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We are back home after a 3000 mile / 1 month road trip through the Mountain West. It’s good to be back, especially for our young kids to settle back into a routine. But I’ll miss the daily action of new places and can’t wait to get back on the road again.

Markets have been nutty while traveling, but in a manner that I had long hoped for. Excesses of recent years have been unraveling, and the ensuing volatility is up. While our portfolio is marked lower today, the companies we own in our equity sleeve are likely seeing a deluge of opportunities to make decade defining investments at more logical pricing than the recent past.

I’m beating a well worn drum here, but it bears re-mentioning that the construct of our portfolio allows for lower stress in times like these, at based on my own personality. Investment income continues to flow in the door with no change to date (in fact, accelerating though distributions are mostly a reflection of past / current performance, not the future) and enables continued reinvestment on a regular basis.

I’ve been picking up shares of fiscally sound companies with dividend yields between 5-8%, that often appear to have no hope for growth in the next few years. Why? Investors love to buy things that have some measure of certainty in their story, something that gives them hope (e.g., share price is down but the future is so bright!). They don’t like to buy things that appear to bear the brunt of whatever the current drawdown is.

As an example, M&A volumes are in the tank right now. If one were to guess, it seems like uncertainty and fear is likely to persist for potentially the rest of the year and perhaps next year too. Certain M&A shops are trading as though this state of the market will persist indefinitely, and there won’t ever be a recovery of business. That may be the case, but it also may not. I’m happy to pick up shares with a generally uninteresting base case, meaning perhaps paying 10x current earnings (with earnings down ~75% from 2021) with a nice payout to shareholders annually and no growth, with the potential upside of M&A volumes improving in coming years.

While this is just what I’ve been up to, there are many ways to position or reposition for the changed economic environment, and I’m looking forward to digging into ways to play offense as new opportunities emerge.

We’re about halfway through our road trip in the Rockies and getting gobs of sun along with mountain air daily has been fantastic. While I’ve been on a posting hiatus during this trip, it feels appropriate to journal a few thoughts at the mid-way point.

In the real world, it appears Rome is burning.

As the tide is going out across most asset classes, but more notably in growth company valuations and speculative assets (crypto, for one), the inbound from multiple friends re-thinking their investment playbook has notably increased.

There isn’t a ‘one size fits all’ playbook that one can spitball with others. Investment strategy is the intersection of one’s goals, risk tolerance, and most important, one’s own psychological makeup. If investing actively, the only way to figure how the puzzle pieces fit is to be washed out to the ocean a number of times. An up-market hides true psyche, a down-market lays it bare to understand and plan around its flaws.

While the journey is never-ending, my mistakes of the past have slowly narrowed the field of investments I allow myself to participate in. Today, distinct from the past, I take solace in the fact that we keep strong debt and cash positions, avoid the crowd, and generally own equity investments that are well capitalized / have opportunistic management teams / generate a strong current earnings yield on our cost. The cash coming back to us on a regular basis affords optionality to buy down more of existing companies, make new investments, and buffer our runway. That works well for us today, and hopefully for the indefinite future. But without fail, I will get my bell rung at some point, hopefully in a small way, and will be better off for it.

Good luck, or better, good luck planning.

My unofficial Twitter mentor (e.g., they never accepted any such role nor do they know they play that role) messaged me in an exchange yesterday:

Ha, always be learning and good things will eventually happen. Cause your competition is almost always below average.

The second part of the comment regarding below average competition was what caught me, as a person with perpetual impostor syndrome.

In many ways, the market for investments in the developed world is one of the most competitive, if not the most competitive, arena that exists. While say, an NFL game includes a score of players on the field with 100k fans watching helplessly in the stands with some hope that their belief can influence the game on the field (not to mention the millions on TV), investing is different.

In investing, the millions of people are all on the field and only a few people watch from the stands or on TV that don’t play the game. You’re either on the field or out (by virtue of an index fund) and have better things to worry about. Among the millions of people that are on the field, a select smaller group of them are armed with billions of dollars in research, talent, raw capital, global scale, etc. Others are armed with massive compute resources, algorithms, data, and rocket scientist level talent to squeeze every last penny out of the market. A select smallest bunch of people just stand near the goal line patiently waiting for months or years for the right moment to strike.

