The Only Certainty is Uncertainty!

The Only Certainty is Uncertainty! 1

‘The future is no more uncertain than the present.’ Walt Whitman

As one gets older, routines and processes become ingrained in your daily life. You eat the same breakfast, take the same route going to work, snack at a predetermined time, have lunch with the same people, etc. Predictability is also quite important for kids as they learn to expect what they will do. Ask any veteran teacher about their work day and they are going to describe a consistent pattern of activities at specific times. Predictability is helpful for efficiency purposes as well, as time is allocated based on what works together well. As an example, companies like Amazon, Uber, or Lyft schedule their driving assignments based on routes where workers can make multiple deliveries during the same trip. I bring up predictability because the investment world is very much concerned with it. Allocators of capital want certainty from revenue streams. Cash must come in routinely, earnings estimates must be met and exceeded, and investors reward companies with a higher multiple. Of course, there is the other end of the spectrum, that being uncertainty.
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As we have moved into a digitally based world, it seems nearly every industry one can imagine is faced with a changing competitive landscape. Warren Buffett is famous for investing in industries which he believes will not change much. He is trying to look out ten years and own something where he can depend on the earnings power to be as good or better a decade from now. A good example of this would be his investments in various media properties, railroads, and utilities (Washington Post, Buffalo Daily News, Burlington, Mid American Energy, Nevada Power). Today, newspapers have been completely displaced by internet and mobile based devices. It is maybe the poster child for how dynamic technological advancement places investors in the cross hairs of both risk and reward. The idea of predictability of earnings power ten years from now is a very difficult proposition to find. Companies like Boeing, with twenty years worth of order backlog and in the aerospace area, seem a natural place to prospect. Of course, with Boeing’s recent troubles with the 737, it again bring up that little issue of uncertainty. The idea that there is ever going to be absolute certainty in business performance over a long period of time is far fetched. As an investor, it is advisable to think in terms of probabilities, or ranges. Many companies use scenario analysis as a way to create a variety of outcomes when planning for the future. Investment analysts use this in their modeling to forecast what the range of earnings outcomes could be for a specific industry or company. With digital disruption such an obvious risk to results, let alone the chaos that could take place in politics on a daily basis, it makes sense to accept that there is always going to be plenty of uncertainty in capital markets. That being said, there are ways to mitigate the uncertainty. What might they be?

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Well, first, you should recognize that nothing is fool proof. Second, whatever your approach, it should be consistent with what you are trying to accomplish, and fits your investment psychology. If you cannot handle the daily swings of markets, it might be better to invest in different kinds of assets. With those points in mind, there are industries and companies which have excellent growth opportunities which you should consider. One area would be anything security related, especially on the internet and related to banks or capital markets. Second, the use of options as a way to protect the downside, usually through puts. Third, owning debt of large investment grade companies secures an income stream which diversifies a portfolio and lends a degree of predictability as well. I’ll send the bill next week, and it will run 100K, so get the check ready- teasing.

On the earnings front this week, a light week, but of note was HP Enterprises registering a better than expected number, Palo Alto Networks missing ( a rare security industry miss), VMWare whiffing, Dell exceeding expectations, and Best Buy coming up with a good result. Cracker Barrel hums along with it’s tasty food, while Movado was not on time. In the big news of the week, TD Ameritrade and Schwab officially announced their merger, as did Louis Vuitton’s cash purchase of Tiffany’s. StubHub was sold by Ebay, too ( a cool 4 billion). On that note, I hope your Thanksgiving was certainly scrumptious and you and your family enjoyed yourselves immensely. There is plenty to be thankful for and I most certainly am.

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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.

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