The following letter needs little introduction. Many readers will notice near the end of this post that a mentor of mine has chosen to write a short letter and requested that it be published here. Obviously I am in no position to refuse the request based on the years of guidance he’s provided and hope that his insight can help gain a perspective of the current troubles plaguing the markets.
Technology really is an odd thing when you think of it. Sixty years ago when I was young we used typewriters and a good old-fashioned pen to put our words onto paper. This voice recognition software reminds me of when I used to dictate evaluations during my days as Master Corporal. Remarkable that today that same information can somehow be sent by flashes of light clear across the globe in a matter of seconds. Something likely that generations today take for granted.
I have been investing for a very long time and you learn a thing or two over that period of decades. I remember the first investment I ever made: Johnson & Johnson in 1961. Two hundred shares in one of the finest companies I’ve ever had the pleasure of holding. I bought some more over the years, but never sold any. A good quality company and I never had a complaint. I never once read a book, took a course at college or tried to understand the complexities of investing that so often plague the markets. The simplest ideas were often the most successful and time teaches you to focus on what works.
At eighty-six years of age I have met my share of ambitious young people and remember fondly that in my youth I myself could be counted as one of them. I even remember a young man in baby blue scrubs walking into my room one morning five years ago that held that exact same trait; how times have changed for him. Yet time after time, ambition often leads to an abundance of confidence that shadows the true risks one takes in their decisions. The behaviour seen in the stock markets in recent months to cause the current turmoil is no different than children playing near a busy street unaware of the dangers present all around them. A “bubble” as many call it is nothing new and the investment markets seem to have an ever increasingly short-term memory. That is likely due to the absence of meaningful repercussions for those who choose to behave badly or that risk is often rewarded with gifts just prior to the entire foundation cracking beneath your feet.
The simplest of explanations I can provide for the continual cycles of banking woes over decades stems directly from the lesson I have taught my young student of the perils that go along when people manage other people’s money. The simple fact is that you never quite take care of something in your possession if it is not yours to begin with. In a capitalist system people get greedy more often than they get giving. They forget risk, discount it, focus on doing what is necessary to get to the top of the corporate ladder in order to edge out their competition. The tragic flaw is that they never acknowledge the risks or stakes they are taking to get there. Sadly the honeymoon is now over and not likely to subside until a deep cleansing has taken place of the weakest companies, poorest management and some form of judicial intervention. There is little doubt in anyone’s mind that shady practices in accounting or wrongful disclosure to consumers of mortgages played in some part a significant role in this current kerfuffle.
Bank stocks falling in tandem is nothing new, but what is new is the extent of this current and apparent free-fall. When I think back to other periods of distress I have difficulty forming a clear picture of something to base all of this upon. As I have shared with young Bradley over the past few months; you cannot base current fundamentals on previous valuations. The technicals will not matter much as stock prices will break at their own will through resistance levels that many investors felt impossible. Once a fifty-two week low has been broken down in excess of ten percent, then your guess would be as good as mine for when the bleeding stops. Some investors might be fortunate enough to pick the bottom with a stake into a position by random chance, but likely many others will fall victim to the continuing plummeting of share prices. Chasing a stock will never make you money and although I have never been a fan of technical investing; looking at the charts of many of these blue-chip stocks sends shivers down my aching spine. Once people lose faith in the banking system, the foundation of our financial system, investors and consumers alike have a difficult time forgetting the despair they were a cause of.
My simplest piece of advice I can offer functions on the basic principle of quality that I have looked to over decades of investing. “Quantity is no replacement for quality” and an investor is best served to remember that statement regardless of how cheap they believe a stock is when evaluated on any basis. All the computer models I’ve ever heard of, charting trends or other fancy techniques have never beaten quality over any period of time. Warren Buffett himself, who so many young people praise and idolize, has likely been the best at this one ideal. You can quote him, study him and attempt to replicate his success, but the basis of his approach functions exclusively on quality. That is what it all boils down to when you peel away the years of success he has enjoyed with his managers. He is a masterful allocator of capital, but even a more astute student of quality.
Value investing, as my protégé knows very well, is more a function of quality at times than buying a group of assets at a steep discount. Often the most significant value can be found within the companies that stare you in the face day after day. They do not change over the decades, but build continued strength with their dedicated customers and doing what they do best over a number of years builds them a competitive advantage with only minimal effort. They are rarely considered cheap, but in times of turmoil and chaos they preserve your capital, pay generous dividends and likely never get caught up in scandal or poor behaviour. Their core business is far too important to expose to unnecessary risks and they pride themselves on placing the highest quality of management in positions that protect their operations, brands and employees from harm. Anything less would be a dishonour.
Over the years I have analyzed many companies, but held very few. I have rarely had interest in companies I did not understand within five minutes of reading an annual report. I have used the simplest of ratios in my assessments and place more emphasis on operations than I do on worth. A good business may work out to be a good investment, but an equally or greater business will most often work out to be the best investment.
If it don’t make dollars, it won’t make ¢ents.