The market is very good at grasping one idea at a time. Be it geopolitical tensions, interest rates, high inflation, a slowing US economy, supply chain issues, or China lockdowns.
Investors are very good at quantifying one key known risk. But when risks start to build on top of each other you get what Charlie Munger calls a Lollapalooza. These are extreme outcomes.
Lollapalooza effects are too challenging to quantify. In these instances, investors generally stop positioning their portfolio for the most disruptive companies of the next decade, and investors simply try to focus on the next six months. If that.
It's all about trying to be well-positioned for the next six months.
Now let's rewind the clock a few months. At that time, investors were buy-a-hold forever. Too many investors, myself included, were positioned in these secular growing businesses.
And we were caught up trying to forecast the sustainable growth rates of these companies. And management too was running their business as if the good times were here to stay. Nobody was really asking the difficult questions, such as the next big stock market move.
At that point, asking difficult questions wasn't welcome. But now I do know what the next big market move is and how you can position yourself to benefit.
The biggest bearish consideration investors can bring to the table is that commodities have rallied significantly in the past 12 months, therefore they must be overdue for a pullback.
That's as far as most investors take it. Investors are price-anchored to the price where the stock was 12 months ago and believe that's where it must return soon.
However, as I look through it, I don't have any tangible reason to believe that Warren Buffett's investment in the likes of Occidental Petroleum (OXY) is anything other than an easy layup.
There's really nothing too complicated here. Buffett is thinking - I can buy Occidental at approximately 5x free cash flow, or I can keep my cash in treasuries. It's really not complicated.
I can make a similar argument about fertilizer companies, steel companies, natural gas, coal, aluminum, and a whole host of other commodity and energy companies.
Investors become obsessed with high-quality companies to the point that they starved the capital of old economy companies.
Those boring companies produce things that we need. Yet, with no capital for commodities and energy companies, this has inadvertently become a ''moat'' around these companies. At least over the next two or three years.
And this is quite ironic. Those old economy companies are going to report very strong returns on invested capital. Meanwhile, in the tech sector, investors are going to get paid in non-GAAP earnings.
Said another way, we have the ''pretend management works for free'' and stock based-compensation isn't a real cost, vs. companies that have dividend yields north of 10%.
These old economy companies will generate an unavoidably large amount of free cash flow. And there's little anyone can do compete that away. Hence, why it's the revenge of the old economy.
This part isn't too complicated. It's just a case of keeping things in perspective.
One cannot predict the unpredictable. Just because the market is looking bad right now, it does not mean much in and of itself. In fact, it's entirely possible that within twelve months things will look vastly improved. I know it seems hard to believe this now, but I believe this very much.
Furthermore, the markets will not sustainably soar back up when the good news is out. The market will soar in anticipation of that event. The market will soar when the bad news hitting the airways is a little less grim than the day before.
Put another way, timing the bottom will be absolutely impossible. And when the news flow shows a tiny bit of hope, either from inflation numbers coming down or interest rates stabilizing, share prices will move back up.
There's so much pessimism in the market. Countless pockets of the market have been hit to a pulp. This has caused no end to the amount of pain we've had to endure over the past 12 months.
And while everyone knows that when you invest, stocks can go down as well as up, everyone forgets the first part, that stocks can go down. But at the same time, people have now forgotten the second part.
Indeed, looking back to four years ago, most stocks today are higher than they were four years ago. We've clearly come down in the past 12 months, but many stocks are still higher than they were just four years ago.
This demonstrates that over time, stocks do go up. Even if there are periods of pain along the way.
This pain will end. It absolutely will end. Allowing yourself to benefit from these low prices by staying in the game. That's not the same as buying every dip. But by trying to spend a little more time sitting on your hands and having a slightly longer-term horizon than 90 days at a time.
Try as much as possible to be in a state of mind where you are willing to embrace new ideas.
I'm very bullish on stocks. I have a very strong portfolio of stocks, and I'm super eager to see how my companies do over time.
Furthermore, I believe that I can continue to be patient and wait six months or so, to see my companies making progress.
I don't need to wait three years. And I shouldn't expect strong returns every three months. But between three months and three years, there are a lot of ways to benefit from companies that are now cheaply valued. Provided that I'm able to invest and sit on my hands.
I hope you find this useful. Thank you for reading.
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