Mont Ventoux: 2nd Quarter 2024 Commentary

Mont Ventoux

We don’t watch much television in the Bragg house. It’s not a deliberate thing; I guess we just have other interests. There is one exception. I watch the Tour de France. For most of my adult life, I’ve spent hours per day during the month of July watching full coverage of the 21-day, 2,200-mile bicycle race through France and surrounding countries. I’m watching it right now as I type this letter.

How do I explain this obsession? I guess I would describe it as a confluence of factors. First, I am an amateur cyclist, having ridden on and off for the last 35 years. I find it satisfying to ride forty or fifty miles under my own power. I get a charge from the grind of climbing a long hill and then, when coming back down the hill, like many people, I find it thrilling to go really fast. Cycling is a passion I share with my father, Frank Bragg, who actually raced bicycles (part-time) when he was in his 40s and 50s. He was registered with the cycling federation as a Category Three rider and raced on three sponsored teams, including the Little Caesars team. I bet you didn’t know that about Frank Bragg!

The Tour de France offers intense competition and amazing feats of physical and mental strength. Twenty teams of eight riders compete with intricate strategies to win each day’s stage and ultimately, the overall race. Imagine riding 100 miles on a bike each day for 21 consecutive days.

And there’s France! The first time I traveled internationally was as a teenager in 1985, when my parents took my family to France, where we drove all over the stunningly beautiful French countryside, marveling at the manicured farms, struggling with the language, devouring copious amounts of cheese and bread, and simply enjoying being together as a family.

The Tour de France brings all of this together. And so I watch the Tour. And when my sister-in-law called last fall to invite my wife and me to join her, her husband, and their friends on a six-day guided bicycle tour in the Provence region of France in June of this year, we accepted with great excitement.

As the trip approached, Alice handed me the trip brochure and encouraged me to read about the biking. I had not given it much thought until then, figuring that the biking surely would not be overly challenging, given the group’s average age and fitness level. But in reading the brochure, I learned the trip organizers offered choices of rides each day—a short ride of 20–30 miles or a long ride of 50–60 miles. Wow, they had my attention. I also learned with excitement and no small amount of trepidation that on Day 3, there was an option to attempt an ascent of Mont Ventoux! The ascent of Mont Ventoux from Bédoin, France, features an elevation gain of 5,200 feet over 13 miles of riding. With an average grade of 8%, it is considered one of the most famous climbs in the world, one that is often included in the route of the Tour de France itself! Mont Ventoux? Holy cow! I got goosebumps just reading about it. The trip organizers had thrown down the gauntlet and I immediately knew I had to accept the challenge! There was no way around it; my fate was sealed!

Finally, in reading the brochure I saw that tour participants could opt to ride an e-bike, a battery-powered, pedal-assisted bike. These bikes offer four speeds—eco, tour, sport, and turbo—with each successive level further reducing the effort required by the rider. While recognizing that this was a perfectly acceptable option for some, my long cycling history (and perhaps my pride and maybe even my vanity) wouldn’t permit me to choose this option. But that meant I had to get in shape, and fast! My half-hour stationary-bike routine at the Dowd YMCA wasn’t going to cut it. I pulled my old road bike off the garage wall, dusted it off, pumped up the tires and set out to ride. Three or four long, steamy rides in northern Mecklenburg County got me somewhat back in the groove but also confirmed that I certainly wasn’t ready to ride in the Tour de France.

Fast forward a few weeks and there I was in dadgum France, on none other than Mont Ventoux, pedaling away like a fool, hoping for glory. It was a grind—two long hours of flat-out suffering, breathing out loud like an overheated dog, “Unh, unh, unh, unh, unh.” Up and up and up and up. Failure was not an option; I had to make it to the top given that I had told everyone I knew back home that I was going to try.

Along the way, I saw numerous young people who looked like they were training for the Tour de France. Of course they went by me like I was standing still (I practically was!). I found it inspiring (and cool!) to see those strong, young riders—more power to them! More annoyingly, I was passed by an even greater number of riders—young and old—who were riding e-bikes! They were barely breathing hard, hardly even sweating! I’m sure they had it set on turbo! Not inspiring and not cool!

I’m sure you have guessed by now that I made the summit. I couldn’t very well write this article otherwise, could I? My reward for reaching the top was that I got to ride back down. Yeah! We took a different route on the descent, as we were headed to a different town, the village of Sault. The good news: 16 miles, all downhill. I went 30–35 mph the whole way! How much fun is that? I giggled all the way down. All in all, Day 3 of my biking tour in France was a stand-out day in my life, a very special treat for your humble advisor.

Benton Bragg and Mike Shields—husband of Benton’s sister-in-law—at the summit of France’s Mont Ventoux

My point in sharing this story in an investing letter is to make the simple point that there are no e-bikes in investing. There is no button to push to eliminate the uphill parts of the journey. Some periods are going to be difficult; some periods are going to be both difficult and frustratingly long. To have success, we’ve simply got to grind it out. History has demonstrated that sticking to this discipline offers truly remarkable rewards.

Of late, as the market has reached new highs and as some parts of the market have performed eye-poppingly well, we at Bragg Financial have fielded some questions from clients that remind us of the need to preach the message of grinding it out and avoiding the temptation to think there are e-bikes for investors. Below are are a few that come to mind.

