Dear Fellow Investors,

One of the most famous baseball seasons in history ended in 1951 with a one-game playoff to see which National League team would play in the Major League World Series. The New York Giants (the forefather of my beloved San Francisco Giants) faced their cross-town rival Brooklyn Dodgers at the Polo Grounds for the National League pennant. In the bottom of the ninth inning, Bobby Thomson of the Giants hit a fastball over the fence off pitcher Ralph Branca to win the game. The screaming announcer is ever remembered for repeating, “the Giants win the pennant, the Giants win the pennant.”

We think another shot “heard around the world” occurred on August 23rd of 2016, when the U.S. Commerce Department reported that new home sales surged 12.4% to a seasonally adjusted annual rate of 654,000 units in July, the highest level since 2007. This was 74,000 more homes than economists had expected and was stunning in the same way that Bobby Thomson’s home run was stunning.

It’s no secret that we’ve argued millennials will drive the economy through home purchases and household formation over the next decade. Even patient value investors like us were starting to wonder when they would show up. It seems that millennials are getting sick of their Mr. Potter-like landlords gouging them with rent increases.

Despite compelling demographics, most investors, stock pickers and members of the media have ignored the explosion of weddings, births and household formation.We believe this causes the public and stock market participants to maintain an extremely negative view of the U.S. economy. The negativity has made our stance lonely. While investors poured dollars into technology companies, consumer staple businesses and telecom/utility stocks, our investment discipline forced us to sit patiently waiting to benefit from the change we see coming from a better economic future. We believe these popular investments are unrelated to the groundswell that a dramatically better level of economic activity could spawn if our largest population group reproduces. Sometimes it feels like we are being given an unfair long-duration advantage over most of our competitors.

Ironically, many years later we learned that the 1951 Giants did cheat the Dodgers by stealing the catcher’s pitch signs from a hole in the outfield fence. The catcher put down one or two or three fingers to prompt the next pitch selected. Bobby Thomson knew what pitch Ralph Branca was going to throw. In the major leagues, just because you know what the pitch is going to be doesn’t mean you will hit it over the fence, but the Giants entered those dramatic final moments with a huge advantage via their skullduggery.

Therefore, we have two challenges. First, we must look through the news for signs of prosperity coming from a boom in housing the next ten years. It is estimated by astute folks that the U.S. needs housing starts of 1.5 million per year for a decade to meet the future demand from 86 million people currently between 21 and 40 years of age . We are running 40% below historical norms, but this latest report from the Commerce department should surprise even the most pessimistic observer. Don’t think for one minute that the US Federal Reserve Board missed the latest statistic. Recent demographic studies show that women between 30 and 45 are seeing a huge jump in fertility and we are just getting started . Our challenge is to be patient and lonely while other areas are making people money in the stock market.

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