Worried About Wiluna
June 8, 2010
This Changes Things…
June 19, 2010

What Did I Miss?

It’s great to finally be home. After more than a month on the road, it’s time to get back and do some laundry. Travel is great. It lets you see so many things. You can take your mind off the details and get some deep thinking done. The downside is that you can get horribly behind on world events. While you can get the headlines from the road, it’s impossible to ascertain the nuances.

Although it seems like a whole lot has happened, nothing really has happened. The European financial crisis remains unsolved. The monetary bandage applied just before I left is already starting to fray. There is no solution to the problem except massive money printing. Is China a bubble? Or, are sizable misallocations of capital simply the normal residue of two decades of aggressive growth? I lean towards the view that China will muddle through with some turbulence, but they’ll be just fine. Has anything changed in the past month there? Unlikely.

Over here, our economic data is beginning to point downwards. I’m not terribly surprised. The when and how don’t really matter. What matters is how much money they print in our next bailout. Bigger, Badder, More Corrupt!! That will be the rallying cry of Congress. A few more bad data points and a bailout is imminent. It is all quite predictable. Got Gold? Did I miss anything? Anything unexpected happen besides the oil spill? Nope.

Remarkably, the S&P is only two percent from where it was when I left. Same with gold. There’s been a whole lot of volatility over the past month, but you wouldn’t know it by comparing market prices from the day I left. Despite hearing about the collapse of the Euro every day overseas, it was 1.236 when I left and it’s 1.239 now. Did I miss the whole collapse? The Euro is actually up. Markets have a funny way of creating panic, only to revert to normality. It is quite dangerous to get caught up in the day to day moves. That’s why I stick to the big picture.

One thing is for certain—we have entered a period with significantly more volatility. We might as well get used to it. Not only will there be stock market volatility, but there will also be quite a bit more economic volatility. The days of companies growing 10% a year and beating earnings estimates by a penny are over. The meddling of politicians and central bankers has added considerable uncertainty to every aspect of economic life.

What will the tax rate going forward be? Will carbon taxes strangle our economy? Where will the dollar trade? What will the price of oil be in a year? Three years? No one can answer those questions with any degree of certainty. How can any business plan for the future? Going forward, expect earnings to be more unpredictable.

Into this maelstrom, get ready for arbitrary political decisions. Get ready for bailouts and make work programs. Get ready for foolish regulations and excess profit taxes. Get ready for a start and stop economy. Get ready for the unexpected. Get ready for economic anarchy.

For years, I’ve made money buying little companies that I believed in. The problem is that little companies are fragile. They cannot stand up to economic volatility like more mature companies. As an investor, you now need to be even more critical. You can only invest in the most robust businesses. You have to be more conservative. You also have to be more of a trader. You never know when things will come unglued. The days of being 100% invested are over. You need to keep cash available to pick up bargains. In periods of economic anarchy, you will frequently find good companies that are discarded in panic. You will find situations when shares drop from par, to twenty cents on the dollar. You can buy them and sell them a few months later at nearly par. This is a much more difficult environment for investors. At times, you have no choice but to be a trader.

Trading is hard. It takes an iron stomach. You need to step in while things are in freefall. It also means having convictions. Look at the market over the past month. All I heard in the news was about the market collapsing—yet here we are, right back where we started. You cannot get chased out of things you believe in. You have to just ignore the market sometimes. This is a much more complicated environment than anything I have ever witnessed.

The new rules are the same as the old rules. Do your research. Look out for flaws in your thesis. Demand an even larger margin of safety. Don’t let volatility shake your conviction. The only truly new rule is to always have extra capital sitting around waiting for opportunities. Volatility creates opportunities. Most importantly, you now need to be positioned before events. You can’t react. The volatility is just too extreme. Be prepared.

Categories: Comments On Events
Positions Mentioned: none

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