Author: the_red_deer

Yesterday I had an exchange with someone who I respect. I don’t know quite who they are or what their background is but I suspect that they are likely a retired hedge fund manager in their 50s or 60s that don’t need to work anymore but invest for their own account for the love of the game. This person is a shrewd distressed and special situations investor. They seem to avoid trouble, find good risk / reward, and play their own game.

Essentially this person said one of my holdings is in fact highly interest rate sensitive (in a bad way) when I posted a quote from management saying that they would welcome higher rates. The basis of this was they indicated that the trading prices responded negatively to interest rate hike news starting in Q4-21. It sort of rattled me. Was I completely missing something?

After taking some time to think about it I concluded a couple things. First, his conclusion was purely based on trading action versus fundamentals. It’s not to say that this person is wrong, just that sometimes we don’t know exactly why prices move one direction or another, and often times the market can get it wrong. Second, I have some data points to the contrary. For example, rates have moved from 2% -> 10%+ in Brazil and similar companies continue to see positive inflows. Additionally, these firms have flourished in a moderately higher rate environment successfully in the early part of the prior decade. Last, this person just isn’t close to the business models nor have a view of how they are evolving going forward. Again, not to say that they are wrong, but just that based on the game they play, it’s nothing close to what they would be interested in.

To conclude, it helped me reinforce that I should always take feedback from others seriously and help it evolve my thinking, but also always play my own game.

I typed up a post essentially trashing “compounder” investors who buy stocks that have already had dramatic multiple expansion on small dips. But thought, hey, let’s not put that negative energy out in the world.

To that end, I just want to remind myself of a few core tenets to put the odds on my side.

• Purchase price matters. Good absolute going in valuations (e.g., 10% earnings yield) give optionality to higher multiples in the future.
• Growth matters. Ideally companies are far larger in 10 years versus today.
• Management matters. When things go bad, management who makes lemons from lemonade create a lot of value.

To that end, I feel like, which isn’t always the case, that there are a number of companies that fit these metrics today that offer a nice opportunity to nibble.

A larger financial twitter personality yesterday commented “During this drawdown I’ve realized I’m a real investor.”

To me that implies that this person questioned whether they should or should not be investing in the past. If you read their more recent letters, they are candid about underperforming in the recent past, particularly given the late ’21 and current drawdown.

But the question in my mind is what is this person’s goals? Is it to outperform a benchmark? Is it to be able to post that they have a double digit investment track record?

Those are really tall goals to set. The funny thing about markets is the cost to get in the ring is zero. But the other people you are playing the game in the same ring with are outright pros. People with huge research budgets, decades of experience, large professional networks, huge geographic footprints, etc. Furthermore most individual punters who set out on this goal look at mid / large cap names because it’s what interests them. It’s what in the news. They are the products they interact with and own. But that is precisely where the pros play.

For me / us, our goals are clear. To provide stable and increasing investment income through good times and bad. So I don’t care what the benchmark does. I care about the process I’m implementing and the constant refinement of that process. I invest in debt, real estate, and equity. All of them must produce cash flow to us today. I keep a strong rainy day fund for our living expenses and invest incrementally versus trying to push out big slugs when I “think” the time is right. I strive for as much diversification as is possible.

All is to say, the bar for our existing investments really is “are these companies or assets generating enough cash to pay us?” versus will earnings increase or will the multiple reflect what I think it should be. And that makes it much easier during a drawdown to evaluate if the process is working or not. And that makes it easier to sleep at night.