Q3 2022: The Test of Fortitude and Investment v Speculation
It’s been six months since I last wrote about portfolio update. I thought quarterly may be too high a frequency to talk about the portfolio which is meant to be long-term. Infact, excessive commentary may imbibe short termism and extra justification or defensiveness on the portfolio positions on my end. I have no client or regulatory obligation to write on a quarterly basis, and going ahead, I will talk about it whenever I have something major to jot down. Moreover, I would intend to put more generic thoughts on investing and psychology rather than portfolio positions.
The last six months have been an absolute carnage in share prices of majority of US based stocks, not just the high flying tech growth names but also the relatively cheaper ones on a price/value basis. This environment has created all sorts of confusion, people turning back to macro-forecasting and twitter community digging out hourly updates and analysis on their holdings. I should say what a mess of extra information.
It is times like these that test our fortitude and separate men from boys.
Few weeks ago, I met a friend of my age in mid 30s having his substantial current net worth invested in US equities and he seemed worried about the current state of affairs with regards to deploying further capital in equity markets. Being in a high paying job with substantial worklife runway ahead, I urged him to be looking forward to these times when he gets huge discounts in share prices for a near to mid-term future.
Warren had wrote about this few decades ago that “as a net buyer of stocks, you should cherish lower prices”. For someone in his 20s or 30s with 10 years of foreseeable earning power from his skills, environment like these are the best one can hope for. Infact, one must hope that such low prices stay for few years to allow one to deploy majority of his income into equities. The worst that can happen would be for the market to shoot up quickly in a quarter or 6 months not providing enough firepower to take the benefits (unless one has substantial dry powder ready to deploy now).
Times like these don’t come too often in a lifetime, and matching out one’s ability and readiness to these times is the key to long-term outperformance.
Now, as an observer of the behavior of people, I did learn some very strange things during these times. Some of the people I was following on twitter or blogs or hedge fund managers, I surprisingly saw a considerable proportion of them doing the following-
a) Taking market-timing stance in these times, when the same guys were advocating quality matters, not price few months back
b) Exiting the same positions they were shouting as dirt cheap and inability of people to appreciate the business quality or the charismatic founder
c) Exiting businesses citing challenges on fundamentals due to slowing economy
This is why I believe times like these help one filter the true investors vs speculators and also help me cut down the people to follow.
Didn’t “The intelligent investor” or “50 years of Berkshire letters”, which everyone references on twitter or hedge fund letters, say that as an equity holder, one must expect periods of economic downturns, credit cycle freezes and lower growths. An investor is supposed to buy businesses which have the ability to thrive in all conditions, so isn’t it a speculation on macro economy when one’s thesis on holding a business rests purely on favorable economic time.
Some Thoughts on geographical diversification
Despite more and more globalization in the world today, I believe the benefits of geographical diversification are under-rated. In today’s environment, where currencies are manipulated by the governments , basing one’s assets in one geography can be risky in the long run. However, geographical diversification just for the heck of it doesn’t make sense either. It is an ideal scenario if enticing value bets can be found in multiple geographies with ample margins of safety. This prevents significant drawdown in case one market is deeply out of favor and enables you with some portion of portfolio which is on the positive side , thereby providing dry powder for rebalancing in values.
It should never be a planned theme , but you can aim this factor if you find similar enticing opportunities in different geographies to evenly balance out the regions thereby insulating you from economic and regulatory challenges in one region in the short to mid-term and enhancing your ability to bear interim pain comfortably.
Circle of Competence
The essence of investing comes down to one’s ability to value businesses, holding an independent opinion on them and our intellectual honesty in judging our ability.
There are many styles of investing and everyone brings his own approach and comfort in valuing certain businesses. For starters , the easier businesses are the ones which generate Predictible free-cash flows which Warren focusses on. There are some businesses where one can have relatively higher degree of confidence in predicting that some businesses’ cash flows can be materially higher 5 to 10 years from now while maintaining its competitive positioning. In investing, it is totally on you if you want to make your life easier or simpler. You can try to complicate things by trying to understand hard things by over-exertion and leaving higher scope of mistakes. The downside of the easy approach is that with such filters one would need to wait for long periods of time before something enticing falls into your lap. But those will be great investments, which you would have independent opinions than the street and will provide you the ability to hold for longer periods of time.
Haphazardly buying stocks with mid-level of conviction or assuming them as decent value buys will leave you dissatisfied and a worrier all the time.
To aim for great results, one’s filters and methods should allow one to do less and say yes to only screaming opportunities while allowing the rest good ones to pass through.
In essence, it always pays off to reflect the basics in challenging times and not overthink and complicate matters. This is a game where simplicity and easy approach can far outperform complexity and hard ones. Lets aim to stay true to these principles and control our inputs .
Akhil D.
Disclaimer : The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and represent personal opinion. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund.