covid-19

Can You See the Forest?

© Can Stock Photo / Elnur

The old saying, “Can’t see the forest for the trees,” refers to the difficulty we humans have in maintaining perspective, of keeping the larger context in mind. Our current challenges bring us reminders of this.

Recently we were discussing the prospects for investing in a food processing company. Market disruptions have knocked the cost of $1 of annual earning power down to $10 – an earnings yield of 10%. (Another way to say it: a price-earnings ratio of 10.) If one can purchase durable earning power in an enduring industry at valuations like that, the holding might be owned a very long time.

(No guarantees – there are a lot of assumptions in that last paragraph.)

A colleague asked us whether we were concerned about the impact of processing plant shutdowns. After agreeing that any shutdowns would likely be limited to a matter of weeks, this seemed to be one of those problems of perspective.

For none of the past few decades have the plants been shut down for a virus. Apart from the next few weeks, it seems unlikely that virus-related shutdowns will be much of a factor in the decades ahead.

The forest is that we humans will still need to eat in the future, and there is probably money to be made by meeting that need. The trees are the virus and the shutdowns and the disruptions. One of our key roles is working to see the big picture and striving to act accordingly. We need to be able to see the forest in spite of the trees.

Interestingly, the challenge of maintaining perspective may play a role in creating bargains. Investors who get too wrapped up in transitory effects may push prices to levels that don’t reflect the long term value. When current conditions fade, as they will, that value may become apparent. Again, no guarantees.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Up In The Air

© Can Stock Photo / jefras

We have written before about the miracle of air travel. You can go from breakfast on the coast to lunch in the middle of the country, renting the use of an $80 million machine and the services of $1 million in payroll for just a couple hundred dollars.

It is no wonder that US passengers flew 57% more miles in a recent year than they had twenty years before. This record of growth included the disruption caused by terrorists on 9/11. Our commercial aviation system was used against us, to devastating effect. Dramatic changes in the flying experience resulted. But traffic volumes still grew over the long term.

The global COVID-19 pandemic has created a larger shock to air traffic volumes. Noted investor Warren Buffett, who had previously invested in four major US airlines, recently announced the sale of those holdings by his firm. Many are wondering what to think.

Our research and thinking will continue to evolve, but we do have thoughts to share.

  • Buffett had the luxury of selling out before news of his sales depressed the share prices. What we may choose to do today is a different set of choices than what could be done last month.
  • Although he is arguably the most successful investor in all of human history, he has proven to be wrong from time to time. (We treasure those moments when we were right and he was not– just ask us, we will tell you all about them.)
  • Buffett’s original idea, that he was buying $1 billion per year of earning power for an $8 billion investment in airline ownership, became obsolete. But perhaps the buyers of those shares have purchased $1 billion per year of future earning power for less money, $6 billion. No guarantees.

The future of air travel and participating companies is up in the air. But it seems likely to us that the miracle of air travel will sooner or later exert its charms over an increasing number of people from year to year. We are working to understand what this all means in terms of investment opportunities and challenges.

Clients, if you would like to talk about this or anything else, please email us or call.