Dear CSC Partner:

In this uncharted mess of circumstances in which we are presently all immersed, unless requested otherwise, we will try to keep our communications brief and on material matters.

We don’t think it is helpful to react to every zig and zag in the investment world, of which there are and will continue to be plenty. We are also not a primary news source on the spread of pathogens. So in conclusion, we do not want to add to the clutter of your inbox, of which we are sure is unhelpfully full of mostly useless corporate blather.

We will note the following as of this Thursday morning, March 19th:

1 Cove Street is fully operational and mostly in office. We have long standing “disaster recovery” procedures that are tested annually and are ready to be implemented as necessary. The firm can operate in a completely remote fashion if needed. Our ability to access client information, work with third parties to effect transactions, and actually “do investment work” is undiminished amidst the roar of the crowds.

2 This period has been painful for our portfolios. Despite careful asset allocation where we have discretion and curated stock selection, having cash BEFORE a drop is really the only remedy when nearly all assets “trade as 1.” We have seen material “marks to market.”

3 This is not the first rodeo for our investment process, which does not make being thrown from a bull and getting gored any less painful. Without sounding trite, we seek to “lean in and buy lower” and “lean out and sell higher”. We are looking to add to companies we own that we really like for the long run, eliminate any “exposed mistakes” or simply sell weaker names to create liquidity for new purchases in companies that are upgrades and suddenly available at compelling margins of safety. It is a time tested playbook

4 A “bear market”—which is media-defined as down 20%—is a sign not to be fearful, but actually signals something closer to a bottom.

5 The process of “contagion” is almost a mathematical formula. Our reading suggests it almost defines “transitory” but at what point the bottom is reached is obviously unknowable—whether it is the number of cases, the human reaction to it, or the financial market’s collective ability to handicap the damage. We do think there will be an aggressive V-shaped economic recovery from that point, from pent-up demand of goods and human nature. After a financial crash/economic crisis it is pundit-posited ad nauseam that human behavior has forever changed. We haven’t seen much evidence of that in 36 years in the investment business.

6 In the meantime, we attempt to stay vigilant and on game, and to not be overly swayed by the barrage of both real and misleading news. We are deeply in the realm of elected official activity, who are solidly incented toward activity that is perceived to enhance their electability post-crisis. It is not always helpful or relevant.

7 The Federal Reserve is attempting to “grease” the ability of the financial system to function. It is the “plumbing” that is of concern, not that zero rates are so much better than 1% interest rates. We watch this very closely.

8 As far as fear and the disconnect in securities prices that we are seeing, we sense early 2009. It may be February and not March, but this is arguably one of the best opportunities in decades to put new money to work in real companies whose stock prices reflect the twitter du jour rather than long-term fundamentals. This is the second time in our history we are earnestly asking for money to make money.

We are available to discuss any of these issues and any others that you may have. As we have seen again and despite a lot of ink devoted to the opposite, investing capital is a distinctly human process.

Best regards,

JB and Team CSC

Jeffrey Bronchick, CFA | Principal + Portfolio Manager
Cove Street Capital, LLC

Let’s discuss. — 424-221-5897

The opinions expressed herein are those of Cove Street Capital and are subject to change without notice. Consider the investment objectives, risks, and expenses before investing. You should not assume that any of the securities discussed, if any, are or will be profitable, or that references we make will be profitable.

CSC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. Additional information about CSC can be found in our ADV Part 2A. A copy of CSC’s current written disclosure statement discussing the Company’s business operations, services, and fees is available on our website and also upon written request.