Don't let volatility get in the way of investment opportunities, says Christopher Tsai
A slightly calmer session that's shaping up for Thursday wouldn't go amiss after stocks' worst day in a month over worries about U.S. debt management.
What do seasoned money managers do when the going gets tough? Christopher Tsai, president and chief investment officer of Tsai Capital, leans on advice from Berkshire Hathaway's late vice chairman Charlie Munger, who he dined with in 2018.
"Charlie has said in the past that if you cannot handle a market decline of 50% with equanimity, then you don't deserve to be a common stock investor. And you're going to get the mediocre returns that you deserve," Tsai told MarketWatch in an interview on Wednesday.
"That's been in my head this year and during every market drawdown," he said. "You need to do the work and understand the underlying business value and recognize stock prices move up and down around those values," he said. "For over 25 years, we have focused on investing in businesses we can own for the long term. We pay little attention to daily market volatility, except to seek opportunities that arise during market downturns."
With $140 million under management, Tsai's portfolio returned 23% on a net basis last year, closely matching the S&P 500 SPX, and it is roughly flat this year. Since inception, its annualized return has been 8.2% after fees, versus 7.7% the S&P 500 SPX, the company said.
Trading is in Tsai's blood - his father was the late Gerald Tsai Jr. who pioneered momentum trading and started Fidelity Investments' first aggressive growth fund in 1958, and his grandmother Ruth Tsai was the first female trader on the Shanghai Stock Exchange.
"She was extremely good at separating emotion from the decision-making process," said Tsai, who shares some of her wisdom: "In order to be a successful investor you have to reverse your head with your stomach."
At the top of Tsai's diversified portfolio of 25 companies is Tesla (TSLA), whose shares, he notes, are up 8 times since he bought them in February 2020. He believes the EV maker will be worth several trillion dollars in market value in the next four to five years.
Also read: This investor has millions in Tesla. Here's his big wish for Elon Musk.
"We've been very positive on Tesla for more than five years, there's a lot of noise around the name, almost continuously, but what's important for us is the fundamentals of the business and what the company is doing to build intrinsic value for shareholders," he said.
"I'm very happy to see that [CEO Elon Musk] seems to be focusing even more so on Tesla these days and has publicly stated that he would be less involved with government in the future," he said.
Even more exciting for Tsai is the portfolio's second-biggest and relatively new holding - QXO (QXO), a building products distribution company. CEO Brad Jacobs, who he's known for 25 years, founded companies such as United Waste and United Rentals and "created enormous shareholder value during his tenure with those companies."
"What's interesting about this industry is it's deeply fragmented and technologically antiquated, so Brad is bringing his proven playbook to an industry that is ripe for consolidation," he said.
"It's in an industry that is not particularly sexy. It's not an AI company, but they are going to use AI really to transform the building product distribution industry," he said, adding that only 3% of the industry is e-commerce.
Apple (AAPL), Amazon (AMZN) - "significantly undervalued" - and Markel Holdings are his other top holdings.
Markel (MKL), a specialty insurer group and holding company that has been described as a mini Berkshire Hathaway (BRK.B), has two key engines driving intrinsic value higher - the insurance side and Markel Ventures, which functions as a venture capital arm. Tsai thinks shares are worth "quite a bit north" of their current $1,864 per share, noting the company's compounded growth rate of 14% for the past decade.
"That's a nice trajectory and it's a very high-quality, stable company, which is a counterweight to some of the more volatile tech that Tsai Capital owns," he said. While the share price is probably a barrier for some retail investors, the company is looking for investors with "a very long-term view," with a different mindset and toolbox.
Read: Leon Cooperman on what would turn him more optimistic: 'I am looking for news to get worse.'
The markets
U.S. stock futures (ES00) (YM00) (NQ00) have turned sharply lower as the 30-year Treasury yield is up to 5.14% BX:TMUBMUSD30Y BX:TMUBMUSD10Y on news House Republicans passed the budget bill. Oil (CL00) and gold (GC00) are down, the dollar DXY is up and bitcoin (BTCUSD) is atop $110,000.
The buzz
House Republicans got their "One Big Beautiful" multitrillion-dollar tax breaks bill through by just one vote, and now it's headed to the Senate.
Urban Outfitters stock (URBN) is up 15% on forecast-beating results as sales rebounded. BJ's Wholesale (BJ) stock is rising after the retailer stuck to guidance, despite disappointing revenue and sales. Walmart (WMT) is reportedly cutting 1,500 jobs.
Nike (NKE) said it would raise prices and start selling on Amazon again.
Snowflake shares (SNOW) are jumping after the data-warehousing company's results and forecasts beat expectations.
Weekly jobless claims came in slightly lower than forecast at 227,000. The preliminary S&P U.S. services and manufacturing purchasing managers surveys at 9:45 a.m. and existing home sales at 10 a.m.
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The chart
The chart via the Daily Shot from Danielle Park, portfolio manager and president of Venable Park Investment Counsel, shows retail dip-buyers bought a record $4.1 billion in U.S. stocks in Monday's first three trading hours. "Heavy participation from retail bagholders 'investors' is typical of market tops," she writes on the Howe Street blog. "The S&P 500 risk premium-forward earnings yield minus the 10-year Treasury yield-is once again about zero. Such dismal equity risk-reward prospects have only been seen once in the last quarter century and that was coming out of the 2000 bubble top."
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