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Only When the Tide Goes Out Do You Discover Who's Been Swimming Naked

Second Quarter 2022

By Mark Oelschlager, CFA

It is believed that the term “bear market” originated in the early 1700s with bearskin traders selling their skins before they actually owned them.  This early form of shorting was a bet that bearskin prices would decline before they had to complete delivery.  We aren’t fully versed in the dynamics of the 1700s bearskin market, but perhaps the traders were taking advantage of the value consumers place on certainty – of knowing that they will have bearskin at some point in the future.  A modern-day example would be the secondary market for sporting events and concerts, which tends to see prices decline as the event draws closer.  Many people are willing to pay a premium to secure tickets well ahead of time, which helps them plan.  The ticket sellers sometimes provide these tickets, or the promise of them, without owning them, expecting to acquire them at a lower price in the future.  In the 1700s the term “bear” eventually expanded to other markets, and today someone who believes stock prices will fall is called “bearish.”

The broader stock market entered bear market territory in the second quarter, falling to levels more than 20% below its January 3 peak.  High inflation and tightening monetary policy from the Federal Reserve (Fed) have not only raised the risk of recession but have reversed what was long a tailwind for the prices of financial assets.  The Fed raised interest rates half a point in May and another ¾ point in June, the first 75-basis point hike since 1994.  The two-year Treasury yield, which essentially incorporates expected future Fed Funds rate hikes, has risen to over 3% from 0.4% less than a year ago.  Mortgage rates spiked to 6 ¼%; remember, they were well below 3% last year.  Higher mortgage rates may not affect home loans that are in place, but they slow the refi market, raise the cost of new home purchases and tend to slow housing turnover.  Such turnover is a natural stimulant for the economy.  Inflation is raising the cost of everyday goods and services, which means consumers have less money to spend on discretionary items.  So, in sum, the cost of money (interest rates) is up, and the money one has is worth less than it was before.  Not a good combination.  The tight labor market is helping consumers a bit, as workers have the ability to demand higher wages, but of course this reduces corporate profits.


The title of this report is an old Warren Buffett quote that applies today.  Some investment managers have been swimming naked, riding the speculative wave, propelled by an ultra-accommodative Fed and a tide of liquidity.  As they saw the prices of their stock holdings rise, particularly in the “growth” arena, these managers came to believe that no price was too high to pay for these businesses that were either excellent now or expected to be so one day.  That worked - as long as the prevailing conditions lasted.  But they didn’t, and the downside for their clients has been painful.  When the tide went out, it was revealed who had paid too much for their securities, whose portfolios hadn’t been backed by sustainable cash flows, who was dependent on the greater fool theory, and who hadn’t adjusted for the coming sea change, or at least the possibility of one.


We largely avoided these traps, and, as we talked about in previous commentaries, had been positioning our portfolios incrementally more conservatively, given the prevailing macro conditions and market valuations.  In retrospect, we made a mistake in not having been even more cautious.  But the steps we took have helped our clients’ account values hold up far better than both the market and other managers’.  It may not sound sexy to have “lost less,” but successfully limiting downside has a major impact on the long-term growth of a client’s portfolio.  If a portfolio declines 25%, it must grow 33% just to get back to where it started.  If it declines 50%, it must grow 100% to get back to even.  Our accounts have performed well ahead of the broader market since inception.


Cryptocurrencies suffered a severe blow during the quarter.  Bitcoin, the flagship digital currency, declined in value by close to 60% and is down more than 70% from its peak last year.  Ethereum, the second largest cryptocurrency, has lost about 80% from its peak.  And the so-called “stablecoins” have turned out to be not so stable.  Terra, which is governed by an algorithm linking it to LUNA coins that is supposed to keep it (Terra) from deviating from $1 - a relationship that had been compared to the Earth and the Moon - saw its value drop not just below $1, but to essentially zero.  Let’s hope our celestial bodies have more stability than this.  It is looking increasingly likely that cryptocurrency is just the latest easy-money-induced craze that had a nice story behind it but lacked a fundamental rationale for its meteoric rise in value.  Perhaps one day it will be remembered the way we recall the tulip mania of the 1600s.  Then again, this period has several to choose from.  Please step forward, non-fungible tokens.  You too, SPACs (special purpose acquisition companies).


As ridiculous as all this sounds, it’s important to remember the magnitude of the losses people have endured.  The cryptocurrency market was approximately $3 trillion eight months ago.  It’s less than $1 trillion today.  That means $2 trillion has evaporated.  That’s obviously a meaningful sum.


Back to the more traditional asset classes.  It has been a brutal start to the year.  The S&P 500, the most widely used stock benchmark in the world, posted its worst first half of a year since 1970, confounding those who thought the impact of rising rates would be different this time.  Bonds, which were assumed by many to be safe, have produced one of the worst starts to a year in a century, with investors experiencing significant loss of principal.


Everyone wants to know where the bottom is, and of course we don’t know.  A tightening Fed is a clear headwind for the market, and a recession is becoming a very realistic possibility.  What we do know is that the stock market tends to look ahead, so stock prices should bottom before the economy does.  The key to everything appears to be inflation, as it dictates Fed policy, which affects the outlook for the economy and for asset prices.  If inflation meaningfully decelerates, it should be very positive for stocks.  But due to mistakes by both the Federal Reserve and the federal government in dealing with an exogenous shock (Covid), inflation has become at least somewhat entrenched and is therefore becoming harder to corral.  Also, lower inflation may very well be accompanied by a weakening economy.  In the early 1980s, Fed Chair Paul Volcker broke the back of inflation but at the same time drove the economy into recession.  This set up the economy and market for much rosier times, but it took a lot of pain to get there.  Today’s Fed seems to be in a similar situation.


We will continue to invest in a disciplined fashion, mindful of downside risks but also being opportunistic when attractive businesses are out of favor for short-term reasons.


Mark Oelschlager, CFA  

Oelschlager Investments 



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The statements and opinions expressed are those of the author and do not represent the opinions of Towpath Funds or Ultimus Fund Distributors, LLC. All information is historical and not indicative of future results and is subject to change. Readers should not assume that an investment in the securities mentioned was profitable or would be profitable in the future. This information is not a recommendation to buy or sell. 

This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. 

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Total Return as of 6/30/22

Towpath Focus Fund

Russell 3000® Index

S&P 500® Index


Gross Expense Ratio: 1.23%, Net Expense Ratio: 1.11% (Contractual until 3/31/2023)

Q2 2022





Since 12/31/19 Inception








Since 12/31/19 Inception*




Total Return as of 6/30/22

Towpath Technology Fund

Morningstar Tech Category 


Gross Expense Ratio: 3.23%, Net Expense Ratio: 1.12% (Contractual until 3/31/2023)

Q2 2022




Since 12/31/20 Inception






Since 12/31/20 Inception*



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