Valentine Ventures – First Quarter 2020 Client Review

on July 23, 2020

By Bill Valentine, CFA
Valentine Ventures, LLC

Below is our quarterly investment review that is sent directly to clients and shared with you for your benefit.


As you’re undoubtedly aware, the second quarter saw a massive recovery for growth assets, across the globe and by asset class. The recovery, however, has not been uniform, with some areas coming back more than others. However, we are pleased with results for the year on an absolute basis, and relative to the benchmarks.


We did a lot of trading during the second quarter. The first batch of trades took place in taxable (non-IRA) accounts. The purpose was to harvest losses brought on by the market swoon from February to March. We sold funds with material unrealized losses and replaced them with similar funds.

We also rebalanced in May across all accounts. That entailed lowering our fixed income weights (due to their bloating on the back of declined values in growth assets), but also rebalancing within the growth assets—paring back the best performing ones and adding to the laggards.

The combined effects include tax losses that will reduce your taxable gains and income going forward, as well as strong performance when the market recovered, as beaten-up assets led the way.


We hope we had you prepared mentally for the events of the year. While no one could have predicted the events that have transpired, we made mention of the coming bear market as a possibility and alluded to the fact that it would likely be caused by something no one was conceiving at year-end. It’s impossible to know where we’re headed from here, and I make my ‘bullish’ and ‘bearish’ case for markets in this Review. But we feel that the portfolios are structured properly in any event.


This quarter, we packed a lot into this section. We point you to my new column in The Bend Bulletin, talk about our weekly videos, and explain about the new Client Relationship Summary. Per usual, we remind you about notifying us of your financial changes, and the need to keep an eye on your realized gain/loss position in your taxable accounts. 


Below is the performance for the quarter and year of the five primary asset classes that we invest in, according to broad index returns for each area:

Source: Interactive Data Corp | These are the returns of index funds for the five major asset classes during the period(s) specified above.  They are provided for contextual and comparative purposes. They are not the returns of your investments—those are found on your Performance Report, along with the returns for the appropriate blended-benchmark using the above indices.


Here’s a look at where we are for the year:

Growth markets generally bottomed on March 23 and have recovered from there, but as I said, it’s not been uniform. On the extreme to the up-side is the Nasdaq Composite (green), up 13.17% on a year-to-date basis through the end of the second quarter. The Nasdaq is heavily influenced by US large tech companies. On the other end are commodities (yellow)—commodities track inflation and recessions are decidedly disinflationary. Interesting to note the large spread between the S&P 500 index (blue)—down just 4.04%–and the Dow Jones Industrials (red), down 9.82%. Why such a large difference between two supposed indices of US stocks? Tech. The S&P 500 derives almost 25% of its weighted performance from just five of the 500 stocks: Microsoft, Apple, Amazon, Facebook, and Google. The S&P clearly distorts the performance of the average US stock, which is closer to the performance of the Dow.

Also note that foreign stocks (purple) are lagging the US, and Real Estate Investment Trusts [REITs] (black) are on the bottom along with commodities.

As you’ll see on your Performance Report, we beat the benchmarks during the second quarter, and are at-or-above them for the year.


Starting in April, after markets bottomed but while they were still depressed, we sold the ETFs in the taxable accounts that had large unrealized losses. In doing so, those losses became realized and are thus available for your use in reducing your tax bill. I don’t recall being able to harvest this much in losses since the Financial Crisis of 2007-2010—and that’s a very good thing: real dollars in your pocket in the form of tax credits. But rather than leave the proceeds from the sales in cash, we invested in similar assets to the ones that were sold, availing you of participation to the upside—and that was critical to getting back into a position of being down just a few percentage points of return for the year.

We also rebalanced. For accounts that have sizable fixed income (bond) assets, we sold them back a tad and plied the proceed into the growth assets. Within growth, we pared back our best relative performers and bolstered up the beaten-down. This added to our outperformance versus benchmarks during the quarter, as the beaten-down from 1Q20 were generally the leaders in 2Q20.

That’s what you do in a sell-off. You harvest realizable losses in taxable accounts and rebalance (as opposed to sitting in cash). 


I truly don’t know where we go from here. We are in unprecedented times. Never before have governments ordered the economy to halt, globally. Never before has our Federal Reserve printed $6 trillion dollars to combat the malaise.

If you were a client at the end of 2019, you may recall that I was bullish on the markets and economy—the greatest our country had ever encountered—but I also told you:

  1. There was a Bear Market and Recession coming.
  2. It would not be as bad as the Financial Crisis.
  3. We were postured to handle it.

I concluded the year-end 2019 review with the following:

While I remain bullish, I am fallible and could be wrong.  If I am, it will likely be due to an exogenous shock to markets/economies that no one is talking about now.  The real power to damage markets comes from the thing nobody expects.”

And so it was…

But back to where we’re headed. I can see a bullish and bearish case, and will share with you the following from our blog ( on May 24, 2020.

Something is afoot.