The fallacy I often see is the casual interloper in markets that fools themselves into believing that they can play at the same level of the pros, the people that have decades of experience and the above advantages, just because there’s no security guard to keep them off the playing field when the game starts. They run around the field in a manic state trying to score within the field of pros. This person most often utilizes price and belief to generate a highly credible, in their own mind, investment thesis that they put hard earned dollars into. For example, they love their Peloton and the price of Peloton stock is -50%, and they believe that this is a mistake by the market. Nevermind what the valuation of the company implied as far as growth and profit expectations both then and now.

Worse is when an investor makes the above bet and the price of Peloton goes up 25%. They instantly believe that their specific thesis was the explanation. Specifically, the day this person decided to pay attention to Peloton, they called that it was undervalued and after they bought it, the market decided they were right and it was wrong, and here we are. More often it’s just blind luck or the overall market moving down then up versus that person’s prowess. The sad part is when this happens, it reinforces the person’s confidence in their ability to outsmart the market, and they increase the size of their bets. Inevitably, this person ends up losing a large amount of money when it doesn’t go their way.

Alas, I say all this not to troll the interloper in markets, but as a distilled memoir of my own experience and failures as an investor. My experience is not unique, in the sense that a common arc for any investor to go through is the stages of discovery, trial, overconfidence, obsession, disappointment, and ultimately despair. Once an investor goes through this cycle, it’s the love of business or trading securities (whichever style of investment that reflects their personality and interests) that keeps them on the field despite being pummeled early and often.

This love of the game, is manifested in a learning curve with no plateau. The game of reading press releases, research reports, SEC documents, transcripts, articles, etc. (or in the case of short term trading, a different set of exercises). Of using that research to refine the insight manufacturing process. The ultimate goal is a mirage, the goal being the arrival at a state in which confidence exists to pick one’s spots, but the confidence is accompanied by indefinite paranoia that the confidence will ebb if one isn’t constantly learning to adapt to the ever evolving makeup and interplay in markets.

Back to my mentor’s words, while it may be arrogant to say that your competition is always below average, my interpretation of the claim is few are willing to keep climbing the mountain of learning that has no peak. And if you keep climbing up versus just hiking around the mountain in circles, eventually your competition is for the most part, down the mountain.

A friend of mine posed the question yesterday – “how do I make money from this EV transition?”

My immediate thoughts were words like: popular, crowded, challenged business models, etc. Somewhat the equivalent of playing soccer and trying to score a penalty kick by arcing the ball around 3 rows of defenders, three goalies, and having the wind blowing strong in the right direction to score a goal.

On the way home I tried to challenge myself to think any ways that allows an investor to shoot the ball from a few feet out of bounds behind the goal where nobody is looking, and perhaps bounce it off the foot of some unassuming goalie only to see the ball bounce backwards into the goal. What I mean by this is, is there a way to play the trend that nobody is looking at today or, is there a way to play that most investors cannot play?

While a bulletproof answer to such a difficult question of making money in the EV transition is elusive, I had one thought along the lines of the shot behind goal…

Coal is an un-investable asset class. It is universally hated by investors and the public. Banks have entirely stopped lending to the sector, sending companies packing to Chapter 11 or forcing them to run debt-free. The terminal value of these businesses is valued at near zero.

Never-mind these businesses are printing cash today as a collision of geopolitics and oil and gas underinvestment has driven a resource shortage. Most management teams continue to focus on coal exclusively, as they don’t have a pathway to anything else. However a select few are trying to morph to survive the energy transition.

These companies are good at one thing, mining. In a global economy, mining is achieved at lowest cost in resource rich countries with a poor population. However, the geopolitical regime of today is not the same as the one of only a few months ago. And if one truly believes the EV transition will come faster and bigger than people imagine, new possibilities emerge.

One coal management team is specifically scouting renewable energy opportunities, to which in the past I had always thought, “this team has no advantage at anything in renewables versus the crowd of renewables specialists.” Enter the Q1-2022 earnings commentary in response to a question:

To that end, I think an opportunity that may be interesting is companies that are off limits for most investors (ESG negative companies), that are trading at undemanding valuations (the above company happens to be trading at something like 3-6x earnings with a 10%+ dividend yield), and making potential inroads to use their skills to produce raw materials that power the renewable economy.

While not the perfect shot on goal, an investment like this may give the downside protection of real cash earnings at a low multiple and upside optionality of the upcoming climate transition. And importantly, most investors either cannot or will not make an investment like this, handicapping the odds of not losing money / giving a shot at making substantial money more in the favor of the investor.

Making money in a crowded field is hard, but certainly some investors will make it happen, either within the crowd or just outside of it.

Disclosure: This is not investment advice, do your own work.