Reality of the Terrain and a Fundamental Review
Investment Banking and Big Brokerage.
Throughout my decades long career, I have witnessed an industry get progressively worse for individual investors. Whereas Wall Street used to be a place where one would go to borrow money or raise capital to build a business. The industry has become a utensil for maximizing the number of encounters between the strong and the weak. Smart money vs. dumb money. Turning the industry from a wealth creation engine to a zero-sum game similar to the birthday party game of musical chairs where in this case the last person standing is the greater fool.
Individuals and institutions levering up their portfolios to achieve steroid-like returns has been enormously problematic over the past several years. Similar behavior exists in every bubble environment I have ever witnessed. When one borrows great sums of money to invest in order to inflate returns, in essence you are moving the future into the present. It isn’t the actual future so much as some grotesque silicone version of it. Leverage buys you a glimpse of a prosperity you have not really earned. Not to mention it allows for over-rated money managers to inflate their fees.
Beware of Zombies.
When buying companies for one’s portfolio is very important to look out for zombies. There are two different types of zombie companies on the prowl. The first are the slow-moving variety. zombie businesses that exist due to a myriad of reasons such as regulatory capture, incestuous management, and business plans that serve management not the shareholders. Tell-tale signs of these companies are out-sized stock compensation packages that lead to stock buybacks rather than capital expenditures. The Board of Directors for these zombies is an incestuous mix of ex-politicians and executives and CEOs of other companies. If you are not growing your business you are dying, if a company is not investing via capital expenditures it is a zombie. Even though these businesses are slowly but surely deteriorating, they stay afloat via their connections in Washington and Wall Street.
This leads us to our next type of zombie, the grow at all costs, earnings don’t matter variety. These companies exist during periods of easy money and all out-bull markets. These zombies feast on venture dollars for as long as they possibly can before going public to then seek out the greater fools that will take the insiders and venture funds out. These zombies are built up often through clever marketing. These companies are created and developed all in accordance with getting the insiders out, not about long-term sustainable business models. These zombies can often be described as, great concept, terrible business.
Do you have zombies in your portfolio?
If the answer is in the affirmative, it is time to make some changes. Side note: Even some of the best get taken by zombies sometimes. Stanley Druckenmiller stated after the Dot Com collapse…
“I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case, and I couldn’t help myself. Son maybe I learned not to do it again, but I already knew that.”
Don’t Be a Stock Buyer. Be a Great Company Buyer.
We at Markowski Investments look to build ownership in great businesses with great ideas. Businesses that have certain economic and niche advantages. Also, firms that have great management. We own great companies based upon our expectations of performance over time. One thing we do not do, is try to time the market. If it is a solid business that we feel is valued properly we will buy no matter what the market is doing. We are not stock-pickers or market timers; we are great business owners and buyers.
Bulls, Bears…When should I buy?
If you are holding good and great companies, you really don’t have anything to worry about when the markets inevitably reverse for periods of time. Granted, your portfolio will decline in value during these periods. Ultimately the world doesn’t end. (Never a good bet, only going to happen once.) Good and great companies will bounce back. During a period of wild fluctuations back in 2016 Warren Buffett was asked about what investors should do during times of tumult?
“I would tell investors, don’t watch the market closely. Investors that buy good companies over time will see results 5, 10, 20, 30 years down the road. If they are trying to buy and sell stocks, they’re not going to have very good results. The money is made by investing by owning good companies for long periods of time That’s what people should do with stocks.”
In May of 2022 at the Berkshire Hathaway shareholders meeting, Buffett gave more perspective…
“Don’t obsess over finding a perfect time to buy a stock. Go ahead and invest and then observe over time to see if you should buy more or sell. This strategy leads to a higher chance of return. It alleviates some of the pressure of trying to predict the stock market. If the stock dips, it’s shares have become less expensive, so buy more of them. We haven’t the faintest idea what the stock market is going to do when it opens on Monday. We’ve not been good at timing. We have been reasonably good at figuring out when we were getting enough for our money.”
