There are decades where nothing happens; and there are weeks where decades happen.
Vladimir Lenin
It was noon on a Tuesday and not a soul was in sight, anywhere I looked. Sidewalks, streets, stores. All empty. I walked down the middle of the main boulevard to take a panoramic video, trying to capture the eeriness of a usually bustling downtown suburb now vacant. California had recently issued a stay-at-home order. I thought to myself, “what an extraordinary sight… I’m sure life will be back to normal next month.” Well, I was 100% wrong about that one. For such a terrible year, I can’t decide whether 2020 went by slowly or quickly; some weeks felt like decades, while others felt like days. Tragedies were numerous, routines were interrupted, and jobs were lost. The scars won’t go away quickly, if ever. Yet, as always, humanity has persevered. If there is any silver lining, this year forced us to pause life’s distractions to focus on and cherish things that truly matter such as health, family, and friends.
As the year comes to a close, I thought I’d do a short recap of my posts since starting the blog in February. Reviewing one’s work is necessary for growth and for highlighting key thoughts. First, a note to self: when staring a new venture, be wary of the impending ramifications(!). Fortunately, I don’t try to predict markets, but to share my reflections on investing. Writing is an incredibly useful tool for critical thinking and solidifying knowledge. It also helps mitigate biases and tests your understanding of certain subjects since the ideas are publicly documented and available for critique.
In Allure of Investing, I described the often misunderstood and under-utilized concept of intrinsic value, and the value investing philosophy of buying something for less than it’s worth. I believe value investing is the most logical and lucrative strategy, as evidenced by some the greatest investors of all time, but isn’t the only way to invest. “It is precisely because there is no formula or strategy that works all the time that makes the game interesting.” Successful investing requires curiosity, independent analysis, and emotional stability. Discovering assets priced below their intrinsic value is not easy nor straightforward, but can be exhilarating if found. Shortly thereafter, markets proved why investing is “simple, but not easy” as people fearfully de-risked due to the rapidly spreading virus.
In A Bat Swan (a bad riff on “Black Swan” and that the virus originated from a bat), I reflected on the market turmoil and thought “forced selling seems to be occurring” and that “it’s generally been a great signal to buy.” I, for one, was excited that prices were coming down. An investor with a long-term time horizon should welcome lower prices driven by fear. I thought “companies with superb business models and management teams will not only be able to withstand a downturn, but possibly even increase their intrinsic value” because “capital allocation will be scrutinized, inefficiencies and wasteful spending will be reduced, and some secular trends may actually accelerate.” March once again proved that what you own is less impactful to overall returns than how you behave. Having the right temperament is crucial for success. In fact, during turbulent times like March is when the outperformance is earned. You cannot control external events or market gyrations, but you can control your behavior.
In Uncertainty and Luck, I noted that because investing is all about the future, uncertainty is unavoidable and luck will always influence results. During highly uncertain times, investing is still possible, and potentially more rewarding. “Envisioning a brighter future in the midst of darkness seems foolish yet can be quite rewarding if the negative news is fully discounted into prices and a rosier outlook is not.” Deviating from the pervasive narrative, especially when the narrative is extreme, can be as profitable as it is difficult since investing is all about the implied odds. “Therefore, active investors should be salivating in a time like this, if they believe in their ability to perform quality valuation work.” That being said, “luck inexorably plays a role when making predictions; a prerequisite for estimating intrinsic values.” If, in March or April, you dollar cost averaged into index funds or bought single stocks, like I did, your skill in sticking to your plan was rewarded. But luck also played a huge role because outcomes could’ve turned out much differently. “Investing involves faith in your analysis, yet an understanding that inevitably there are external factors that will influence the range of outcomes.” If you sold or didn’t buy, you’re in good company; even the Oracle himself cannot escape dealing with the uncertainty and unluckiness (though notably he is one of the best at diminishing their influences).
In BRK Annual Meeting 2020, I reflected on the uncharacteristically but appropriately somber Berkshire shareholder meeting. Afterwards, there were a lot of hot takes that I wanted to address and refute based on my understanding of Buffett. The main declaration was that “he’s lost it,” which I wholeheartedly disagree with. In my view, not only did he prove he’s still got it, by changing his mind when the facts changed and probabilistically weighing future outcomes, he also proved that his corporate painting remains a fortress against whatever risks come to pass. Buffett and Munger embody rationality and patience, and are not influenced by the crowd screaming “swing, you bum.” In hindsight, Buffett could’ve deployed capital during the panic, but “Buffett, just like every investor, has a different risk tolerance, circle of competence, capital allocation strategy, time horizon, and subjective outlook” and “some businesses outside of his circle of competence will be less impacted than those within.” Unfortunately for Berkshire, but fortunately for the economy, the Federal Reserve stepped in so swiftly and aggressively that financing markets swung back open, at rates much more generous than a Berkshire lifeline. As intended it had a spillover effect into investor psychology. In the absence of sports to gamble on, people turned to the stock market.
