Market Update: Process Over Reaction — The Empty Boat and the Iran Conflict
Recently we published our year-end letter. Since then, we’d like to address rising conflict in the Middle East. In our year-end letter, we shared the Buddhist parable of the Empty Boat: a monk meditating on a lake, angered by an oncoming vessel, prepares to shout—only to discover the boat is empty. No intent. No malice. Just a drifting boat.
The lesson is not about the boat — it’s about how we react.
We recognize that the Middle East conflict is cause for real concern. Human costs are high, energy markets have spiked disproportionately hitting major oil importers, and shipping through the Strait of Hormuz is disrupted. Clients are rightly focused on risks to equity markets and the broader economy. We are actively monitoring the situation and escalations.
From our perspective, the primary risk is global supply chain disruption, which could create a supply shock, increase inflation, and pressure equity valuations, especially for companies lacking pricing power. Any supply shock would likely be temporary. However, we seek to mitigate this risk by focusing on companies with strong bottoms-up fundamentals—high-quality businesses with durable competitive advantages, strong balance sheets, and pricing power capable of sustaining earnings through disruption. The result of our investment process is a portfolio whose consensus-expected earnings outpace the S&P 500 Index by more than 100 basis points.
In recent days, we have observed similar conclusions from large institutional investors. We share the view of peers at Goldman Sachs and Citadel Securities, that investor sentiment has become increasingly defensive following recent volatility tied to the Iran conflict. Positioning and flow data suggest markets have already priced in a meaningful amount of near-term risk, with elevated hedging activity and persistent retail dip-buying absorbing recent downside pressure, while U.S. money-market fund assets have risen to a record $8.27 trillion—highlighting the substantial amount of capital currently positioned in cash that could eventually rotate back into equities as uncertainty subsides. If geopolitical tensions stabilize, this reset in sentiment and positioning could create conditions for a rebound, particularly in high-quality companies with durable earnings growth.
How We Are Protecting Client Assets
In recent months, we have increased exposure to “barbell” industries—resilient businesses or those likely to benefit from Middle East escalations—including pharmaceuticals, domestic homebuilding, media content, aftermarket auto parts, and defense infrastructure.
While avoiding prime defense contractors, we hold aerospace and defense-adjacent companies and are exploring selective alternatives. Prime contractors tend to offer lower returns on capital, rely heavily on government spending and lumpy appropriations, and trade at elevated valuations already pricing in extended conflict, making them less suitable for durable, long-term compounding.
Our approach also emphasizes:
Supply Chain Resilience: Companies with transparent, flexible supply chains, diversified sourcing, and onshoring capabilities.
Inflation-Resilient Sectors: Consumer staples, regulated utilities, and industrials with pricing leverage.
Geographic and Currency Diversification: Exposure to regions with lower geopolitical risk and stable supply chains.
Barbell Strategy: Growth-oriented technology and semiconductor holdings for indirect defense exposure balanced with stable, recession-resistant businesses.
Valuation Discipline & Rebalancing: Avoiding crowded or overvalued assets while maintaining long-term compounding.
Active Risk Monitoring & Scenario Planning: Tactical adjustments based on meaningful shifts in geopolitical dynamics, not short-term volatility.
This framework allows the portfolio to benefit from rising defense spending and geopolitical tensions while maintaining diversification and long-term earnings growth.
Process Over Reaction
Market volatility during geopolitical crises can be cause for concern. If the conflict resolves within a few months, long-term drivers—earnings growth, capital allocation, and innovation—will likely reassert themselves.
Our goal is not to eliminate volatility but to avoid mistaking drift for direction. Patience, discipline, and a clear framework for selecting high-quality businesses remain the best protection for client assets. We appreciate your trust as we navigate these periods thoughtfully and strive to preserve capital through market cycles. Please reach out with questions.
Ryan Kanaley
Disclosure
This material is provided for informational purposes only and is not intended as personalized investment advice. Nothing contained in this communication constitutes investment advice or offers any opinion with respect to the suitability of any security, and this communication has no regard to the specific investment objectives, financial situation and particular needs of any specific recipient. Past performance is no guarantee of future results. Additional information and disclosure on Overbrook is available via our Form ADV, Part 2A, which is available upon request or at www.adviserinfo.sec.gov.