Bonds, golds are the wrong thing to buy right now: Valley Forge Capital Management Founder

Dev Kantesaria, Valley Forge Capital Management Founder, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Heidi Chung to discuss how the markets are faring amid coronavirus.

Video Transcript

BRIAN SOZZI: Welcome back to Yahoo Finance Live. I want to get right to Dev Kantesaria, Valley Forge Capital Management founder. Dev, good to see you this morning.

I really liked your notes. You like to invest in monopolies, or companies that pretty much resemble monopolies. So in this type of market, what are those companies?

DEV KANTESARIA: Yeah, so, you know, I think the best thing to own when there's market chaos are businesses that provide predictable earnings, strong organic growth. So companies that fit that description are things like Moody's, Intuit, FICO, that produces the consumer credit scores. We own things like Autodesk, MasterCard. And so these are companies that sit at the top of the food chain and can wait out a period like this and come out of the other side even stronger.

ALEXIS CHRISTOFOROUS: Dev, many people may not know this, but you actually graduated from Harvard Medical School. You decided not to go into medicine, but to go into finance. And you also don't hold any health care stocks in your portfolio right now. I found that very interesting, especially during this environment, when health care seems to be one of the bright spots, because a lot of companies there are working on treatments or vaccines for COVID-19. Why are you bearish on this sector?

DEV KANTESARIA: Yes, I spent a many years as a venture capitalist as well. So I've been at the ground level, seeing how medical devices and drugs, you know, make it through clinical trials and ultimately get approved. You know, biotech companies, pharma companies, medical device companies don't provide the predictability that we would like to see in earnings over a 10-plus-year time frame. So we're very much focused on steady and predictable earnings. And although those businesses can provide us a wonderful social good in this time-- at this time-- you know, as a business, I can't predict what their earnings are going to be 10 years from now.

HEIDI CHUNG: Hi, Dev. It's Heidi Chung here. So I want to talk a little bit about the economy. I think one thing we do know is that the damage from the coronavirus outbreak is about to be extremely brutal.

First quarter was really bad for the markets and the economy. Second quarter is expected to be even worse. But most people out there-- most experts-- are saying that the economy is going to bounce back in the second half of this year. Do you think that's a realistic expectation at this point?

DEV KANTESARIA: Yeah. I think, generally, people are unrealistic about how quickly we can return to normalcy. So I think it's going to take longer than what most people think. And the big question is, is the rebound going to be swift-- you know, is there pent-up demand-- or is it a slow recovery?

You know, what I would recommend to investors is to try to look at steady state 12, 15, 18 months out from now. The next few quarters are going to be ugly. But try to look at what those steady state earnings could be for the companies that you love and have that type of time frame, rather than trying to market time, you know, when to get in and out of stocks over the next couple of quarters.

BRIAN SOZZI: Dev, you're in the hedge fund industry. You know, when you talk to your peers, do you think there are still a lot of crowded trades out there that need to be unwound, given the new reality in not just the US economy, but the global economy?

DEV KANTESARIA: Yeah. I mean, where I'm seeing crowding is really around market timing types of events-- so people piling into a certain pharmaceutical or biotech stock, people buying, you know, some types of defensive names, which may work out for the next few months, but are not really great businesses to own for the next five-plus, 10-plus years. So I think people are focusing increasingly on short-term moves. And that's really not the best playbook to make money long-term.

ALEXIS CHRISTOFOROUS: What do you make of the Federal Reserve's actions right now, opening up a whole bunch of different avenues to continue to pump liquidity into the market? Do you think that what they've done thus far has made a difference? And do they need to do more?

DEV KANTESARIA: Yeah. So I think there was a point of maximum fear and panic last month. And you know, I think what we've seen with hospitalization and mortality rates is that things are not playing out in the worst case scenario.

So things will be certainly worrisome, but a lot more manageable than initially expected. And so, you know, fiscal policy, government policy can't help fear and panic in a pandemic situation. But now that some of those risks are moderating, the fiscal policy of the Fed, of the government has absolutely been helpful.

And I think I've been surprised by the size of their actions and their ability to really do anything, essentially. And so it has been quite helpful to calm down markets. It will be helpful in getting us, you know, back on the road to recovery. So the actions have been, I think, intelligent, of the right size, and extremely helpful.

HEIDI CHUNG: Dev, I want to talk a little bit about different sectors within the market right now, specifically energy. We've been talking a lot about oil and the energy market here on Yahoo Finance. But I want to get your thoughts on where you think this is all going.

How low do you think oil can go at this point? We're flirting right up at that $20 per barrel mark. So what's next here?

DEV KANTESARIA: Yeah. So, you know, I've never invested in an oil company in my life. We don't invest in companies whose fortunes are tied to the price of a commodity.

There's companies that can make money when oil is $40, but then become profitless when oil drops to $20. So I think making an investment in oil company, oil exploration, or even the commodity itself, to me, is a speculative activity. And so I would shy away from oil and energy altogether, you know, as I look at opportunities in the marketplace. There's wonderful companies trading at steep discounts today. And I'm not sure that you really need to take the risk of a commodity type of business when you have so many other great opportunities to look at.

DEV KANTESARIA: Well, Dev, I can certainly appreciate wanting to invest in companies that resemble monopolies. But more tactically or short-term, what type of speculative trades are you putting on right now?

DEV KANTESARIA: Yeah. So we're very consistent. We're really playing out the Warren Buffett-Charlie Munger playbook in what we do.

So the time frames in which we look at things are generally five-plus, 10-plus years. So we're buying businesses that we're going to love five years from now, 10 years from now. And again, I think that people look for safe haven assets in a situation like this.

They look for gold. They look for bitcoin, bonds. You know, I think that is absolutely the wrong thing to buy. What should help you sleep best at night are companies that, you know, are really dominant, that can weather, you know, the storm, and come out of the other side, and continue, you know, where they left off, and prosper from there. So I think that the whole notion of "what is a safe haven asset" is wrong, you know, in the minds of most investors.

ALEXIS CHRISTOFOROUS: And Dev, we know we're going to be getting bad economic data in the days and weeks to come. Tomorrow, jobless claims could top 3 million, people are saying. We've got the monthly unemployment report out on Friday. What should investors make of these numbers? How should they handle them when it comes to their day to day trading?

DEV KANTESARIA: Yeah. You know, the market is forward-looking. And so we know the numbers are going to be ugly.

The question is, you know, what percentage of those job losses are permanent? And you know, our company is going to rely increasingly on automation, AI, cloud services, and make permanent changes to the workforces coming out of this situation. You know, that is an unknown. I would expect some job losses to be permanent. But I think the headline numbers that you'll see over the next couple of quarters, you know, people should largely ignore and focus on where they think we're going to be 12 to 15 months from now.

BRIAN SOZZI: All right, we'll leave it there. Dev Kantesaria, Valley Forge Capital Management founder. Thank you for the insights.