January 9, 2021
The U.S. markets continued their upward march during the fourth quarter, tacking on another 12.12% for the S&P 500 ETF. That propelled the gain to 18.47% for the year, after plunging more than 34% from its highs when the COVID-19 pandemic hit in the spring. Fueling the rally were aggressive efforts by the Federal Reserve and other major central banks to prop up the global economy in the wake of the related economic collapse, and an eye toward an eventual end to the pandemic and an anticipated return to normalcy.
Our Kirwan Capital Strategy portfolios gained 13.21% for the quarter**, versus the market as measured by the S&P 500 ETF*, which finished with a gain of 12.12%. The quarter's performance leaves our average compound annual return after fees since Jan 1, 2013 at 14.32%, which would have turned a $10,000 investment into $29,174 in 8 years. Our performance was boosted by recoveries in banking stocks as Discover, Wells Fargo, and JP Morgan gained 56%, 28%, and 32% respectively. Anheuser-Busch and Molson Coors also bounced back nicely from their lows, gaining 29% and 34%. We were hurt by Microsoft, Amazon, and Hanesbrands, which all had big moves higher earlier in the year, leaving less gas in the tank for this period.
While most of you may well wish to stop reading now and get on with your day, for those of you that may be intrigued by the field of Psychology, I'm going to discuss a bit of the field that I think applies to investing today. Having been intensely focused on the markets for several decades, I feel like I have previously seen an atmosphere much like the one we presently are in. It is now hard to remember any time when buying a two week dip would not have made quick money, or how it feels to have lost over 25% in your 401k with no optimism for a recovery. It is equally hard to remember losing money when buying the latest and greatest technology stocks. The record number of new individual accounts being opened up on brokerage sites such as Robinhood indicate that tens of thousands of new investors now think they can pick stocks successfully. This is exactly the way my peers and I erroneously felt in the late 1990's. You may be aware that study in the field of psychology has identified many tendencies for mis-judgement that humans (and other mammals in some instances) innately possess. Charlie Munger identified 25 specific tendencies many years ago, and those are my primary focus. I think there are several of these tendencies at work for many market participants currently:
I obviously think that several misjudgement tendencies are at play in the current environment, which, combined with the increased money supply from the CARES Act and the accommodative stance of the Federal Reserve, are working to hold the market at high levels in comparison with economic performance. Since these numerous tendencies are working together, it is very possible that a Lollapalooza effect will continue to produce extreme results. I guess what this means in layman's terms is that while the market may seem high, it's anyone's guess how high it can go or how long it can stay there. I wish you all a successful 2021.
Patrick J. Kirwan
President and Portfolio Manager Kirwan Capital LLC
* The benchmark I use against which to gauge our performance is the SPDR S&P 500 ETF (ticker symbol SPY). It's purpose is to closely track the stocks in the S&P 500 Index. Often cited as a proxy for the U.S. equity market, it is the most heavily traded security in the world. It can thus easily be purchased by any investor, as opposed to the oft quoted S&P 500 Index, which is simply a calculation, and does not include costs of ownership. ** Kirwan Capital Strategy quoted returns are calculated using the quarterly composite average of all accounts using the strategy in aggregate. Due to the individually managed nature of our accounts, not all accounts have similar performance. Factors such as available cash, tax considerations, and timing of previous purchases or sales can effect returns. In addition, transactions noted may or may not have been made for all accounts.
* The SPDR S&P 500 Trust ETF is an Exchange Traded Fund that seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.
^ Due to the individually managed nature of our accounts, not all accounts have identical performance. While usually similar, factors such as available cash, tax considerations, and timing of previous purchases or sales can effect returns. In addition, transactions noted may or may not have been made for all accounts, and are a generalization of transactions completed for all accounts in aggregate.
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