Tag: Investing

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.

As the market gyrates, with it down dramatically two days prior and up materially yesterday, the predictable stream of platitudes and Buffett-isms are filling my Twitter stream. Buy when fear is greatest. If you’re not investing now, you’re making a macro call (implying a macro call in it of itself). Etc., etc.

In my opinion, platitudes are cheap. They make someone feel better about making a blind decision. For example, my stocks are going down and it doesn’t feel good – this must mean buy based on what Buffett said in a 1972 shareholder letter, right? In reality, the platitudes align an investor to another investor’s process and plan, not your own. Furthermore they oversimplify a difficult set of decisions.

I’d add that most investors today haven’t been through a real downturn. A downturn in which there is true end market demand destruction. One in which employers are shedding jobs by the truckload and unemployment hits 10%. No, Covid does not count.

Downturns don’t happen all at once, they take time. It’s not a quick buy the dip and be done with it, like it was during Covid, 2018, 2014, etc. The real downturns feel sort of desperate. Like there’s no light at the end of the tunnel. When the platitudes run out and real investors get to work.

While the above may imply that I know better than others, I assure you that I do not. We simply continue to keep a healthy cash buffer, own investments that aggressively push cash back to us, and make incremental investments as cash builds. Investment hero acts generate worship, but also breed financial ruin.

Just reviewed Buffett’s annual letter. While always entertaining to hear his folksy charm, at this point I don’t learn anything from him.

I first read his letters in 2007 and felt, like many, that I had discovered a secret to investing. What in fact I had discovered is wisdom that can’t be immediately implemented – but confirmed over time through innumerable mistakes.

Furthermore, what has become even more clear to me is that everybody has to play their own game. Investing is the intersection of opportunity, interest, and goals. It’s unlikely that all three align to what old Warren’s are.

Knowing my game has taken time, and I believe that over the long run, I’ll have wisdom to bequeath for others to ignore (…at least initially).

I feel fortunate to be enjoying clear skies and and active stress free days while away skiing (aside from picking what to eat for dinner). Other parts of the world are not so fortunate, especially those in Ukraine today.

As the fighting deepens and targets shift from military to civilian, I feel a lot more frustration at world leaders versus when it was a lot of chest thumping circa one week ago.

Markets whipsawed on Thursday and jumped on Friday. The large swings of a manic market appear to be classic moments of widening probabilities and disappearing liquidity.

I’ve continued picking up shares of select companies that pay out a good share of their earnings but remain cautious to not move too quickly. Remaining over-capitalized is not only a strategic asset but a psychological asset (to the detriment returns due to cash drag).

On the road today as well…

Markets are rattling with Russian bombing of military sites in Ukraine. The Moscow stock market halted trading and major Russian companies are -40%.

M&A and new equity issuance is grinding to a halt – and accordingly some associated companies are selling off more dramatically than others.

Steve Schwartzman, founder of Blackstone, preaches that his coping mechanism for mayhem is to wait for a bottom and buy after the market turns (in his case transact for private companies).

My current view is nibble slowly. Keep calm and carry on.

On a private forum for accredited investors that I browse for private deals (primarily real estate), there’s heavy discussion on how to position one’s self for persistent inflation.

Generally speaking, when people think of high inflation, people think of Zimbabwe, the Weimar Republic, etc. Essentially extreme scenarios. The next most common scenario is the 1970s. The thought process is “I don’t want to be the patsy, how do I avoid it or benefit from it?”

There’s a phrase that often circulates these days, “scared money don’t make money.” I believe this is true. Those that hoard gold, bitcoin, put everything into floating rate loans, etc. – are the ones that likely dramatically underperform over full market cycles.

The harder, but what I posit to be the right way to invest, is:

• To be broadly diversified
• To invest in management teams that position for the ability to aggressively invest when times are bad
• To invest in companies at low multiples of profit
• To invest in companies that generate real and significant cash flow that is returned to owners
• To keep adequate rainy day cash for peace of mind because life happens

In more simple terms, “keep calm and carry on.”

I have been reading The Lords of Finance off and on for the better part of a year. Typically I’ll pick it up during bedtime and I make it through a few pages before it puts me right to sleep. Alas, one of these days I hope to finish it.

I believe the author’s interpretation of a Jesse Livermore quote was a fantastic way to describe the way that stocks over and undershoot their theoretical “correct” value.

The great bear of Wall Street legend, Jesse Livermore, once observed that “stocks could be beat, but that no one could beat the stock market.” By that he meant that while it was possible to predict the factors that caused any given stock to rise or fall, the overall market was driven by the ebb and flow of confidence, a force so intangible and elusive that it was not readily discernible to most people.

The Lords of Finance, Liaquat Ahamed

After pushing through the early parts of the industrial revolution as it pertains to finance, I’m finally into the 1920s and on the heels of the 1929 crash. It truly is fascinating to read how similar some of the actions of market participants, from the Federal Reserve to “homemakers,” rhyme with the actions of the past few years to today. Just a few to note:

• The market started the 20s bifurcated between old economy and new economy stocks (textiles, coal and railroads vs cars, radio, and consumer appliances)
• Earnings growth drove the initial major upwards push in the stock market in the 20s
• The Fed eased rates into a generally strong market
• On the back of Fed easing, the market as a whole started decoupling from earnings growth
• The least informed investors were making the most money, while fundamental investors were considered out of date

While these features have been present in most bubbles, I nonetheless find it interesting to refresh on the topic as we have seen similar signs of excess form in crypto assets, software / tech stocks, and renewable energy stocks.

I continue to stay the my own course by paying a reasonable multiple to earnings (~10x earnings or a 10% earnings yield) for very well capitalized companies that tend to take advantage of market dislocations.