Investing Through Uncertainty

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by: Bill Ehrman

The hearings surrounding the nomination of Judge Kavanaugh to the Supreme Court as well as Federal Reserve Chairman Powell's press conference remind us, yet again, that we live in a VUCA world. (As defined by the US Military VUCA stands for Volatile, Uncertain, Complex and Ambiguous.)

Every day we experience disruption, swerves in directions and short-term decisions that challenge our beliefs and re-examine our charted course. We must listen, ask questions, remain open minded, challenge our long-held beliefs and be willing to adjust how we think. As Margaret Wheatley, noted author and lecturer, says in Willing to be Disturbed we must develop a willingness to have our ideas challenged by what others think.

She explains that "no one person or perspective can give us the answers we need to the problems of today. Paradoxically, we can only find those answers by admitting we don't know. We have to be willing to let go of our certainty and expect ourselves to be confused for a time. We weren't trained to admit we don't know. Most of us were taught to sound certain and confident, to state our opinion as if it were true. We haven't been rewarded for being confused. Or for asking more questions rather than giving quick answers. We've also spent many years listening to others mainly to determine whether we agree with them or not. We don't have time or interest to sit and listen to those who think differently than we do. It is very difficult to give up our certainties-our positions, our beliefs, our explanations. This help defines us; they lie at the heart of our personal identity. Yet I believe we will succeed in changing this world only if we can think and work together in new ways. Curiosity is what we need. We don't have to let go of what we believe, but we do need to be curious about what someone else believes. We do need to acknowledge that their way of interpreting the world might be essential to our survival. We won't be able to understand its complexity unless we spend more time in not knowing."

Well said. We are investing in an era of great complexity and uncertainty. Consider the impact of the rise in globalization, populism and disruptors on each of us. To be successful, an investor (or for that matter a leader, politician, corporate board member or management team) must be open to really listening to what they do not agree with and confident enough to challenge their own belief system, recognizing learning moments when they present themselves. When you hear yourself disagreeing, it can be reframed as potential opportunity to be informed by new thinking.

Trump has divided the nation weakening it internally and externally from what it otherwise could be. By the way, the Democrats are no better. While we support most of his economic agenda, we question his leadership skills. We are also impressed by Wheatley's thinking in Who Do You Choose to Be?which explores the leadership skills needed to succeed in today's VUCA world. We agree that today's leader needs to be open minded, vulnerable, able to bind people together, want to do the best for people and create "islands of sanity" where good work gets done despite all the noise, chaos, opposition and slander.

In this refuge of sanity, information is gathered, synthesized and decisions are made to chart a successful path forward. Trump, his party and the Dems must do so much better at this, so that this country and our people can reach their true potential. Divide, disparage and conquer is not the solution.

There are lessons to be learned from this that can assist us in investing.

For example, Ray Dalio has got it right. He created a learning culture at Bridgewater Associates where everyone is encouraged to ask questions and challenge each other's thinking to reach the best decisions. Nothing is etched in stone - the past is not prologue for the future. Bridgewater has one of the best long-term records in the industry!

Another example is Warren Buffett who continues to allow himself to be disrupted. He told us once that he would not own railroads only to buy the Burlington Northern a year later. He also owns airline stocks which he avowed years ago to never own again. He is confident enough to challenge his own thinking and change course.

Living in a world where old concepts and strategies have to be challenged and altered has been the overriding theme of Paix et Prospérité since we opened in 2013. We spend an inordinate amount of time understanding the competitive global landscape and the interrelationships and interaction of one region to another. We question leaders at all levels, especially corporate managements and ourselves, to get an understanding of their view of the global landscape, what it will take to succeed and challenging each decision. To be successful in this VUCA environment, you must be patient, challenge your beliefs, listen to everyone who may agree or disagree with you and play the long ball like Buffett.

The United States continues to be in an enviable position as our economy is basically firing on all engines while growth overseas has slowed down or just stalled out. Hence our stock market has done better than most; our currency is strong; and our interest rates have risen. The Fed is the only monetary body who has been able to start a path towards normalization. Even China has been forced to veer its monetary course opening its cash spigots permitting lower capital ratios and higher leverage to offset a rapidly slowing economy. Can they stabilize the Yuan at the same time? We doubt it and expect it to fall unless there is a trade deal with the United States.

We have not altered our view that the US economy will maintain above average growth for the foreseeable future. The Fed did raise rates last week as expected and confirmed that another hike is likely in December. Fed Chairman Powell held a very positive conference call after the Fed decision was announced. We were particularly struck by his admission that the Philips curve is no longer valid in predicting inflationary pressures which was something we said months ago. Globalization and disruptors are a powerful offset to hourly wage pressures.

Trade issues remain in everyone's spotlight. Even Fed Chairman Powell commented that corporations are holding back capital spending worried that trade skirmishes could broaden into something more serious. Changes in supply chains are inevitable but take time to implement. Trump is finally moving forward on trade negotiations with Japan and Europe before he tackles China in earnest. It appears that a deal with Canada may be near, but we will wait to hear the announcement before cheering. It was interesting to note that the WTO, IMF and World Banks seek "urgent" international trade reforms. Where were they before Trump shined a spotlight on unfair trade practices, subsidies and IP?

It is clear to us that economic growth will quickly accelerate in those regions once trade deals with the US are reached. We will benefit too.

We continue to successfully invest holding to our core values. We challenge them daily listening to all sides of an argument paying special attention to the naysayers. We were pleased that the Senate Judiciary Committee supported an FBI investigation before a full Senate vote for Judge Kavanaugh to the Supreme Court.

Third-quarter earnings begin this week, and we expect another 20+% gain while fully expecting to hear more about trade and the impact of a strong dollar. Listen closely to management's long-term strategy to win in this evolving global environment. This is exactly what Bezos, Buffett and Dimon do and their stocks reflect. It all comes down to leadership!

Our leadership needs to lead by example. It begins at the top. While we agree with most of Trump's economic agenda and willingness to disrupt the status quo, we disagree with his delivery and style of management. He should take to heart what Margaret Wheatley wrote about leadership. All of us should too.

Our portfolios continue to emphasize the largest US domiciled global banks, industrials and capital goods companies, technology at a fair price to growth where the government is not in your face, healthcare, transportation, cable with content, domestic steel and aluminum, and special situations where internal changes will add to shareholder value. We are short bonds and flat the dollar.

Review all the facts; pause, reflect, question and consider mindset shifts; always look at your asset mix with risk controls; do independent research and…

Invest Accordingly!