Category: Missives

[…] Quality is an overused word to describe the winners (surviving planes) of today’s stock market. People will explain the profitability or return-on-equity of a company like Microsoft. In my mind, it’s like explaining the fuselage’s ability take bullets when all that should be focused on is whether the engine is well armored. The only way to measure that from a historical perspective is to ask the question, has success come to investors paying 40x earnings for a stock from the 10 largest market cap list? Chance of fatality is low, but it’s usually just another chance to languish. […]

Due to the pandemic, there is a sense of permanence on Wall Street to what has transpired. This permanence focuses on the changes that we have seen in the recent five months in our daily lives. These changes include shopping online versus shopping in-person, getting takeout versus sitting in a restaurant and working from home instead of talking sports around the water cooler with our colleagues. The question at hand for this argument of permanence is whether it is truly permanent or if it is temporary. The definition of permanent is, “lasting or intended to last or remain unchanged indefinitely.” So, to us this begs the simple question: will our lives remained changed indefinitely?

In the time since COVID-19 hit the economy and stock market, there has been three phases. First, the question was ‘when’ will the economy return to pre-COVID normal? Next came ‘sooner or later’? Recently, we have moved to ‘will the economy ever come back’? For long-duration investors like us, what are the investment implications in where we are now in a U.S. stock market with many securities priced for ‘never’?

When you are in a financial euphoria episode, like the one we are in currently, it is hard to visualize the impact it has when it breaks. Historically, it is the leading cause of stock market failure. We thought it would be helpful to discuss the secondary impact of the euphoria on common stocks. What do companies not in the center of the euphoria do when the fever breaks? How much portfolio adjustment do you need to do to protect yourself? What are the investment implications of owning common stocks whose prices have been inflated by mania, but are not in the center of the storm?

[…] We believe we are at the beginning chapters of a wonderful economic era globally where the consumer and economy will have slack to build upon for years. With rates this low and many stocks so cheap, it seems illogical to us that investors are so unaware that stock market failure could transpire out of today’s circumstances. The problem is that logic has nothing do with what is going on. As James Grant wrote in his 2019 book Bagehot, “Logic is as poor an argument against a boom as it is against a love affair.” […]

In the business of common stock portfolio management, most of your time is spent practicing your own specific discipline. However, extremes of mass psychology force you to take very uncomfortable positions for extended periods of time. When folks are scared to death of owning common stocks, like in late 1987, late 1990, late 2008 to early 2009, and in March through May 2020, we must provide evidence to “be greedy when others are fearful.”

[…] This got us thinking about business models and how profitable they can be. These companies are in e-commerce and have had the state governments of the U.S. shut down most of the physical locations of their competitors. The last three months were effectively two Christmas selling seasons spread from late winter into spring. Why is one of these business models responding so well to these circumstances? How profitable have these two platforms been in the past? Why does eBay sell for such a steep discount to Amazon? […]

The oddity of today’s stock market is exactly what any God-fearing value manager should pray for. There are very few scenarios in the last 50 years that can be used to model or forecast what is currently going on. We are strong believers in Mark Twain’s saying that, “History never repeats itself, but it rhymes.” While you can’t precisely forecast the future, the rhymes of past eras can help provide a mental model to produce potential outcomes to help us as stock pickers. Our model for thinking about today’s circumstances is the inversion of what took place in 1972, matched against the opportunities available in 1974.