Dear Partners and Friends,
After three strong quarters, the long-anticipated correction arrived in the 4th quarter of 2018.
Apple suffered the worst loss of market capitalization in the history of U.S. markets and responded by eliminating its reports of unit sales. Bill Gross, the bond king, retired after years of less than royal returns after leaving PIMCO. Warren Buffett blamed a rule change requiring mark-to-market accounting for the losses at Berkshire Hathaway (We are astounded by that explanation--Branzan Fund results have always reflected mark-to-market accounting and we naively assumed that most did).
The S&P 500 plunged almost 20% in the 4th quarter. The NASDAQ suffered its worst December ever. The S&P hadits worst December since 1931. While the markets have recovered strongly in the first couple months of 2019, it is a reminder that market cycles and volatility are not dead.
Our expectation that the ratio of prices of real assets (commodities and real estate) to the prices of financial assets would regress to the mean was fulfilled, but primarily as a result of the decline in the prices of financial assets, rather than appreciation in the prices of commodities. Gold, copper and oil showed signs of life in 2018. We believe this has a long way to go.
Gold did well in the 4th quarter and continues to be strong in 2019. Gold, amazingly, has outperformed the S&P 500 and bonds in the 21st century. We still consider gold as a form of insurance, rather than an investment, and it served as a counterbalance to the volatility and uncertainty in the markets during the 4th quarter of 2018. Silver, which has a significant industrial component, continues to struggle.
We expect copper demand to grow as India works to electrify every village. At this point in its industrialization, India has utilized 14 lbs. of copper per capita; China had utilized 41 lbs. at the same point. Copper mines take years, even decades, to get from discovery to production. Years of low prices have resulted in a dearth of new mines. Currently we don’t own any copper, uranium, nickel or lithium, but are looking for compelling ways to invest in these commodities.
As we look forward to 2019, we continue to be vigilant and attentive to the risks that exist in the equity and fixed income markets. While the U.S. stock market has had one of its strongest starts to the year, we believe that the fundamentals do not support the valuations. As such, we prefer to find opportunities elsewhere – income-producing real estate, private loans, mineral rights and royalties and other natural resources and commodities.
Very truly yours,
Branzan Investment Advisors, Inc.
THIS LETTER CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY OR MAY NOT PROVE TO BE TRUE. PAST PERFORMANCE IS NO ASSURANCE OF FUTURE RESULTS.