Bad weather or bad clothes?

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We are undoubtedly living in uncertain times, the likes of which most people in North America and around the world have not seen in nearly a century. These risks and uncertainties have almost biblical or medieval proportions.

A global ‘plague’ is shutting down the economy, leading to supply shortages for a host of products, inflation spikes to levels not seen in decades, and now, ‘rumors of war’ leading to real war .

The playbook just keeps getting more interesting.

Typically, heightened geopolitical concerns have rarely affected markets for more than a few days or weeks. But when generated by Russia, a nuclear power, wantonly attacking the sovereignty of neighboring Ukraine by conventional means so far, it becomes difficult to claim that we have any lead or insight. All the same, we would not want our silence to give the impression that we are not thinking at all.

We always reflect and sometimes, when the times demand it, we act.

Although we refer our readers to our Investment Playbook published just six weeks ago, Putin’s actions in Ukraine likely exacerbate the risks that were already in vogue at that time.

Inflation is a real concern, interest rates are likely to rise, and supply chains remain a mess. The war in Ukraine will only increase the effects of these volatile variables already in play.

At the start of the year, we mentioned that we were more diversified in our portfolio than we had been in some time. While the innovation cycle has been almost the exclusive driver of wealth creation over the past ten years, variables associated with the business cycle have come to life over the past year, and with it our presumption that new gains could come from long-silent areas.

Who would have guessed that new positions in energy stocks and even a fertilizer company would be the biggest winners in our portfolio over the past year? If you had told us that we could sell our PayPal (PYPL) and Facebook (FB) positions to fund Lockheed Martin (LMT), CF Industries (CF) and Schlumberger (SLB) a year ago, I might have said you were crazy.

But we’re glad we did. Times change and sometimes so do we.

There are those who have wondered in recent months, and even asked us, whether or not we had changed our approach, if we had “deviated from the style”. We can say with absolute certainty that no, we did not. Our overall investment philosophy has been on display for years on our website and in our corporate brochure for those curious to know more.

We’ve always said that three factors or cycles generate “value” in markets for investors over time…the business cycle, the innovation cycle and the credit cycle. We’ve even argued that of these three factors, the business cycle can often have the most pronounced effects over a given time horizon. This factor, although dormant for years, seems to be coming back to life.

After the tech bubble burst in 2000, new opportunities for relative “growth” arose in real estate and financial stocks that lasted for several years. Just as the bursting of the tech bubble gave rise to relative growth opportunities in these areas, the pandemic, excessive ESG mandates and now war could also give rise to relative growth trends in new areas.

Am I panicked? No.

Almost a year ago, I was a little nervous, but in response to that anxiety, we made some changes to the portfolio, which have served us well today. That doesn’t mean we’re not down on the year – we are – but it does mean that if we hadn’t acted on the mild PTSD we experienced at the time, we could be in a position much worse than today.

According to our analysis, on an annual basis, we are doing better than 80% of our growth peers, a fact that we attribute to taking action where we have seen fit.

It seems clearer to me that we have a unique situation today, where inflation is disrupting patterns of economic variables that seemed set in stone for so many years, perhaps even most of my 33 years of career. The war in Ukraine seems to have only further accentuated these differences.

I believe that we do not have a problem of demand for goods and services so much as a problem of supply. Classically, the Fed has raised rates to slow the economy when it overheats, to reduce demand and quell the boil.

Markets, especially in higher value areas with speculative and often profitless business plans, have been hit extremely hard over the past year as the likelihood of rate hikes has increased.

The trajectory of Cathie Wood’s ARK fund reminds me of the early years of my career, when I enjoyed a similar quarter hour of fame on the covers of financial newspapers and television.

Don’t make a mistake. I respect Cathie Wood. She is right to suggest that innovation is responsible for most long-term wealth creation. But that doesn’t mean that other factors can’t also play a role, that times are changing, or that greater diversification can sometimes bring benefits rather than costs.

Sensing that monumental changes could be on the way, we gradually began to make changes to the portfolio, a process that we will continue to undertake as we see fit.

The credit cycle, “money flows gone crazy,” has kept us from driving out many of the SPACs that have captured market attention during the pandemic. The boil is out of these areas, and some of that money may be looking for a new “growth” home right now, in areas that are growing here and now, short-lived versus ultra-long. .

Ten years ago, on the whiteboard in my office, I wrote the heading Deciding What to Cover, with the following three bullet points.

1.) Is it a significant provider of industry knowledge?

2.) Is something worth investing in? i.e. an alpha generator

3.) Is this a unique innovator worth following for the future?

Most people are unaware of the tremendous time and effort that goes into final reading of financial statements and conference calls for companies that we don’t even own.

We’ve done it religiously, almost mistakenly over the years, not because it’s necessarily fun or where the financial “glamour” exists at the time, but maybe so we can move faster in the times we find ourselves in today.

As an Eagle Scout, I learned to “be prepared” in my youth and to take actions that might not benefit me at that particular time, but undertaking rehearsals might prepare me for a day when I would need it the most.

Mom made me mow the lawn not when I wanted, but when I could, when it wasn’t “raining”. She was tough at times, but in hindsight, maybe she just loved me in ways that have become countercultural relics of the past.

A few weeks ago I went camping in a “winter” tent in zero degree weather for the first time in almost thirty years. Our scout leader reminded me that there is no such thing as ‘bad weather’, only ‘bad clothing’.

Well, for the most part, I’d be the first to say that in bad weather, staying in the best shelter available – a heated house – is the most sensible and logical choice.

But sometimes, maybe even rarely, it doesn’t work that way. Sometimes reality calls for adjustments. This does not mean that pessimism should prevail, simply that an optimistic attitude and preparation for new realities could make the difference in making it possible to live for another day.

We don’t sit back and lock ourselves into a buy-and-hold-at-all-costs mentality. We may be battered and bruised, but we are prepared as best we can. We are constantly evaluating and adjusting, as our experience has taught us and as the courage of our convictions allows us.

For years, investing in knowledge seemed like an easy game in a market that was growing all the time. But true discernment consists in transforming knowledge into wisdom.

For me, such wisdom has often come from the pain of “touching hot stoves” in the past, but also, in a very real and “fiery” sense, from a God who nudges me in the directions I have to take. Be calm. Stay silent. Listen.

Buckle up and get ready for a continuous, perhaps even wilder ride. There are no guarantees, but history has almost always shown better days ahead.

Call your advisor to make sure you’re ready. Do not click on HTML links that look suspicious. And finally, think about the best way to ease your self-centered concerns – by giving back and serving others in the world right now.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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