Greetings reader! One year has passed since I published my first post on this blog on circle of competence. It’s been an interesting year to say the least. I want to take you through some of my personal thoughts on the past year, lessons learned and what’s ahead.
Bears Need Not Apply
At year end of 2019, we were in a prolonged bull market. The US president loved quoting the new highs of the Dow and it seemed the party would keep on going. Prudent investors understood that for the past few years, prices had been very high and opportunities for intelligent investing very low. One of my favorite investors, Howard Marks, had come to the conclusion: “Move forward, but with caution”.
It was widely known that the bull market cycle had lasted unusually long. But there were no immediate crises at the horizon (there never are), so most investors carried on as usual.
The Herd Panics.. But Not For Long
In March 2020 we witnessed a classic, text-book example of a panic. In a very short timespan, stocks took a massive nosedive sparked by COVID19 related fears. Finally! This is what intelligent investors had been waiting for. The rapid decline pushed many companies into mouth watering cheap prices, and you could pick up plenty of wonderful companies at deep discounts to their intrinsic value.
As the above picture illustrates, financial markets are ridiculously interconnected. The largest holder of public companies in Finland are domestic pension funds, institutions and government entities. The massive overselling in March makes me question the rationality of these sellers. Even though plenty of the companies in the index have defensible moats, the erratic behavior of Mr. Market will never change. Much to the benefit of the thoughtful investor.
Across the pond in the US, the Fed came to the rescue with the same weapon they used in 2008: Quantitative easing. Whatever people feel about QE, I think the Fed’s actions are understandable. The decision making timeframe is short, they did it in the last crash, might as well do it now. In the midst of, and months after the panic, jobless claims were rising in massive numbers. But the market was shooting right back up. Strange times indeed.
This is not your traditional cycle. As I’m writing this, the market has spectacularly rebound to pre-panic levels. And now after the announcement of a Biden presidency, markets have reached new highs again. It seems there is a lot of hope regarding a vaccine for COVID discounted from the future, but who knows. Mr. Market moves in mysterious ways.
The Sitting Bull
High prices means that there is a lot of optimism baked in the future outlook of companies. While stimulus packages can provide liquidity (in the short-term), they cannot provide solvency. An over-levered, bad business will not become a good business through life support injections.
I feel the market is currently more like a sitting bull than a raging one. The near-term future of economic activity hinges a lot on the political decisions in the making. At this stage, I highly doubt a full-scale lockdown, even though president-announced Biden is more open to the idea than his predecessor. And who honestly knows about the timeframe of the vaccine.
As for investing lessons learned from the past year for me, it’s the watchlist.
A Long Overdue, Simple Idea
The watchlist is a list of companies that you make with patience over time. These are businesses that meet your criteria of excellence. An easy starting point would be to address the Four M’s as coined by Phil Town. The reason you want to have your shopping list ready made is because you never know when Mr. Market offers you these wares for bargain prices. I’ve known about this mental model for several years, but have held it at bay. The reason is that when great companies have been available at cheap prices, I haven’t had a good chunk of capital at hand to put to work. Thus I’ve been frustrated that I found something great, but lack sufficient funds to generate meaningful compounding. This was a mistake.
Now that I’ve corrected my mistake, I’ve added a few names to my watchlist. I’ve accepted that I may miss some opportunities while waiting until I have sufficient funds for sound long-term compounding. But as we know, the future is unknowable. The watchlist will make investment decisions much easier when the opportunity arrives. The buying window may not be open for long, so it’s best to have your research done beforehand.
As for the future posts of this blog, I want to continue in sharing the knowledge I’ve compounded in my head over the years. As my library continues to expand, there is lots of great insight I can write about. You can expect to see topics that focus on lessons learned, and reviews on the ideas of great but lesser known investors. Some have suggested to me to write full on investment theses on individual companies. This may be possible, but as of now, the focus will be on wider topics that are relevant in investing.
I don’t know who will be reading this post, but if you made it this far, my sincere thank you. If you are new here, welcome! Be sure to check the “New? Start Here” link at the top of the page. And if you are a returning reader, my warmest thanks to you. Clearly, there is something on the blog that you find valuable, and I intend to continue to provide it to you. To sum, the purpose of this blog is to write meaningful investment content to all readers, new and old, well into the foreseeable future.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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