Talaria Quarterly Investment Insights

The idea that prudence brings opportunity may raise eyebrows. Nowadays, everyone assumes that things like leverage, scale, and disruption bring opportunity. Prudence just brings weak tea and crumpets. That was certainly true for last year’s equity markets as prudence delivered only modest returns.  The widening spread between what people paid for shares and the cash flows those shares generated stood out. Liquidity, momentum, and sentiment grew the gap between price and fundamentals, with valuations in the US, for example, moving to near all-time highs.

Looking at the S&P500, the latest forward price earnings ratio of 21.7x is 1.9 turns higher than the five-year average and 3.4 turns higher than the ten-year average. Contrary to popular opinion, tech does not have a monopoly on what’s expensive as the rating of sector neutral indices demonstrates. Early in 2025, the resultant risks are in plain sight but calling time on any associated trend is not the focus of what follows. After all, even at a more than twenty-year extreme, it would be bold to ring the bell, say, on the valuation gap between US shares and the rest of the world’s markets.

Instead, this report looks at the index and the Talaria portfolio with a longer-term view, acknowledges our surprise at the strong performance of indexes in 2024, particularly as the lagged effect of interest rate hikes on earnings came through, examines our risk-taking and decision-making against various criteria, and asserts the attractions of the portfolio. Our strategy is prudent, inherently exposing our investors to less risk and characteristics that are not in vogue. We are confident in this approach, which provides a significant margin of safety today in the same way it has done for nearly two decades. The improvement in our holdings’ fundamentals is yet to be reflected in valuations, and the sectoral, regional and factor exposures are very different from both the index and other global equity funds.

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