One of the most unnerving years in recent memory is finally behind us. Congratulations, we made it!
In considering the many lessons of 2020, one conclusion is so inescapable as to feel like a truism: The world is unpredictable, and markets are unpredictable. Who would have guessed in late 2019 that a virus would come to dominate our consciousness only a few months later? Or in early 2020, that oil prices would turn negative? Or in mid-March, that markets would race to all-time highs?
As we look ahead with a temptation to predict the future — or to listen to those who wish to convince us they can predict it — it might be instructive to keep the foregoing in mind: The world is unpredictable, and markets are unpredictable. True, but not a truism.
If we cannot predict, then what? As Buffett suggests, “Predicting rain doesn’t count. Building arks does.” Here are a few arks to consider building in 2021:
The Inflation “Ark”
Despite unprecedented balance sheet expansion by the Federal Reserve and the European Central Bank, a low-inflation consensus persists among investors. While gold and bitcoin prices have risen, those gains may be considered little more than “noise” when compared to the trillions still invested in negative-yielding bonds. Inflation protection remains cheap.
For perspectives on this topic, you may like to revisit our conversations with Chris Bloomstran, James Davolos, and Daniel Gladiš. For specific “inflation ark” ideas, you may like to replay our conference sessions with Santiago Domingo Cebrian on Atalaya Mining, Marta Escribano on Polyus, Juan Huerta de Soto Huarte on Maire Tecnimont, Bob Robotti on energy sector ideas, Amit Wadhwaney on asset-based ideas, and Samuel S. Weber on Swatch. Recent sessions on great businesses with pricing power also offer plenty of ideas to consider.
The Bubble “Ark”
Another Buffett quote applies: “What the wise man does in the beginning, the fool does in the end.” Some investors embraced “compounders” years ago — Nick Sleep with Amazon, Sean Stannard-Stockton with Netflix, Elliot Turner with Roku, Peter Mantas with Zscaler; the list goes on.
These days, “compounders” are seemingly everywhere, as undisciplined investors justify nosebleed prices for largely unproven businesses — no need to “name names,” as I’m sure you have your own mental list of such highflyers. Simply avoiding the worst excesses of today will put us in a better position to preserve capital when the froth inevitably dissipates. (Did I just make a prediction?)
A classic piece you may wish to revisit in this regard is Chris Bloomstran’s letter on Microsoft in 2000. Chris argued that the company’s soaring stock price would lead to investor disappointment while the business grew into its valuation in subsequent years. After the bursting of the Internet bubble, it took more than fifteen years for Microsoft shares to best their bubble peak.
The Obsolescence “Ark”
“Traditional” value investors – those seeking out companies selling for less than readily ascertainable net asset value – are going through a soul-searching time. While it would be foolish to give up on value, it is similarly foolish to ignore the massive and enduring changes underway in almost every segment of life and the economy. We must demand higher premiums for businesses that may become obsolete, and we should think creatively about value in businesses that will remain relevant for decades to come. Bruce Greenwald shared this view in a recent conversation with MOI Global.
For instance, investors tend to place ocean shipping companies into one large bucket entitled, “Do not touch with a ten-foot pole.” Meanwhile, most would agree that oil tankers are unlikely to be around in fifty years while containers should remain a widely used standard in the shipment of various products. If you can buy tankers and containerships at similar valuations, why would you opt for the asset more likely to become obsolete?
Wide-Moat Investing Summit 2020 offers a place to start your search for businesses that are likely to endure and prosper. Selected ideas are highlighted in this issue. A standout presentation of a great business at a reasonable price was Stitch Fix, presented by Felix Narhi at $28 per share in early July. As Felix’s thesis started playing out in recent months, the stock has advanced toward $70 per share. While ideas like Stitch Fix may not have the hard asset backing of many “traditional” value ideas, their prospective earning power makes them worthy research candidates, even for those of us insisting on a bargain purchase.
The FOMO “Ark”
We have all probably felt it at one point or another — the “fear of missing out.” Even those of us who don’t generally have FOMO when it comes to highflyers outside our circle of competence or valuation comfort zone tend to have some version of FOMO. For me, it usually kicks in after I sell a stock. Irrationally, I want the stock price to go down in order to feel good about my sell decision. I feel massive FOMO if the stock keeps rising, with “newbies” getting rich off my idea.
The Newtonian version of FOMO is more destructive because it leads to permanent loss of capital. Sir Isaac Newton once famously said, “I can calculate the motions of the planets, but I cannot calculate the madness of men.” Even with this realization, the FOMO Newton experienced during the South Sea Bubble was so strong that he ultimately succumbed to it.
My appeal to all of us: Let’s not let FOMO drive any of our investment decisions going forward, whether on the buy side or the sell side. Let’s stay focused on our long-term goals, without getting envious of those who might be getting richer more quickly. Let’s be comfortable with being the proverbial tortoise every once in a while.
The Fixed Mindset “Ark”
Going beyond the narrow definition of investing, it might be worthwhile to devote more time and energy in the new year to “investing in ourselves.”
MOI Global members tend to be lifelong learners already, so this might be a superfluous point, but I have found the distinction between a fixed and a growth mindset incredibly helpful for my own development. A growth mindset seems more congruous with where the world should go and with where it is going, at least for now. As value investors, let’s commit to developing a growth mindset. It will help us in life and in investing.
The go-to book on this topic is Carol Dweck’s Mindset: Changing The Way You Think To Fulfil Your Potential. Another wonderful resource is fellow member Remo Uherek’s Learn & Grow email list.
It has been a great pleasure to launch a new podcast in 2020, This Week in Intelligent Investing, featuring two of my favorite up-and-coming fund managers — Phil Ordway of Anabatic Investment Partners, based in Chicago, and Elliot Turner of RGA Investment Advisors, based in Stamford, Connecticut. Tune in weekly to hear the three of us discuss timely and timeless investment topics. We welcome your questions and topic ideas.
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