Steve’s Thoughts on the First Quarter 2022

The first quarter of 2022 started out pretty poorly for most investors. The S&P 500 stock index declined 11% during the first 16 trading days of the year but recovered somewhat to finish down 5%.

Of course, if you’ve been an investor with us for some time you already know that we seek to build portfolios that are non-correlated to the markets. In other words, we want our investments to increase in value because we recognized the mispricing and not because the rest of the market went up.

I can’t tell you whether the markets are going up or down. Neither can anyone else. However, I can give you a very intelligent evaluation of the securities we own and have studied over the years.

Having said that, our largest position in our client portfolios began 2022 by advancing 15%. This is after a nearly 40% advance in 2021. This particular holding has been undervalued for years, and that’s okay with us. We have two ways to win… the discount to true intrinsic value can narrow OR the stock can grow its earnings and book value. In this particular instance, both happened. Today the stock is trading closer to intrinsic value than it’s been in nearly a decade AND they are growing their earnings by 6-10% a year. With their competitive advantages and low cost of capital, they will do well in the coming inflationary environment.

Let’s take a look at Energy, Bonds, Commodities, False Bargains, and Insurance…


We began writing about energy companies in 2019 shortly after Covid. These shares have advanced 40% on average in the first quarter. Not a surprise at all. We typically avoid buying shares in energy companies but the supply-demand dynamic was out of whack even before Covid, and then the bombing of Ukraine came along. My guess is it will last a while. Taking some money off the table in commodities is usually prudent. After all, we’re not talking long-term compounders here. It’s boom or bust. Occidental Petroleum led the way in the sector rising 95% in the first quarter and its warrants over 200%.


My long-term forecast of bonds being certificates of destruction is starting to come to fruition. These “safe” investments fell across the board. U.S. Treasuries fell 5.6%. Investment-grade corporate bonds were down 7.8%, and municipal bonds — usually bought for safety and their tax benefits — posted their worst quarter in 40 years by falling 6.4%. It could be just the beginning as the bond bull market of the last 40 years comes to a close.

Hmm… so bonds acted just like stocks. I wonder how proponents of the 60-40 portfolio are feeling right now? For my assessment of this fallacy, read my missive on the myth of the 60-40 portfolio on our blog. Simply put, the idea that bonds go up and stocks go down (and vice-versa) is broken, and probably has been for some time.

If you still think bonds are necessary holding, consider this… For every 1% increase in interest rates, the 10-year U.S. Treasury falls 8.4% on average. Corporate bonds fare a little better falling anywhere from 3.7% to 6.4%. The coupon or interest rate on the bonds will give you a little something but not enough to break even. As Leon Cooperman (one of the legends of the industry) says, “Bonds today are a return-free risk.”


Commodities roared posting their best quarter in 40 years. We’ve mentioned oil and gas, but wheat prices advanced 31% and the nickel market was so volatile that the London Metal Exchange closed trading and shut the exchange down for a week.

Supply chain inefficiencies, supply-demand imbalances, and shortages bode poorly for consumers but well for commodity investors going forward. Metals such as gold and silver, uranium, copper, and cobalt… you name it, it’s in short supply. It’s hard to imagine them not doing well over the next 5 years.

Beware of False Bargains

Many former pandemic darlings have decreased 30-70% off their highs. Zoom, Peloton, and meme stocks such as AMC and Gamestop have cratered. This “price reduction” doesn’t necessarily spell a great opportunity, as these companies were grossly overpriced to begin with. To be successful, investors should always focus on what a company is worth and not on short-term share price movements.

Markets will rise and fall, but history tells us that taking a multi-year view tilts the odds of success in an investor’s favor. According to JP Morgan, since 1950 annual S&P 500 returns have ranged from +47% to -39%. For any given 5-year period, however, that range narrows to +28% to -3%. And for any 20-year period, it is +17% to +6%. In short, there has never been a 20-year period when investors did not make at least 6% per year in the stock market. Imagine what you could do by doing smart research and applying it.

Past performance doesn’t guarantee anything, but history does clearly show that the longer the time frame you give yourself, the better your chances of having beyond-satisfactory returns.


The entire CSH staff will be in Omaha for the Berkshire Hathaway annual meeting the first week of May. It will be great to see old friends and learn from some of the best. On Sunday, we’ll be at the Markel breakfast. Markel is one of our holdings and one of the premier property-casualty insurance companies on the planet.

We haven’t yet talked about P&C insurance stocks — one of our favorite sectors. The whole insurance sector has outperformed the market by double digits this year. Again, no surprise. We’ve talked about the boomerang effect of rising interest rates and a hard pricing market in insurance.

Nobody gets excited about insurance stocks like we do. You’ll never be at a party and hear, “Hey, the combined ratio of Markel is only 95%.” Most people don’t care or understand, but we love it. P&C insurance is a great business if it’s run properly. A decade of soft pricing made the sector a coiled spring ready to snap back at any time. I believe Q1 of 2022 is just the start. Book values, the driver of stock price returns, will continue to go up as insurance companies reprice their policies for higher inflation.

My Personal Positions

As a reminder, my personal investments always mirror my client investments. My top 5 holdings today are Berkshire Hathaway, Cambria Tail risk EFT, Occidental Petroleum warrants, Meta Platforms, and Sprott Resources.

That’s all for now. I hope 2022 has been off to a good start for you. If you have any questions or would like to make an appointment to speak with us, give us a call at 217-824-4211 or find us on our website. We’ll be happy to speak with you!