“She never wants to get to the point where she looks forward to hearing from someone. Once you look forward to something, you’re inevitably let down and nothing can stay the same so she’d rather expect nothing at all and just be surprised that she was thought of at all.”
― Donna Lynn Hope
Last year, I struck up a friendship with a person who seemed to have a similar interest. We met a few times and seemed to have a nice, cordial, professional relationship that could be mutually beneficial. In trying to build on that further, we arranged to meet for an early bite. As we all understand, time is the one resource which cannot be replaced. Everyone gets twenty four hours in a day. How you choose to spend it is yours, but in many circumstances, the choice of time gets reduced because of mandatory responsibilities related to ones job and family. So time is quite precious. The individual called me after I arrived at the destination to tell me of a problem and an hour delay. Would I wait? The history here was it happened on a previous occasion and I gave it a pass. This time, uh, no. Fool me once, that kind of thing. I am sure you can relate. Anyway, disappointment happens with people, and of course, it extends to other areas.
In the sports realm, a team we enjoy rooting for was eliminated from the baseball playoffs this week. They had plenty of opportunities to succeed, but their best players did not come through when it counted. Again that word, and feeling, disappointment. What can be gleaned from these experiences to make it applicable to investing? First, in the equity market, disappointment takes place in the form of unexpected events. Investors react much better to problems if the management team is up front about what those challenges are. Usually, when you see dramatic drops in value it is because you get an “Oh, by the way, we are taking an unforeseen charge on assets we bought that are now worthless.” Disney used to do this regularly under prior management. You see it happen quite a bit when the market value of assets has a great deal of variability in the judgment of those who determine their worth. It typical takes place in private companies which are going through the process of getting additional funding. It could be moving from an angel round to an A round, or an A round to a B round, etc. If you have been paying attention to the recent travails of WeWork, their value went from between 60-90 billion to now maybe nothing. Pretty wide variance of fluctuation, eh? If you want a hint on how to value something private or small, start with whether the company generates cash from operations, and how it does that. If it is selling something for a one time gain, throw that out. Second, find businesses which are predictable and have management teams who are honest and have histories of creating value for all shareholders on a consistent basis. When I say consistent, I am talking about for decades at a time. Third, look for companies which have durability to withstand the various parts of the business cycle. Good times aren’t with us forever, and neither are bad times. You want something that will be profitable in both environments. Fourth, pay attention to politics, but understand in most circumstances, the candidates and parties can potentially affect regulation which affect specific companies, but it doesn’t happen frequently. Fifth, know that disappointment is going to happen with your holdings, but evaluate the overall situation. If the company is in a good position, it is usually worthwhile to take advantage of a negative event, especially one of those one timers. Finally, don’t expect too much from what you own. As Mr. Munger says, the secret to life is low expectations. Apparently from the quote above, others see things similarly.
In the markets last week, stocks saw nice gains (nearly 1%) on all indexes. It appears Brexit may be clearing up after three years of limbo (we will see- time will tell). Of note was the “Phase One” agreement with the US and China regarding tariffs and trade, and investors decided to buy on Friday. Also in China, last week Houston Rockets general manager Daryl Morey made a brief statement on Twitter supporting the Hong Kong protesters and the Chinese government wasn’t thrilled. NBA games were taken off China’s national cable channel and social media outlets have been frozen for NBA related content. Adam Silver, the NBA commissioner, flew to China to attend a pre-season game, but I suspect the long term potential of the Chinese market might be the bigger issue. You know who just loved putting his two cents into the mix, especially after a couple of NBA coaches, noted critics of the President, decided to decline from commenting about the situation. Speaking of Mr. Trump, he is as docile as ever, engaged in controversy after after controversy. On the other side of the spectrum, it looks like Senator Warren is gaining steam versus the other Democratic candidates. She only wants to break up the largest banks, cable companies, insurance companies, media entities, pharmaceutical companies, private equity entities, and of course, big bad oil. Not much else out there too touch, Elizabeth. Oops, I should just be quite and keep my mouth shut, unlike Mr. Morey. Anyway, next week brings the beginning of earnings season and on Tuesday, Chase, Wells, JNJ, Netflix and others will start us off with a bang. Hopefully, we are not disappointed.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.