Second Quarter 2022 Executive Summary

Russell Mohberg, MBA, CFP®

Russell Mohberg, MBA, CFP®

Co-founder, Managing Partner & Co-CIO

There is a lot of debate about the current strength of the economy as job growth outsourced expectations in the recent measures. But we know for certain that GDP was negative during Q1 and may come in negative for Q2. That means we very well may be in a recession now. An extra bout of Covid was the main culprit in Q1 but Q2 was derailed by continued supply chain disruptions, and inflation of the likes we have not seen in 40 years! The consensus is inflation had peaked in April, but an even higher point triggered another leg lower in stocks, as investors knew the Federal Re-serve would respond with larger interest rate increases. Now, the consensus is recessionary conditions will persist over the next couple of years, but the loss of jobs and the hit to the economy should be mild. This should be no 2008-2009 crisis because we have full employment and corporate and personal balance sheets are much stronger. Both short and long rates are risky, so this signals a belief in the resiliency of the economy. 

U.S. stocks entered an official bear market during Q2, as defined by a -20% drop in the major benchmarks. The valuation compression was much worse in the growth stocks—even those like Amazon, Apple, and Alpha-bet (that weren’t particularly expensive going into this year). Some stocks were sold off so deeply that they may have bottomed but others are likely due for another leg down. Nearly all professional investors believe that estimated earnings for the next year are way too high and will begin getting cut. This is a healthy reckoning with reality and should be a key component of the bottoming process. We are adding to undervalued and smaller company stocks.

Publicly traded real estate acts a lot like stocks and has also sold off this year. Vanguard’s VNQ ETF was off -20.6% at mid-year. The four funds of primarily private REITs and individual properties were all positive during the same period. Private real estate valuations tend to lag and somewhat bridge mild economic slowdowns. These funds are less subjected to short-term trading emotions and investors tend to take more of a “wait and see how the rents hold up” position. With this said, we have had quite a good run in these funds and will be taking a touch of profits when we rebalance back to our target allocations. Our managers of direct private apartment buildings are now thoroughly in a “patiently wait- ing for deals” stance. However, they do frequently make offers at prices that would produce good returns if accepted.

For non-accredited investors or situations where daily liquidity is required, we added a merger arbitrage fund to our man-aged portfolios with income allocation last February. This fund buys shares of select companies that are being acquired (merging) and sells short the shares of the company doing the buying. The strategy is half a century old and aims to arbitrage the spread between the target company’s stock price after the merger announcement and the actual purchaser price upon the close of the merge. We would prefer to own simple investments like bonds that pay income, but with such low bond yields and rising rates we need a bond alternative with lower interest rate sensitivity.



We use funds of private companies that are available for both accredited and non-accredited investors. The two primary funds we use were both positive mid-single digits at mid-year. The fund managers we use both to buy companies at fair prices and a margin of safety so the funs tend to be less volatile and economically sensitive. But there is no perfect investment, and these too will come under pressure if a recession materializes.

Alternative income sources for accredited investors may come from many different sources. Your Regatta Financial Advisor can provide you an update on your specific holdings. Needless to say, we continue to look for and in-vest in assets that should do well in a low growth but inflationary environment. These include farmland, renewable energy, containerships, select real estate development and quick service restaurants.


Bond rates have risen but we are still looking at the low 4% for a core bond fund. The cur-rent yield is a very good indication of the forward total return for at least the next five years. We are lucky if we keep up with inflation with that type of yield. We don’t own much of corporate bonds and where we do, we view them as an insurance policy.

Tax-exempt bonds and private debt are a different story. De-pending on your tax rate, municipal bond yields look attractive again.

Short-term floating rate business loans and short-term commercial mortgages should also produce inflation beating in-come and hold up well in a mild recessionary environment.

It isn’t fun to read all of the negative headlines and articles during a bear market, not to mention the value declines in your accounts, but it is the time for us to make the most of the opportunities at hand while avoiding permanent loss of capital.


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