September Selling Hits Stocks As 3rd Quarter Nears End!
‘An organization’s ability to learn and translate that learning into action rapidly, is the ultimate competitive advantage.’ Jack Welch
The investment profession is full of the most competitive people on the planet. In many of the largest asset management families, there is a belief that areas of the highest contested pursuits are excellent backgrounds for entry into the investment industry. Not all are in agreement, and academic excellence is highly desired across the landscape. Still, there is a good reason for wanting people who are familiar with the bottom line mentality in anything which involves a struggle. If we take sports, succeeding or failing involves in game analysis to discern how to best attack the opponent. Often it involves letting the opposition defeat itself. Take for example, the difficult sport of golf. In head to head play, a very successful strategy is to merely make par on a consistent basis. It is usually good enough to win. In the case of team sports, analysis usually involves situations where one or two players are either exceptional, or particularly poor. If they are outstanding, continuing to give them opportunities to make something good happen, is an excellent strategy for success. Letting Tom Brady throw the ball often or giving it to Lebron James nearly every time usually will result in good things taking place, which ultimately means a win. Conversely, if there is a poor player who can be exposed, whoever they are defending will probably see the ball more often than usual. They are examples of competitive advantage in sports, and for investment firms, the ability to understand it is critical when analyzing the positioning of individual firms in any industry.
In the case of businesses, creating a sustainable competitive advantage allows a firm to enjoy higher margin profiles than it’s competitors. Over a long period of time, profitability typically gets competed away. As Mr. Bezos of Amazon has remarked, ‘Your margin is my opportunity.’ The important question for corporate executives is what makes your firm different than your competition? Why will this differentiation last and how can it be made larger? There are various different advantages firms cite as their competitive strength. One is being the industry low cost provider. Another one involves owning a well known brand. An exclusive license to operate, essentially being a monopoly (think cable companies), is another competitive advantage. Add to this the idea of switching costs, which create a high barrier to entry. Large network effects are an important distinction, too, think Spotify or Facebook. Anyway, investors are looking for firms which have deeply entrenched competitive advantages. The difficult part is analyzing the industry and competitive landscape, locating the competitor which possesses quite a few of these characteristics, and being able to pay a fair price for it. Even better is if others don’t quite see the industry the same way, and the advantages you believe exist aren’t considered by others. Essentially, can you understand the business better than other investors? If so, and eventually you are proven right, you will get rewarded. Not easy, and it’s not supposed to be, but it is what equity investing, in nearly every form, is centered around.
In the markets last week, the SEC chairman gave took questions about his stance on cryptocurrencies and how his thoughts about regulating them. The issue, along with the related digital assets like NFT’s, stable-coins, and various associated instruments like swaps and options, represent trillions of dollars of potential tax revenues. The entire meta-verse thesis, which revolves around the digital future and how it intersects with the virtual and real world, increasingly is mentioned as the core investment question for the world over the next few decades. Another important variable is China, which is being hit with the unfolding debt problem of Evergrande, a massive real estate developer burdened by a mere 300 billion of liabilities. The ripple affect of an Evergrande bankruptcy filing may be part of what ails the investment outlook on China. Add to that the aggressive involvement of China’s various government agencies, and the largest market in the world has plenty of uncertainty related to it. On the deal front, Intuit announced a twelve billion dollar acquisition of Mailchimp. It is an effort to dominate the small business area, oops meta-verse, where Shopify, Amazon, Stripe, and others are also striving for leadership. On the earnings front, the week was light with Oracle and Manchester United reporting.
In the always difficult to observe realm of politics, Governor Gavin Newsome won an easy victory in California. It was not hard when nearly 70 percent of the voters are registered Democrats. Canada will vote on Monday to decide the fate of Prime Minister Justin Trudeau. He is still favored to eek out a narrow victory. His real challenge to overcome is governing with a minority, which is why he called for the election. In Congress, it appears House Majority Leader and President Biden have decided to go against the strategy of divide and conquer. Instead, they are full steam ahead with tying their trillion dollar infrastructure package, which has the support of Senate Republicans, to the 3.5 trillion dollar spending bill, which does not. Progressive House Democrats insist on linking the two. Mrs. Pelosi and Senate Majority Leader Schumer believe they can get both across the finish line. With not one Republican Senator willing to play ball, the Democratic leadership clearly believe they will be able to persuade Senators Manchin and Sinema to play ball. We are going to find out how that plays out fairly shortly. On that note, if you know of anyone who could use our investment advice, please don’t be afraid to reach out or pass their name along.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org.
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.