Another great investor Jack Bogle, stated in 2018…
“Buying stocks and holding them was the best way to invest because your emotions will defeat you totally if you try to sell your holdings to avoid losses and get back in afterwards. Stay the course. Don’t let these changes in the market, even the big ones, change your mind and never, never, never, be in or out of the market. Always in at a certain level.”
The conventional wisdom in the grand echo chamber known as business news when it comes to when the market sell-off/tumult/bear market will end is when the average retail investor throws in the towel and sells. You’re not trading in a casino chip when you sell a company from your portfolio, you are selling to someone else. For every seller there is a buyer. The stock market is the only market I could ever think of, where they hold a massive sale and everyone leaves the store, wanting to pay higher prices. Who is buying quality companies when markets sell-off and value is created? Smart Money.
In bear markets stocks return to their rightful owners.
Strength Through Tumult and the Antifragile Portfolio
The Antifragile portfolio, is a concept that I have written about and discuss extensively in our programming. One of my favorite authors/philosophers, Naseem Nicholas Taleb, has written extensively on the concept of Black Swans. (In short, things that happen that you just do not see coming.) When preparing for one’s future, that concept needs to be taken into account. Rather than plan for retirement, one should prepare. I have this philosophy when coaching my lacrosse teams as well, I tell my players that as a team, we want to be so prepared for our opponent that it does not matter who we are facing, we can win.
A Navy Seal described this idea quite eloquently…
“You can go into battle with a map and a plan. When you get on the battlefield and the terrain and conditions are different than what you expected. What do you then? Go with the terrain.”
Warren Buffet in his annual report back in 2007 wrote his annual message to shareholders in the form of a Help Wanted advertisement…
“Wanted: A young man or woman with the potential to manage a very large portfolio. The ideal candidate must be someone genetically programmed to recognize and avoid serious risks including those never before encountered. Other key requirements: Independent thinking, emotional stability, and a key understanding of both human and institutional behavior.”
What Taleb, the Navy Seal, Buffet and myself are all trying to get across is, expect the unexpected. When the market sells off for no apparent reason, don’t be surprised. When the market skyrockets on what you perceive as no news, don’t be perplexed. As Forrest Gump stated after stepping in a pile of it while running cross country; “Shit Happens…Sometimes.”
The investors that lose time and time again, includes all the hedge fund gurus who continue to go out of business at an ever-accelerating pace. The stockbrokers or financial advisors promising ridiculous out-sized returns or the idiots on the radio or television pitching their magical software/trading program/newsletter that will “make you money no matter what the market is doing”; are the ones that think that they are immune.
Their arrogance is that they don’t know, what they don’t know. In the field of psychology, they call this the Dunning-Kruger effect. It is a cognitive bias in which people of low ability have illusory superiority and mistakenly assess their cognitive ability as greater than it is. The cognitive bias of illusory superiority comes from the inability of low-ability people to recognize their lack of ability. These individuals that are not self-aware, even though they will tell you how bright, smart and intelligent they are, cannot objectively evaluate their actual competence or incompetence. This includes, most economists including Larry Summers, Paul Krugman and Joseph Stiglitz, most hedge fund guys, most stock analysts, radio show or television show gurus that tell you what to buy, sell or hold, anyone who tells you Socialism is awesome, and unfortunately a large swath of millennials.
I have often spoken and written about resilience when it comes to managing one’s assets and dealing with financial storms. I often have used the word resilience, because quite frankly I did not know of any better description. Author/philosopher Nicholas Taleb invented a better one, antifragile.
Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk and uncertainty. Yet, despite the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile.
Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes, the rise of cities, and cultures.
Investors need to take the concept of the antifragile and apply it to their portfolios. Those same investors should also apply it to their lives.
