From Warren Buffett’s 1997 shareholder letter:
 
In his book “The Science of Hitting”, Ted Williams, who is widely recognized as one of the greatest hitters in baseball history, wrote that he carved the strike zone plate into 77 baseball sized cells. He strongly believed if he only swung at cells in his best zones, he would hit 400 and enter the Hall of Fame. If he swung at his worst cells, the low and away fast ball, he would hit .230 and get a ticket to the minors. 
 
Buffett went on to say in his 1997 Shareholder Letter, “If they are in the strike zone at all, the business “pitches” we now see are just catching the lower outside corner. If we swing, we will be locked into lower returns. But, if we let all of today’s balls go by, there can be no assurance that the next ones we see will be more to our liking”. 
 
Much like Buffett in 1997, which was not long before the dotcom bust caused significant declines in the S&P 500, we consider a great deal of the pitches being thrown at us today to be low and away fast balls. Recently, we have been happy to add to our existing cash position by selling some investments that no longer met our criteria and are waiting for better opportunities. 
 
While patiently waiting for better opportunities, Buffett also recommends ignoring anyone in the stands yelling swing you bum. His returns have benefited from not feeling the need to always be fully invested. We think this has also helped our returns outperform the market since the inception of our strategy on January 1, 1992, more than thirty years ago.* 
 
In large part, finding companies in your circle of competence, so you can assess future earnings with confidence, which also trade at a discount to their fair value is what constitutes fat pitch investing. Investing in popular stocks whose prices have benefited from excessive hype, which we feel exists today regarding AI investing, is the opposite of waiting for a fat pitch. However, we don’t believe today’s environment suffers from overvaluation to the same degree as the 1998-1999 period just prior to the dot-com bust of 2000-2002.
 
Massive policy uncertainty is another element in today’s difficult investing environment. One thing that made Ted Williams such a great hitter, besides his great discipline, was his uncanny ability to “see the ball”. In our view, widespread high valuations have created a difficult investment environment which isn’t helped by the great policy  uncertainty. We think investors are fooling themselves if they think they can clearly see where the ball is going in this environment, especially considering that even in more normal times forecasting has low odds of success.  
 
We don’t believe in trying to time markets and don’t believe that is a wise idea for individual investors. We would happily invest in a situation that met our criteria, but we do believe in being disciplined and patiently waiting for those criteria to be met. Our goal is to generate attractive long- term returns by investing in common stocks in a risk -averse way. Index funds don’t have that option. They are constrained in that they must be fully invested all the time, regardless of the pitches being thrown at them. Something we think investors should be mindful of in today’s environment. No one even has to yell “Swing you bum!” They are always swinging.
 
Although we are approximately 75% invested, the chart below illustrates that stock prices of large cap U. S. stocks have  increased much faster than their underlying earnings growth for the last ten years making it more difficult to find attractive investments. We hope and expect that our cash equivalents will serve as an option for better opportunities.

The analysis, shown in Figure 1, highlights that the increase in the P/E ratio for U.S. large-cap stocks has been driven much more by large-cap growth stocks than value stocks. Over the period, while both categories are more expensive, the P/E ratio for large-cap growth stocks increased by 69% versus only 23% for large value stocks. Since growth stocks dominate the S&P 500, investors need to understand this buildup in valuations is similar to the period prior to the dot-com bust of 2000-2002.

Figure 1 | U.S. Large-Cap and Large Growth Prices Have Risen Much Faster Than Their Earnings Over the Last 10 Years

Data from 10/2014 - 9/2024. Source: Morningstar, Bloomberg. Past performance is no guarantee of future results. The S & P 500 index includes the leading companies representing all major industries in the U. S. economy and is market cap weighted. The Russell 1000 Value index is also market cap weighted and measures the large-cap “value” segment of the U. S. equity universe.  

Forward market returns are typically lower than historical averages when the market reaches elevated levels like today’s. In our view, at a minimum, investors need to adjust their expectations of future returns for stocks whose price increases have outrun their earnings growth for such a long period.
 
Along with First Carolina Bank, we will be hosting a function at Cape Fear Country Club on July 31st at 5:30 to discuss our strategy and outlook. John Slayton will also be making a presentation regarding the significant estate tax changes that families possibly need to address, which are currently being discussed in Washington. 

John is the managing director of First Carolina Wealth and formerly served as the General Counsel  and Investment Adviser to the Gordon P. Getty Family Trust. John holds a Master of Laws Degree from Georgetown University Law. 

Feel free to contact our office for further information. 
 
*South Atlantic Capital claims compliance with the Global Investment Performance Standards (GIPS). The firm maintains a complete list and description of composites as well as GIPS reports, which is available by calling 910-763-4113 or emailing [email protected]. Returns are net of fees and include reinvested dividends and interest. Past returns are not indicative of future performance. Our most recent GIPS verification includes the period January 1, 1992 through December 31, 2023.