Reflecting on a crazy '22 and wild beginning to '23.
| Bloomwood | Core |
Monthly (3/23) | 1.95% | 1.40% |
YTD | 3.05% | 2.99% |
As an organization, we have done our best to maintain nimbleness and adaptability in our capital allocation and deployment during a tumultuous period in the markets. Our approach entails a wide-ranging scope, from investing in physical commodities to taking short positions to long-term, buy and hold investing.
In assessing each opportunity that comes our way, we carefully evaluate the risks and weigh them against the available information. If we determine that an opportunity is appropriately priced, we take the risk. On occasion, this has entailed charting our own course and investing across various stages and asset classes, a journey that can at times be solitary. Nonetheless, we have endeavored to carve out space for others to collaborate with us or replicate our successful endeavors.
Ultimately, the success of our investments hinges on their efficacy from the point of entry to the point of exit. We strive to achieve favorable outcomes and hold ourselves accountable for their attainment.
Some of the best companies were born in higher interest rate environments.
As we navigate the current market environment, we find ourselves facing one of the most complicated situations of the past 20+ years. In previous letters and podcasts, I have emphasized that as we enter a sustained period of non-zero interest rates, the discipline of mission must now intersect with the discipline of management and operation. Sustained profitability, efficiency, risk management, and business model fundamentals are now must-haves rather than nice-to-haves.
The end of the free money party.
Looking back at 2022, it is crucial that we take the time to reflect on how we arrived here. The past year has brought a plethora of lessons, which have not only informed but also confirmed our outlook for the future.
The era of abundance and zero interest-rate policy, which began as a stimulus measure following the global financial crisis in 2008, has come to a close. Last year, we likened it to ending the best party in town - but the past year has been more akin to a cold shower.
Over the last 15 years, zero interest rates fueled the longest bull market in U.S. stock market history, and the Federal Reserve's balance sheet grew over 800% from $923B to $8.3T.
However, COVID-19 and the ensuing shutdown of the economy resulted in the government doubling down on zero interest rates and injecting the economy with cash.
As a result, there was a sudden influx of free money into the economy, causing prices of commodities, shipping, and used cars to skyrocket. Meanwhile, the excess liquidity continued to fuel higher household spending and persistent, rather than transitory, demand-side inflation. This was a perfect storm of pent-up demand colliding with a supply shock.
We may need to take more medicine in the form of rate hikes for longer than we initially anticipated. It’s important to acknowledge this reality and adapt accordingly.
Ukraine
The invasion of Ukraine by Russia, after years of tension, marked one of the most significant geopolitical events of the year. The loss of human lives and displacement of millions was tragic, but the conflict also brought to the fore a battle for economic dominance.
The energy sector, in particular, was hard hit, but this was not an overnight problem. European leaders had long ignored the need to boost domestic energy production, opting instead to focus on political expediency and pandering to special interests. By failing to invest in renewable energy sources and relying too heavily on Russian natural gas, Europe became overly dependent on one country, making itself vulnerable to economic blackmail.
For example, between 2010 and 2018, Russia's share of Europe's natural gas intake increased from a quarter to over 40%. In addition, domestic policies like Germany's decision to abandon nuclear power further exacerbated Europe's energy crisis. All this allowed Russia to tighten its stranglehold on Europe's natural gas supply, putting global energy markets in turmoil.
The war had other economic implications beyond energy. As countries took sides or remained neutral, we saw how vulnerable the U.S. had become to major producers such as China. The U.S. had relied heavily on China for critical raw materials, including silicon metal, lithium, cobalt, graphite, and rare-earth elements, all essential inputs for battery production.
Suddenly, what had been a long-term problem of overreliance on a single exporter of vital materials became an acute crisis. As investors, we must be vigilant about such vulnerabilities and find ways to mitigate risks that arise from overreliance on single sources of critical materials.
At Bloomwood, it is our job to (a) invest in assets that will become more valuable over time, (b) make a small number of well-informed investment decisions, and (c) identify, then execute on one-way risk/reward scenarios. We are proud that we have the discipline to stick with that.
Disclosures
a. The benchmark index used to compare the Bloomwood Strategy is the S&P 500.
b. This performance data is net of fees charged by Bloomwood.
c. This performance data assumes no reinvestment of dividends and interest.
d. Past performance does not guarantee future results. All investments have a risk of loss.
e. The volatility and risk/reward profile of our strategy is fundamentally different from that of the benchmark index.
f. The Bloomwood Strategy seeks to invest in companies and real assets across the globe that have a sustainable competitive advantage and are reasonably priced. We use simple but effective algorithms and order types to maximize downside protection. Bloomwood uses tactics, order types, and algorithms that are not present in the benchmark.
k. The results of the Bloomwood Strategy are taken from John William Amberg, II’s historical investment decisions relating to this strategy throughout his career for himself and for his clients with the appropriate risk tolerance.
Due to sell orders being triggered by algorithms and varying order types, performance data, as it relates to realized sales, is calculated based on the weighted average of the execution price across all accounts invested in the strategy. Results vary slightly between accounts.
l. Bloomwood Capital Advisors LLC is a registered investment advisor in the state of Georgia and North Carolina.
m. The performance depicted in this document has not been audited by an independent third-party and is not compliant with Global Investment Performance Standards (GIPS) or any other third-party investment performance standard. Bloomwood and John William Amberg, II do not claim that the Bloomwood strategy presented in this document has been audited by an independent third party or is in compliance with any third-party standard of investment performance.
n. Results shown are from January 1st, 2023 to March 31st, 2023
o. A proprietary model was used to generate the results.
p. Performance results available on request.
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