Thursday, May 17, 2018
The Stoic Investor
The redwood is a very interesting tree; it is impervious to most diseases, it can withstand fires, and also has extreme drought tolerance. In many ways, the redwood tree physically demonstrates the virtues of a successful investor, the stoic investor.
I'm often asked what stocks I like or where to invest. Good questions, but they are meaningless if an investor doesn't have the stoic fortitude to actually invest like a farmer. Stoicism, an ancient Greek philosophy of enduring pain or hardship without a display of feelings or complaint, valued virtue as the highest good. The wise were considered indifferent to the vicissitudes of fortune and to pleasure and pain equally. I believe successful investing requires a great deal of stoicism, especially if one is hoping to turn a sapling of savings into a redwood fortune.
From a distance, and in a single moment in time, the redwood is seen as still and massive, but over the course of hundreds of years a multiple of growths and starts have occurred that are imperceptible in the here and now. There have been droughts. Fires. Earthquakes. Meteors. And men. But yet the redwood survives. Without a doubt stoic investing involves mental fortitude, but it also involves pruning.
You can lose the small bets in life, and many of them, but you gotta win the big ones. Winning the big bets is the manifestation of a mathematical formula dubbed the Pareto Principle. In short, amongst a handful of redwood seedlings (the recommendation is 20 seeds) perhaps only one will successfully germinate, take root, and rise to the heavens. The rest are failures. So too is the investing landscape littered with the refuse of an absurdly high mortality rate for true start-ups, and only decreasing marginally with ventures that survive the initial lean years. Even then, successful ventures are typically only sustaining ventures.
Consider for a moment that only about 4% of all stocks drive the market's return over time. That's just about the success rate for a single redwood amongst 20 seeds! Coincidence? I think not. The challenge of course is finding these redwood seedlings early and often in your investing career. Which leads me to what I believe is a great fallacy. The thought process of making no mistakes is flawed; I think of investing along the mindset of having a financial destination in mind, a means to secure it, and being able to change course, tac, as necessary.
As investors, theoretically, we should be indifferent to the underlying security, only interested in its potential Alpha...and this is why passive investing survives but by the grace of active investing. By this I mean passive investing owns too much of the forest floor and not enough of the redwoods. Case in point is Warren Buffett's Berkshire Hathaway, which has soundly beaten the S&P 500, no small feat, over the course of 50 plus years. This is due in large measure to Buffett selecting redwoods over time and sticking with them. Technological innovation, branding, and strong leadership matter; buy redwoods!
Monday, April 9, 2018
Buy and Hold On!
Take a moment fellow financial farmers and click on the image above and take a look at all the world crises...yet since 1970 $1 invested in a basket of global equities would have returned $59 by the end of 2017. Think about that for a moment. $59 dollars for every $1 originally invested. Remove the green line and look only at the headlines and few would believe that an investor would stand to get even his own original $1 back!
Being a student of the markets and economic history, I have yet to find a time period which wasn't described at "troubling" or "heady" or "uncertain." There has, however, been one constant: the desire for a better life. And that economic theme reigns supreme in mankind's evolution and greatly explains the rise in global stock markets over time.
Buy and hold on!
Wednesday, March 7, 2018
A Tale of Two Markets
It was the best of times, it was the worst of times...the NASDAQ's heavy tech components roared to new 52-week highs on almost a daily basis, while iconic global consumer brands struggled to keep their heads above water. What happened?
I have noticed a massive decoupling in the stock market over the past 5 years, and over the past year in particular. Typically defensive consumer staple stocks have gotten hammered...and we're talking Bear Market territory for many of the largest brands in the world (a Correction is a 10% selloff from a stock's high, while a Bear Market is defined as a 20% or more fall.)
How could this happen when rates are still at historic lows, unemployment is low, the global population continues to grow, and the economy is booming? Not so fast. The economy IS booming, BUT in CERTAIN sectors. Consumer staples (think toothpaste, diapers, soap, hot dogs, macaroni & cheese, bleach, tissues, paper towels, etc.) have for decades relied upon BRANDING to charge a massive premium over a similar generically produced product. Who ever orders just a "cola" from a restaurant? Or asks for carbonated water and sugar? No one. Consumers have been steered towards brands since birth. An interesting thing is happening though, and it seems to be accelerating.
The oft-cited force of "tech disruption" has uniquely impacted classic brands in a singular way; consumers can now price shop globally and have orders filled at signifiant discounts to traditional full retail prices. Rather than laser-focusing on innovation, distribution, and consumer satisfaction what I've seen are major brands saddling up with lean manufacturing to such an extent that employees have to justify ordering pens or toilet paper. This is a race to the bottom.
The flip side of the coin are the tech innovators who leverage their massive economies of scale and state-of-the-art logistics to provide an unrivaled consumer experience. Many of them are pure software companies, some are not, but the result seems to be the same: extremely satisfied customers who have developed TRUST in the brand. So much trust, that these tech innovators can repeatedly launch offshoots of their core brands into a captive consumer market that actually embraces the new product or service. And many of these products or services directly compete with established legacy brands.
The game plan needs to change for legacy brands to thrive; the old vertical mindset of acquiring lowest cost raw commodities, manufacturing with razor thin margins, spending billions on marketing, and capturing the global consumer from birth is giving way mightily to logistical systems offering consumers ease...and better prices.
Monday, January 1, 2018
Happy New Year!
Wishing all my readers & their families a very, very happy, healthy, and prosperous New Year! I can think of no better quote to kick off the new investing year than from my main man Marcus Tullius Cicero. He writes of a greater good than simply a full belly and entertainment, a fullness of life "which bread and circuses can never appease."
While many of the working poor and middle class have been locked in a political bickering war amongst themselves for at least a generation, the wealthy have consolidated their power. Much of this has been accomplished by providing the proverbial bread & circuses of yore. I find it hard to believe the pinnacle of human existence is captured on a sports field or with the legalization of a plant, but that's where we're at in this country now. I encourage readers of this blog to talk with their friends and family about wealth; how to create it, how to sustain it across generations, and what the greater good is that they seek.
There is tremendous opportunity in this country and abundant resources to accomplish dreams and goals that would seem impossible simply to a generation ago. Space beckons. Science calls. There is poetry yet to be written, lines of code yet to be keyed, and cures waiting for genius undiscovered. We can and must do better as a species. Resolve to invest wisely.