Last week I watched interview from CNN where Poppy Harlow was given a tour of Warren Buffett’s office. I was looking for some grounding, some stability in a world and market that seems so unstable right now. Something about the casual, down to earth attitude of Buffett is comforting. Near the end of the clip, Poppy pointed to a black paper basket on the desk with big red letters on the end reading “TOO HARD”.

“There’s a lot of things that belong in there. The real problem is if they belong in there and I don’t realize it.” – W.B

     My portfolio has performed well in the recent volatility of 2022 and over the past two years. The S&P 500 and NASDAQ composites ended January Down ~5% and ~10% respectively, while I’m up modestly during this period. The COVID era provided an opportunity for me to back up the truck on some conviction picks and this has benefited my returns greatly the past 2 years. These stocks are very positively sensitive to short term interest rates, so current Fed hawkishness is a potential catalyst for me. But fundamentally they are sound businesses that should provide respectable return in most environments and were way too cheap.

     The “too hard” basket resonated with me though. Investing has felt too hard for a while. Aside from a few conviction holdings it has been difficult to find interesting opportunities. Liquidity has raised prices to a point that’s felt unsustainable. Speculation is running rampant because there is no real yield to be found in most areas. Some positions I’ve scaled into have done well but become too expensive to continue building positions. And most difficult of all, my exposure to conviction names is too large to build further from a risk management perspective.

     Government insistence on unlimited QE and liquidity has made winners out of the most suspect of speculations. Profitability no longer seems to matter. Everyone and their cat have gotten rich because there are no consequences when money is free. Everyone except value investors of course, and the bulk of people in the world who don’t own stocks or a home. This feels unfair even though I know it isn’t, it’s just a reality I didn’t understand before. I’ll take the lesson of bad incentives with me the rest of my life.

     But its time to refocus. I started that process this week, forcing myself to write a small thesis on why I owned every position I hold. Largely I was able to do so. But I found some stocks I owned where the “too hard” market had fogged my judgement. Why did I own these companies? Sure, they were well run, and cheap, but I didn’t understand the industry well. When I asked myself why I owned them I couldn’t come up with much beyond “they are cheap”. Not good enough.

     I acted. I sold them all. It’s easy to think you are investing soundly but it requires discipline. I don’t want to let market apathy haze my judgement. My cash allocation increased ~3%. For now these are back in my “too hard” pile, because what I don’t know I don’t know is the biggest risk.

     We’re on the cusp of a return to sanity, I hope. Powell and the Fed have clearly indicated overnight rates are likely to increase in March, and QE will end. QT will begin shortly thereafter. The free money crowd is adamant that the yield curve will invert, and we will be in a recession again shortly. It’s possible, but hopefully not, especially for the sake of everyday people. Either way my focus will continue be on owning great businesses at fair prices.