Excerpted from our 2021 Annual Shareholder Letter.
How are we to make sense of a year filled with so much noise?
The cultural atmosphere of this past year has been so convoluted with unprecedented events, societal revolutions, social unrest, political instability, and institutional skepticism that it seems impossible to weave a coherent strand of meaning through it all. And the chaotic atmosphere seems to have permeated the everyday activities of our individual lives with the same sense of disarray—leaving us craving order and meaning.
As investors, we have been keenly aware that the markets have also been subject to an exceptionally noisy atmosphere.
Entire industries were debilitated by the global pandemic, yet the stock market experienced one of the sharpest recoveries in history. We witnessed COVID-related biotech company stock prices skyrocket, disconnecting from reasonable earnings predictions as they raced to address an important and urgent need. Volition from retail investors ignited investment frenzies in struggling companies, squeezing bearish institutional investors. For six days, a 1,300-foot ship clogged one of the world’s busiest waterways, causing ripple effects through supply chains for months. Popular investment apps invited thousands of everyday people to invest at the click of a button, making it easy and even fun to speculate on trendy stocks.
On top of these anecdotal phenomena, macro forces that were created by enormous fiscal stimulus and accommodative monetary policy are causing fears of inflation as increased demand could outpace supply.
Making Sense of the Noise
Noise by itself is just sound. It has no purpose. But when fragmented noise is synthesized to form a melody and made into a song, it produces something beautiful—music. Music is the result of imbuing sound with purpose.
On a human level, this is intuitive. Our daily habits, weekly routines, and annual traditions are nothing more than disjointed activities that fill our time unless, that is, they culminate into a greater narrative purpose in our lives. When we imbue them with a sense of purpose, the noise becomes a lively rhythm, creating the melodies that make up the songs of our lives.
Likewise, when the immediate market idiosyncrasies and the repetitive business cycles are imbued with a sense of purpose, they become synthesized and structured into something cohesive and meaningful rather than spontaneous and anxiety-inducing.
As investors, we had a choice to make this past year. We could have let the noise drown out the music. In other words, we could have pursued the immediate hype, looking to capitalize on the chaos. Or, we could have remained tied to our long-term investment theses. To be clear, numerous companies have received well-deserved hype over the past year for their ability to deliver true value in times of need. In many instances, however, the noisy atmosphere encouraged noisy investor behavior, resulting in speculating and betting on sentiment-driven bubbles.
At Eventide, we chose the latter option. We continued to invest in light of our underlying thesis that businesses serve a higher purpose—to create value for society by meeting important human needs. As investors, we play the vital role of supplying the capital that fuels the success of these businesses. The result is an economic environment that promotes human flourishing. This is the “music” of investing.
Our team takes great care to position our portfolios to account for sustaining secular shifts, but we have not deviated from our underlying investment process, which acts as a consistent rhythm to our song. We remain confident in the secular themes of human flourishing that we believe are addressing the long-term needs of our society. These themes were important before the pandemic and remain important now, and thus remain in demand. Our deep, company-specific research enables us to invest in companies we believe are best suited to weather the short-term challenges and deliver long-term value to you, our shareholders, and to broader society.
Meeting Important Societal Needs
We are long-term investors—meaning we look for our thesis to prove itself over three-, five-, and ten-year periods, and our track record tends to reflect this. In many instances, this past year highlighted our purpose-driven thesis as it became abundantly clear that businesses are important to people. For example, many companies experienced great success because they were meeting important societal needs, like many of our cybersecurity companies that thrived as they became essential teammates to a society heavily dependent on online connectivity.
Further, it became clear that people are important to businesses. Businesses that had already established trust with their employees were able to rely on their employees with reciprocating trust. Businesses that had built up a loyal base of valued customers saw that loyalty turn into resilience as customers adopted new behaviors to support the businesses they loved. And businesses that had built a reliable rapport with their suppliers were in a much better position to depend on their relational capital to develop flexible solutions as supply chains became immensely stressed. As a result, our comprehensive stakeholder analysis, which we call Business 360®, proved to be extremely helpful to our performance.
While the pandemic drew attention to the value of many companies we are invested in, other companies in our portfolios, especially those in the biotech industry, became underappreciated as attention was diverted from prominent long-term themes to COVID-related themes. Consequently, our biotech companies, chosen for their long-term value, suffered short-term underperformance as we cheered for the success of the COVID-related companies seeking to address our most urgent needs. Our process guided us to remain largely on the sidelines as the stock prices of these COVID-related companies became disconnected from our calculated intrinsic value. Just as important however, our process is revealing great opportunities to invest in underappreciated companies that we believe are trading at a discount. We remain excited about the future.
Taking a Step Back
We opened this letter by recognizing how much noise has filled the cultural and market atmospheres of the past year. It is easy to become distracted and forget to recognize the transformative power that purpose has to turn the noise into music. As anecdotal events spark market abnormalities and macro forces induce systemic fears, we at Eventide continue to take a step back and remember the foundational, long-term drivers of successful investing—driven by its true purpose.
Investing is powerful and important. And when imbued with purpose, it can yield something beautiful—music that makes the world rejoice.