The coming economic fallout of COVID-19 has been described as likely worse than the Great Recession. Some have even postulated that the economic contraction will approach that of the Great Depression. And while we will find out soon enough if either comparison is accurate, the stock market is telling a different story.

The Great Depression saw the stock market drop by 86%. During the Recession, the stock market fell by 56%. As of this writing (May 24, 2020), the stock market is off just 12% from its peak in February. At its worst, it was down 34% at the March lows. To match the full pitch of the Recession, the stock market would need to fall by 50% from here, and to lose as much as during The Depression, it would have to fall 84% from today’s level.

A 12% loss versus ones of 86% and 56%. Hmmm …something afoot indeed.

Because the stock market is a discounter of future corporate profits, we have a major disconnect, and it must be reconciled — either the economy to the market, or the market to the economy. Either the market is pricing in a recession that won’t compare to the Recession or the Depression, or stocks have a heckuva lot farther to fall.

The bullish argument — where stocks don’t make a new low and the economy doesn’t end up being as bad as the consensus — begins with an appreciation for how this recession differs from past ones. Normally, recessions occur after extended periods of economic expansion that, in the process, sow the seeds of their own demise. A typical economic recession is addled by rampant inflation or problematic deflation or a credit crisis. During a normal recession, the economy fixes itself over the course of many months and emerges into the next expansionary period.

But that didn’t happen this time. This is a recession caused by governmental fiat — global leaders halted a broad-based economic expansion. There’s a difference between a train that’s been stopped on the tracks because something prevented it from going forward, and a train that’s run out of fuel.

We were stopped, and now we’re restarting the train. Thus, if it starts faster, and hums along sooner than expected, stocks will have the story correct.

The bullish argument also needs to acknowledge the extraordinary fiscal and monetary stimulus underway. Currently, we are careening towards $10 trillion in fiscal and monetary stimulus. That money is a major shot of adrenaline to the economy and capital markets.

Finally, you hear almost everyone say, “I think the economy is going to be bad for a long time.” That’s known as consensus, and the consensus is almost always wrong. The consensus is “already baked into the cake” that is the level of the stock market.

The erroneous consensus combined with a stronger underlying economy and quicker recovery than expected, along with unprecedented stimulus, suggests that the market has it about right near current levels.

The bearish case for stocks begins with the idea that the market is blind to what the economy will really look like once it’s been open for a while. Consensus, bearish as it may be, isn’t bearish enough in this case.

Here’s where you’d quote Sir John Templeton (of Templeton Fund fame) who said, “The four most dangerous words in investing are: ‘This time it’s different.’” In that vein, this economic-halt-by-fiat is, at its core, not that different from any other material contractions and therefore, the stock market will reflect that soon enough at a much lower level.

The argument would go on to say that the stimulus dollars are not adrenaline but rather a sugar high that will be short-lived. Absent continual money creation, stocks will deteriorate from their lofty levels of valuation to a level befitting a market priced on lousy fundamental earnings for the foreseeable future.

It’s not hard to see how those considerations auger for stock prices that indeed could be 56% to 85% lower.

The real question is what do investors do with their outlook, be they bullish or bearish? The answer is not much.


A few months ago, I was invited to write an every-other-week column in our local paper, The Bend Bulletin.” Titled “Facts on Finance,” we provide you with a link to it in our email to you every Friday (‘The Weekly Recap’—you do see those, right? If not, let us know—they go out every Friday to you).

Secondly, as you may have picked up by now, we’re producing a weekly video for you, week-in and week-out. My videos are ‘The Market Message,’ Andrew’s are ‘Common Cents,’ and Michael’s are called ‘Secrets of the 401(k).’ Sometimes, in lieu of a video, we will write a blog article. And we also weave in our educational videos from our ‘Wealth Academy’ website to educate you on investing ( Again, links to the videos come to you via the ‘Weekly Recap’ email, but you can also see them on the blog. We are trying our level best to lead the field in client education.

This quarter we have filed a “Client Relationship Summary” document in your “VVLLC Information” folder in the client portal ( This is a newly mandated form by the SEC that describes our services. You should have a look. You can also find it on the bottom of all the pages of our website. If, after reviewing it, you have any questions, or if you can’t locate it easily, let us know.

Following are our two standard reminders at quarter-end:   

  • Consider your realized gains/loss so far in 2020, in your taxable accounts, to determine what, if any, estimated tax payments you should make. (You can’t find your realized gain/loss, by short- and long-term, under the ‘Unrealized Gain’ tab on Schwab’s website, then click the ‘Realized Gain/Loss’ link. If you can find that, let us know.)
  • Additionally, remember that if you have had a material change in your financial situation that we’re not yet privy to, let us know so we can reevaluate your Financial Plan and investment allocation.

That’s it for this quarter. We hope you are pleased with our guidance of your investments and the results, all things considered.

We value our relationship with you and please let us know if there’s anything we can do for you.

On behalf of Valentine Ventures,

William Valentine, CFA

Bill ValentineValentine Ventures – First Quarter 2020 Client Review