Time to go Into Debt

Materials Read:

The Engine of Inequality, Petrou 2021

The Lords of Easy Money, Leonard 2022

Principals for Dealing with the Changing World Order, Dalio 2021

The Psychology of Money, 2020

Time Spent ~28hrs

Historically the Virtue Capital Group portfolio has primarily consisted of equities and equity-linked investments. Equity represents a claim of ownership into a (hopefully) profitable asset, thereby giving the holder of equity a share in the profits corresponding to the size of their claim. For Virtue, we have invested in stocks and real estate. Stocks at their most basic are a claim on the residual profits of a publicly traded company after it pays its expenses and debt holders. Real estate historically tracks inflation in value over the long run, but when coupled with a lease to another party it becomes a revenue-producing asset that can be managed similarly to small businesses. To generate a sufficient return, an investor ought to lay out criteria for what qualifies for an investment, such as asset quality and expected returns. As of late, our qualifications for investment haven’t been met in almost a year since we last purchased shares in $META in September of 2022.

When an investor cannot find an investment that fits their criteria, there are two possible reasons:

1. Their skillset needs to evolve to suit the demands of reality better.

2. They are not looking in the right places.

Let us try to tackle both of those at once, shall we? I will be the first to admit I am a very picky portfolio manager. I have incredibly high standards in terms of asset quality, and in wanting to be the best for all of you I strive for higher than market returns with little cost to safety. Evaluating how these standards have played out should be a simple task thanks to the beauty of readily available comparison. To be transparent, the beginning of the chosen period reflects when Virtue Capital Group had become fully funded and officially able to purchase public equities (7/7/2021). The end of this comparison period coincides with today’s date of writing (8/11/2023). To compare against similar domestic investments, we chose the largest 500 public companies within the United States, the S&P500, which has compounded at a rate of 1.15% during this timeframe. Meanwhile, the MSCI All-World Index which captures the global aggregate of equity has compounded at a rate of -2.31% over the period. Lastly, the Virtue Capital Group portfolio has compounded at a rate of 10.51% per year, net of fees.

Performance-wise, it seems like demanding high-quality assets and returns in exchange for ownership while demanding little risk has proved well for us in the medium term. Therefore it would stand to reason we ought not to change our strategies for the long term at the moment either. Contributing to this performance has primarily revolved around the skillset of answering some simple questions. We always need to understand what an investment is worth relative to its selling price. I want to buy something for fifty cents on the dollar.

The motivation behind this valuation analysis is simply to eliminate as much risk as possible. If I am buying a company that I believe will earn two dollars for every dollar I put in, I assume little risk. However, the inverse is also true. I would never desire to purchase a company that seems like it will only be earning a little, or even losing money over the long run.

Evaluating investment in terms of risk-reward is nothing new. As it stands right now, our standard for equity ownership is not as executable as the underlying companies slowly begin earning less relative to the price someone is willing to pay to take them off our hands. Meanwhile, rising interest rates have pushed short-term debt yields up, with our very own federal short-term government debt being recognized globally as a virtually guaranteed investment.

If the preferred strategy of compounding via equities is becoming expensive, we have another option rather than sitting in cash earning nothing while waiting. We can expand our skillset to become better adept at valuing debt instruments, by looking at the new-to-us world of debt. We will not abandon our quality and standards of asset performance without assuming additional risk, therefore naturally we ought to start within this arena in the safest space imaginable.

In recent weeks, the Virtue Capital Group portfolio has started to park cash in short-term U.S. treasuries with durations of 3-6 months. We find the yields to be attractive with relatively little risk and intend to store excess cash here until a company we would love to own forever goes on sale.

As always, I enjoy working with each of you and am blessed to be your manager. I would be more than happy to ask any questions in regard to this decision. Thank you again for this opportunity.

Warmly,

Zach Terpstra

Principal