Quarterly Newsletter - 3rd Quarter, 2025

In early April significant tariffs were enacted in the US on all imported goods. Tariffs are a form of tax. In early July, equally significant legislation was signed into law in the US. We’ll discuss what we see as the high-level impacts below and please reach out if you’d like to talk in more detail.

US Tariffs

Before April tariffs were mainly used to protect a country’s key industries. For example, in the UK, large tariffs have often been placed on agricultural products like meat and dairy to protect domestic agriculture and maintain the UK’s (typically higher) food standards. Food is a necessity of life and the ability to produce it in large enough quantities at home is critical to national security, so this is an industry where tariffs are most often used by many countries.

The blanket tariffs imposed by the Trump Administration in April are much more hostile and can be considered a type of ‘economic war’. Tariffs are inefficient, inflationary, and, like war, create a lot of losers and very few winners. Over the long-term, if tariffs persist, they end up being built into the cost of the goods that we buy, which means we, as consumers, end up paying for tariffs in the form of higher prices (inflation). This is why they are ultimately a tax on the consumers in the country that has the tariffs.

We have examples from recent history of how this may play out. It’s likely there will be similar consequences to those we felt in 2021 when there were large scale global supply chain issues caused by the Pandemic. There were long delays in receiving any goods effected, combined with large price increases, which led to rising interest rates to combat that price inflation. All these effects negatively impacted consumers by increasing their costs/expenses.

In the short-term, any companies impacted can’t pass on 100% of these costs to their customers, so their profit margins are squeezed and their profits fall. This benefits companies that have desirable products which gives them the ability to pass on costs more quickly to their customers. Low-cost producers with many competitors will struggle.

US Government Legislation

The US government pushed through significant, wide-ranging, costly legislation. At the highest level, it took money from the very poorest, from climate change initiatives, and gave that money to the ultra-wealthy (while increasing debt significantly). This is likely to cause problems over the medium to long-term (absent other changes in future), especially if tariffs are maintained. As we know as individuals, if we have more debt and higher interest costs, we have less money and less options for our future growth until we can get those things under control. It is the same for a larger entity like a company or a government. At some point debt issues and income inequality will need to be addressed, which is likely to reduce economic growth, negatively impacting investment performance.

For the time being, the overall outcome for investors, is positive. The US corporate tax rate of 21% was made permanent (it was reduced from 35% in 2017). Lower corporate tax rates equal more money for those who invest in US companies. Corporate tax rates are 25% in the UK and China, and average 25% in Europe. The US in in-line with these rates now as US states also charge corporate tax (between 0%-11.5%) which raises the US average to around 25% too.

Investment Commentary

We have added two new investments since the end of the first quarter and completed research on another. One of these companies, Toto Limited, is a Japanese company, and unfortunately, we don’t have the ability to add this for our UK clients yet (we don’t have access to Japanese markets in the UK). If this changes, we will update your accounts. This is also the case for smaller US accounts as well, as the smallest position we can take in any account is 100 shares, which is currently a $2,500 minimum investment.

Often, when we have significant changes like those we see in the US, this change increases risks while also providing an increasing number of opportunities. The companies we have approved for investment are leaders in their respective industries, and, regardless of how the current tariff situation plays out, they should perform very well. We have added them to our list of investments (included in a separate PDF) that give an overview of the risks we see and the potential for future returns. Below we have included some key details to help better understand what these investments are and why we expect them to perform well.

We pay particular attention to the price we pay for investments because paying less means higher future returns. As a reminder, we intend to hold all investments for periods of at least five years and preferably much longer.

Green Brick Partners, Inc. (Stock Ticker: GRBK)

Green Brick is a rapidly growing, vertically integrated home builder. They have grown substantially since they were formed over ten years ago. They have grown organically, through high quality acquisitions, and by starting their own new companies. They are growing rapidly due to the experience of their team, the efficiency of their process, the quality of the houses they build, and the markets they operate in (Dallas, Austin, Houston, Atlanta, Treasure Coast). They also have a growing inventory of undeveloped lots in prime locations that covers their business for the next 5 years.

They find and acquire the land, they develop it, they build the houses, and they provide financing and insurance (mortgages and title insurance) to help finalize the purchase (this is vertical integration). Most large home builders don’t develop their own land; they purchase developed lots that are ready to build on. Green Brick’s vertical integration has made their profit margins one of the highest in their industry at around 20%. Their stock price is also relatively cheap due to high interest rates, even though they self-fund most of their projects with cash flows from their business and they have one of the lowest levels of debt in the industry. As home building is capital intensive, home builders typically need a decent amount of debt to fund their operations. Also, higher interest rates slow home purchases because it increases the costs for buyers. After years of underdevelopment of new houses, this is less of an issue. Green Brick is also still relatively small and have plenty of room to grow.

Toto Limited (Stock Ticker: 5332)

Toto is a provider of high-end, technologically advanced plumbing products. Their products are in high growth areas, and they are seen as a market leader in many of the areas they operate. They have struggled for some time with low profit margins, but this has been during a period when they have made significant investments in their business for future growth (large investments/cash outflows now, temporarily reduce current profit margins). They have a monopoly in the markets they serve in Japan and have been expanding overseas. This is likely to lead to significant future growth, and we are already starting to see this take place.

Their most successful products are connected to toilets and ceramics. Their toilets are some of the most advanced in the world, using proprietary technology to keep toilet bowls cleaner for longer using custom coatings that prevent sticking and bacterial growth. This substantially reduces how regularly toilets need to be cleaned and eliminates the need for harsh chemicals (like bleach). This is why their products are so popular in high-end hotels. Their toilets are extremely efficient, minimizing water use and the associated costs/environmental impact.

Their ’Washlet’ (bidet) products (which are commonplace throughout Japan and many 5-star hotels globally), are gradually becoming more mainstream elsewhere. These are gamechangers for anyone that has tried them. Toto is the premium offering in the market for bidets that attach directly to your toilet. They also help significantly reduce paper usage and have many health (and comfort) benefits.

With the considerable investment Toto has made in their advancements for ceramics in their sanitary products, these ceramics can now be used in the high-growth, high precision semiconductor industry. Toto helps technology companies produce microchips with precision using their custom ceramics.

Investment Strategy

We seek to hold 15-20 individual stocks like Green Brick and Toto, that are significantly undervalued and offer a high probability of future outperformance versus market averages. We combine these individual stocks with other investment managers (mutual funds) to help further diversify your investments across stocks, bonds, and real estate/infrastructure. Our investment managers have similar processes that seek out and take advantage of overlooked and/or underappreciated investments that lead to higher investment returns.

We believe we are well-positioned for future success. While there will be periods when investment returns aren’t where we’d like them to be (lower than market averages or negative), our research process helps give us confidence to maintain our commitment and give these investments the time they need to play out and reach out goal of long-term performance that is higher than market averages.

We will continue to monitor and keep you informed on major global events that may impact our investments. If you’d like to set up a meeting, please reach out.