How We Do It Review
Thirteen years ago, in what is an ongoing effort to explain and simplify concepts in investing, I wrote a column titled Rules of the Road. In it, I list four simple rules that everyone needs to adhere to an order to become successful investors. They are as follows…
#1. Compounding is the royal road to riches
#2. Don’t Lose Money
#3. Invest like a multi-millionaire
#4. Buy assets on sales
I am a big fan of simplicity. Laws, rules and regulations need to be straightforward-black and white. However, maybe I was a little too simplistic back then. The old saying that successful investing is like getting oneself in great shape, it’s simple, not easy. So, what I would like to do is expand on these rules and share with everyone our mindset, our process for success.
It is not important to be right in the here and now, but right eventually. In other words, what conventional wisdom says is the greatest investment or idea today is more often than not a lousy investment or idea. Markets are not efficient over the short-term. Many of the major calls that we have made over the years in regard to market conditions, the overall economy and various companies were contrarian at the time, but were proven true over time. This means that one of the most important attributes one needs to have to be successful is patience.
Another necessary trait is courage. Sometimes things will not go your way. You need to have the courage to stand in the face of the chattering classes and pundits. The financial crisis of 2008-2009 is an example of an equity market that went off the rails. Many investors acted out of fear and made very poor choices. Courage involves thorough consideration of all the facts. Keep emotion out of the decision-making process. The reality is that humans are not hard-wired to be good investors. They buy high and sell low because emotions take over much too easily.
People need to understand that stocks are not a part of a video game or an electronic blip on a screen. I realize that in today’s day and age they may behave as such due to high frequency traders and other charlatans that have adversely affected the marketplace. Stocks are an underlying ownership in companies. The price of the stock and the overall value of the company can be evaluated based upon the money the company makes, what industry and what the expectations are for the future.
When it comes to managing risk in one’s portfolio. It is important to understand that it is justifiable to love risk as long as the risk does not lead to ruin. Nassim Nicholas Taleb, perhaps the greatest risk-management expert alive today states, “In a strategy that entails ruin, benefits never offset risks of ruin. Rationality is avoidance of systemic ruin.”
I have always hated the term financial plan. How does one plan for decades of uncertainty? How does one really know when they want to retire, change careers, start a new business, find their spouse, etc.? We would rather think of what we do as a process that is going to be able to adapt to the unknowable terrain of life. For the past two decades on our radio show and even longer in our newsletter we have tried to alert everyone regarding the poison that is conventional wisdom. This poison is not limited to economics and finance, it is everywhere. The importance in recognizing the narratives and self-destructive strategies that are being pushed upon you from what I like to call the Watchdog on Wall Street Axis of Evil (big business, politicians, and the media) is critical. We pride ourselves in recognizing and exposing narratives and hidden agendas.
About a decade and a half ago I started a lacrosse program in Southwest Florida with some other lacrosse junkie friends of mine. Lacrosse was completely foreign to where I was living. When we got started our group of very young and very raw players would go up and play clubs in Tampa that had been around for a while, and we would get shellacked. After a five-loss day in a tournament in our first year, I made the skeptical parents and players a promise. If they trusted our process, (focus on the fundamentals, embrace the fact that everything in life that has meaning value and worth, involves work time and effort) that within two years we would dominate. Our practices were focused almost entirely on the fundamentals, throwing catching, shooting, proper defense and off-ball movement. Within two years, I made good on that promise. Today, almost all of the kids that trusted the process are now playing in college or will be soon.
I was a big fan of the television show Friday Night Lights. If you are not familiar, it was a program about a high school football team in a small town in Texas. The head coach Eric Taylor had said something to his players that stuck with me, in its truth and simplicity…
“Clear Eyes, full hearts, can’t lose.”
See the world, the terrain, obstacles for what they are. Not what you wish they are or what someone is telling you they are. Accept the challenges, embrace the challenges whole-heartedly and you cannot lose.