In Markets and Casinos, I describe the difference between speculators and investors, and the irrational yet common use of forecasts by those thinking they know where prices are headed. “Speculators possess a short-term time horizon and try to anticipate price movements, whereas investors possess a long-term time horizon and try to anticipate intrinsic value movements.” Neither is correct, but the game being played differs and the odds vary accordingly. Furthermore, “The amount of oxygen and mental energy wasted by very smart individuals declaring what level the market will or should trade at, is baffling.” Attempting to anticipate price movements is futile, yet unfortunately extremely prevalent. “The factors that impact market sentiment are numerous, highly variable, and include both known unknowns and unknown unknowns. Even if the outcomes of the known unknowns could be known, predicting how the market would react is still impossible.” Lastly, “For speculators, a manic depressive Mr. Market causes anxiety. Risk is volatility, not permanent loss of capital. Investors think only of the latter. But oftentimes, many investors reveal their true speculator colors when volatility becomes permanent loss of capital.”
The market optimism exiting summer confounded those that try to rationalize it. In To Sell or Not to Sell, I questioned, “At a time when a myriad of stocks are priced very highly compared to their underlying fundamentals, is it time to sell?” Selling is notoriously difficult for most. After describing what some of the great investors have to say on the matter and refuting many of the common reasons people cite for selling, I concluded that, for my strategy, there are only two valid reasons to sell: “When the price is considerably higher than the intrinsic value or there is another opportunity with a larger discount to intrinsic value to allocate capital to instead.” Opportunities to buy outstanding businesses at a fair price are few and far between, so selling them in the hopes of buying them back at a lower price is often a mistake. However, even high-quality businesses can become overpriced, and thus capital should be allocated elsewhere even if taxes will be paid. Overall, “If an investor assumes price and intrinsic value are independent, it seems logical they can diverge in either direction” and “it seems intellectually consistent and internally justifiable to apply the same methodology to both buy and sell decisions.” You can be mistaken in either.
As the market resumed its relentless climb, a debate began to emerge as to whether the market was in a bubble that was bound to pop. In Past or Present, and Future, I explored each side’s argument, and my push-backs for each. One side “look[s] at the past and use[s] historical data and analogies to predict the future” while the other “look[s] at the present and use[s] trends and extrapolation to predict the future.” I touched on three broad topics that usually come up: Value vs Growth, the level of interest rates, and high market valuation. In my view, “value” and “growth” are simple categorizations based on financial metrics and do not drive stock returns, interest rates are likely to stay low, and the market P/E is not unreasonable and could potentially remain elevated. I conclude that history can be useful in understanding what and why events occurred in certain environments, but since no two environments are the same, the probability of similar future outcomes will differ given what already occurred is now known.
Lastly, in Disney Going Prime Time, I shared my thoughts on how reinvestment opportunities drive value-creation and why I thought the market was under-appreciating the potential success of Disney+. Although mostly written in 2017, it is still pertinent to my long-term thesis. I believe “Disney’s playbook shouldn’t be to emulate Netflix; it should be to emulate Amazon” because “Disney+ is not just another Netflix peer; Disney+ is Disney Prime – a subscription membership to the company, and future hub of the Disney ecosystem.” Moreover, “Disney+ will further solidify brand loyalty and brand affinity, enabling Disney to more effectively monetize its creative storytelling and unlock value across the entire ecosystem. To bet against Disney+ is to bet against Disney’s brand and content, and consumers’ desire to access content through streaming. I don’t think that is a good bet.” However due to the pandemic, “Disney+ went from a cheap call option to the life vest keeping Disney afloat.” Nonetheless, Disney’s management is executing their strategic vision and rewarding investors for holding on.
In conclusion, for such a massively disruptive and disastrous year, the performance of markets has been nothing short of remarkable. I remain convinced that stocks are ownership pieces of businesses with an intrinsic value worth the discounted cash flows distributable to shareholders over their lifetime. But the stock price is nothing more than the level at which marginal participants are willing to transact. As of this writing, it certainly appears that many stocks are priced for unrealistic cash flow expectations. So a word of caution for those who hold some of the massive 2020 winners or recent IPOs: multiple expansion means increased expectations for the business going forward. If vaccines allow the world to return to normalcy, mean-reversion in behavior may result in a lot of unmet expectations. That being said, I do believe the pandemic accelerated many secular trends, such as e-commerce, cybersecurity, and digital payments to name a few, which benefited certain companies over others. I was lucky to hold a few in my portfolio. My goal for 2021 is to do more company specific writing along with broad investing topics; again with the intent of learning and sharing.
To all the readers, thank you. I hope you found some nuggets of value in my writings, whether you agree with my style of investing or not. By no means have I figured it all out; investing is a constant learning journey and we all strive to get a little better every day. I wish you a safe and happy holiday season!
Reflections on Investing 