Chasing what has been hot

Looking back, we can see that we should have loaded the portfolio this year with shares of companies tied to artificial intelligence or AI and sold everything else. The AI-related stocks have generated most of the return of the market this year. The rest of the market has been mostly sideways. With hindsight, we can all see what we should have done, what we should have owned, what we shouldn’t have done and what we shouldn’t have owned. As my paternal grandfather was fond of saying, “Any fool can see what we should have done.” Along those lines, any fool can buy what was hot last year or best in the last cycle. It is a different mountain to climb to determine what will be hot next year or best in the next cycle. And be assured, there will be a next cycle. What was hot most recently won’t be hot forever. The market already knows what you think you have figured out. If it is in the headline, it is already in the stock price.

Timing

Complicating matters further, determining when the cycle will turn is also exceedingly difficult. But it will turn. And when it does, the readjustment is often punishing to those who belatedly piled into last year’s winners. For all of these reasons, we diversify. And we rebalance. We trim winners of the recent cycle, and we add to losers of the recent cycle. We don’t concentrate the portfolio in one asset class, one sector, or one stock. This sounds straightforward but our logic and our discipline often must do battle with our emotions and our fear of missing out. As famed investor Sir John Templeton is best known for saying, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” At Bragg Financial, we don’t think this market is at the point of euphoria, but some sectors and some names are certainly flirting with it.

Alternatives

The email inboxes of the portfolio managers at Bragg Financial have become clogged with sales pitches from hundreds of investment firms touting the merits of private credit, private equity, and private real estate. Offering these illiquid so-called “alternatives” to retail investors has become the new thing on Wall Street. And Main Street is buying! It’s true. Most of our competitors have begun using, or plan to begin using, alternatives. Your friends are hearing about alternatives, and you will hear about alternatives. What was heretofore reserved only for “sophisticated” accredited investors such as pension funds and endowments is now being made available to you. Buyer beware!

A few definitions:

• Private—not publicly traded;
• Credit—debt, as in lending money to borrowers;
• Equity—ownership in companies;
• Alternative—offered as an alternative to publicly traded securities like stock, bonds, mutual funds, or ETFs, which offer instant liquidity. Alternatives are usually packages, pools, or funds containing securities which are not publicly traded and do not offer daily liquidity.
• Illiquid—investor money may be tied up for 5, 7, or 10 years.

And a few other characteristics of alternatives:

Fees: While competitive pressures have compressed the cost of trading stocks and bonds to almost zero and the cost of owning portfolios of publicly traded securities to far less than 1%, the typical cost of alternatives is far higher, often north of 2% per year.

Disclosure: There is less disclosure for alternatives than with publicly traded securities. It is far more difficult to find information about past performance and fees for these offerings. Because many alternative funds are new, track records are limited or nonexistent. Because the underlying securities in these funds are not traded, there is no third party tracking the opening and closing trade prices and therefore limited performance information exists during the term of an investor’s holding period. In contrast, an investor can go to any financial website and quickly pull the lifetime historical net performance of any publicly traded stock or the net performance and fees of any registered mutual fund or exchange traded fund.

Illiquidity: Because the underlying assets (equity positions in a private equity fund or loans in a private credit fund) are not publicly traded, investors in these funds become price takers. The sponsors or managers of the fund set the price—often through the services of a third-party valuation firm—of the securities held in the fund. For investors considering buying a security, there is tremendous value in a true market—a market with a bid and an ask—where securities trade publicly. Think about the information content of a bid and an ask.

Performance: Certainly, some private alternative funds—equity, credit, real estate—have generated stellar track records. Others have not. This is no different from managers trading in publicly traded securities. Borrowing from comments made by Warren Buffett recently regarding private investment funds, “No form of investment vehicle produces investment results.” Not hedge funds, not private equity funds, not mutual funds, ETFs or insurance contracts. Good investments made by good investors create investment results. As Buffet said, “If it was simply a matter of form, we would all call ourselves whatever that form happened to be.”

To be clear, illiquid investments can indeed be worthy and there are excellent managers in this asset class. But we believe far too much capital is pouring into this business model, that much is ending up in the hands of inexperienced managers, and that risks are misunderstood by investors. Unfortunately, the risks won’t be revealed until the next down cycle. Wall Street promotes that which can be sold and right now, Wall Street is having great success selling private alternatives.

2024 Election

“Won’t the upcoming presidential election cause great volatility in the stock market? Wouldn’t it be easier to sit it out and get back into the market after things have calmed down?” Understandably, we have had a number of clients ask this question. Our response is that we think it is better to think long-term and stay the course. The market may sell down before the election results are known and then rise dramatically. The market may rise dramatically before the results are known, and then fall precipitously. The market may be calm throughout this period. One can find historical examples of each of these scenarios. One can also find in our almost 250-year history as a country that every election has always been deemed “the most important election of our lifetimes.” We remain optimistic that this won’t be the case in 2024, that our great republic will survive, and that we’ll see many free and fair elections in our future.

We find it helps to remind ourselves that as shareholders, we own pieces of great companies. We are owners and we should think like owners. “I own the company and I’m not going to throw up my hands and sell the company because I’m worried about an election, inflation, a recession, government debt, etc. My company will find a way to get past whatever hardship we face and go forward.” Will McDonald’s sell hamburgers after the election? Will you purchase an iPhone, will you take a vacation, boot up your computer, fill your car with gas, turn on your air conditioner, use your credit card, log in to Amazon to shop? Maybe even buy a new bicycle, e-bike or otherwise? If so, I want to continue owning shares of the companies that provide these goods and services to you.

I hope these reminders are helpful as you enjoy your summer. From all of us at Bragg Financial, thank you for trusting us with your planning and investing.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.