such as this week, the value of a well-established investment foundation and long-term focus becomes particularly evident. As managing partner, I am happy to report I have felt nothing but bliss witnessing stock prices nosedive. We are net purchasers of publicly traded businesses and significant market volatility, coupled with depressed prices, serves as an opportunity for long-term investors to purchase “more of a good thing for a better price.” The same cannot be said, however, for speculators. Again, markets are here to serve us, not to instruct us. Instruction comes specifically from the business through careful analysis of financial statements and sentiment provided directly from the managers navigating the complexities pertaining to their company.
It is true that the widespread implementation of tariffs will have an effect on businesses globally. Companies will need to strategically navigate additional costs, adjust and diversify their supply chains, optimize technologies and techniques to produce more efficiently, and reshore manufacturing operations. Simultaneously, they will need to maintain competitive advantages, foster brand loyalty with the consumer, drive profit growth, uphold healthy capital structures against a seemingly difficult economic landscape, keep inventories, lead times, and safety stocks in check, and stay laser-focused on delivering exceptional products that meet the evolving needs of the customer. This delicate balancing act demands strategic ability, operational excellence, and unrelenting focus from all executive managers. In short, this is a massively difficult task.
Altogether, as I look to evaluate companies, there are important economics of any business that serve as indicators for successful investment. While certainly not immune to negative impacts from tariffs, the services industry holds the advantage over capital intensive companies. When tariffs are nearing 34% on tangible imports, I would much rather be a software-based company like Microsoft who relies heavily on its Cloud Services, Productivity and Business Processes, and Online Advertising versus a Chipotle which relies heavily on foreign producers to import fresh ingredients frequently and is highly susceptible to price volatility within their supply chain. Additionally, I would ensure the capital structure, in any company, is healthy. Where direct costs may be volatile, it is crucial to have enough liquidity to pay workers, keep the lights on, make lease payments, pay down short-term debt obligations, etc. However, day-to-day survival is an insufficient hurdle to warrant investment. Ensuring capital outlays in marketing, research and development, and property, plant, & equipment are adequate, as well as, the returns associated are acceptable are main drivers of performance over time. Margin growth (gross, operating, & net) will be massively important in evaluating impacts to production from tariffs as expenses will certainly increase as an additional “tax” on imports ensues. I will save further discussion on metrics of business evaluation and in turn valuation for you to decide on your own but the point is that while certain businesses possess inherent advantages over others, it is crucial for owners to maintain a nuanced understanding of their companies unique vulnerabilities and potential disruption points.
At Time Horizon LP, I don’t predict markets nor do I make long-term business decisions using short-term emotional responses. Simply because I lack the ability. The stock market is a giant distraction to the business of investing. I do believe I am capable of making investments in businesses:
1. I can understand
2. With favorable long-term competitive advantages
3. Run by capable and competent management
4. Available at a reasonable price
When prices are appropriate, I make great efforts to act intelligently. Oftentimes, I wish more people took a similar approach to business. However, it is true that without their ignorance, personal success in allocating capital would not be possible. In response to the past two days of market declines, you can hardly read a financial news article not promoting a trepid, pessimistic, and unenthusiastic sentiment towards business. I can not confidently say this is untrue in the short-term. Perhaps markets fall an additional 10%, 20%, 30%, 60% in the coming weeks and months. Perhaps more of our trade partners counter and enact retaliatory tariffs. Perhaps tariffs are the least of our worries and a more formidable threat lurks in the not-to-distant future. Your guess is as good as mine, and mine is as good as a monkeys. All that being said, I continue to remain firm in my optimism towards American business. Wonderful American companies that meet the above 1- 4 criteria, will be worth significantly more in 10, 20, and 30 years. This is a bet I have had 90% of my own personal net worth placed on for over 6 years and, all things considered, have not been disappointed.
Over time, I am optimistic that the culture at Time Horizon LP will embody a similar long-term investment philosophy, driven by a community of investors who prioritize strategic decision-making and opportunistic growth. My expectation is that the firm’s values promote a disciplined and patient approach, allowing the fund to capitalize on attractive prices as they emerge. My conviction in this framework has been consistently validated and I remain confident in our long-term prospects. Thank you for reading.
Kyle Delmendo
Founder, General Partner, CIO