value investing

Rough Markets: When the Wisdom of the Crowd Becomes Herd Mentality
photo shows a mountain stream

Clients, some of you have reported that some people around you are finding it inexplicable that you haven’t yet sold out of the stock market, given its rough times. One of you even heard the prediction, “You’re going to lose it all!” These conversations are happening at coffee time, out to dinner in a group, at every kind of casual gathering.  

We often think of peer pressure in connection with children. But there are strong forces at work among not only children: it’s also retirees and everyone in between! 

In ambiguous situations, humans tend to copy what other people seem to be doing. If we don’t know what to do, we may assume that others do. So we emulate them. This type of behavior is sometimes referred to as “social proof”: we take our cues from others when we feel unsure what to do. 

In some social groups, people react to rough markets by selling out; in other groups, people cling to the long-held belief that investing is too dangerous for anyone. If everybody in your “group” seemed to be doing the same thing, you’d have lots of social proof to reassure you that, surely, you must be on the right path. 

But this social influence can hold more weight in our choices than it deserves. Yes, someone marching to a different drummer can seen as a rebuke. The contrary behavior—going against the crowd—is full of resistance. Sometimes it takes a big splashy effort to swim upstream! Hence the hectoring and lecturing. 

But we choose our own course, and it does not start or end with what others think about us. 

You can see the core principle at work: “avoid stampedes.” We believe this has kept us out of fads—and pointed us to bargains. We think going against the crowd may be profitable, though no guarantees of course. 

If your friends hassle you about your investing, be kind to them. You can always change the subject if you need to. Maybe in their mind, fear is in the driver’s seat right now. Or maybe they’re in the grips of peer pressure. 

Either way, we know what we’re about. And that’s enough. 

Clients, if you would like to talk about this or anything else, please email us or call. You are among the best clients in the world, a group where you may find all the proof you need that being contrary may be a great thing.

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Rough Markets: When the Wisdom of the Crowd Becomes Herd Mentality – 228Main.com Presents: The Best of Leibman Financial Services

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Growth Expectations and Searching the Bargain Bin
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I’m familiar with someone known to venture out on sunny weekend mornings to wander local garage sales. Their first target, wherever they stop, is usually to the area marked “FREE.” This is the stuff that the sellers don’t want so badly they wouldn’t even bother with a price tag.

My acquaintance is a bargain hunter. They know that there’s a chance they find something that can be repurposed or reused, that could bring them value far beyond the cost of finding it.

We here at 228 Main spend much of our research time searching for bargains, too. Occasionally, this takes us to Mr. Market’s version of the “FREE” table—things that seem so undervalued by most investors, we may get rewarded. These opportunities get to a point where things can’t possibly be as bad as people are saying (no guarantees, mind you).

But as we’ve been growing, our thinking on this has stretched a little. Sure, we still dig for the bargains of old, but we are also looking at things that our fellow bargain hunters might call “overvalued.”

When a stock is labeled as “overvalued” (by us, the financial news outlets, Wall Street…), typically the labeler is leaving out the “right now” part.

Since we’re investors, aimed at the long haul, the “right now” part is less interesting to us. Instead…

  • How long does “right now” last?
  • Is the price fair right now knowing that we’re buying for the next 3–5 years?
  • Are we paying a reasonable price for the next… however many years of future growth?

Again, we can’t promise that future growth pans out, but a good story, an intriguing product mix, and some competent management are all things we’re considering for these growth-y companies. It’s exciting.

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

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Play the audio version of this post below:

Growth Expectations and Searching the Bargain Bin – 228Main.com Presents: The Best of Leibman Financial Services

This text can be found at https://www.228Main.com/.

Schrödinger’s Market

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Quantum physicist Erwin Schrödinger once came up with a thought experiment to illustrate a difficult conceptual problem. Suppose you have an opaque box with a cat inside. In the box is a mechanism that is designed to release a poison gas based on the random actions of subatomic particles on a quantum level.

Now according to quantum theory, it is literally impossible to know what these particles will do in advance. You cannot even accurately measure what they are currently doing beyond general probabilities. In fact, until you observe them they act as though they are doing multiple mutually exclusive things—including behaving as though they are two places at once!

Hence Schrödinger’s box. Without observing the contents of the box you have no way of knowing if quantum action triggered the poison or not. Thus, until you open the box and look the cat is simultaneously alive and dead: a surprising conclusion, and a difficult paradox for physicists!

You and I can leave that problem to the scientists, but Schrödinger’s box can be a useful metaphor for other unknowable states. The actions of financial markets are theoretically not as complicated as quantum mechanics. But predicting market action is so far beyond our current mathematical understanding that they might as well be.

Like quantum particles, the value of a market cannot accurately be measured without interacting with it. This leads to a great deal of uncertainty and can sometimes make it feel like multiple conflicting realities are true at once.

Reading the financial press you will often be presented with competing headlines declaring that we are simultaneously in the midst of a great bull market and a terrible bear market.

As with the box, we prefer to leave these paradoxes to people with more time on their hands. Instead of trying to time the market, we believe in sticking to timeless principles like avoiding stampedes and finding bargains in the hopes of finding quality companies. We cannot predict what market prices will do from moment to moment, but we can guess at general probabilities.

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

Pain and Gain

© Can Stock Photo / Anke

Great thinker Morgan Housel talks about the scene in Lawrence of Arabia in which one man snuffs a match out with his fingers and doesn’t flinch. Another tries it, yells in pain, and asks what the trick is. “The trick is not minding that it hurts.”

Housel concludes “accepting a little pain has huge benefits. But it will always be rare, because it hurts.”

The implication for our business with you is clear. Housel concisely states what we’ve been working to convey for years: “The upside when you simply accept and endure the pain from market declines is that future declines don’t hurt as bad. You realize it’s just part of the game.”

That you have learned this lesson, and tend to live by it even when it is uncomfortable is why we say you are the best clients in the world. We feel fortunate, because it is rare. Somehow we found or attracted people with effective investing instincts, or helped to instill those.

The key to making this work in the real world is avoiding the need to sell at bad times. Cash reserves and adequate cash flow are the things that let us live with short term fluctuations with our long term money.

When we are all on the same page, we spend less time worrying about, and explaining, day to day or week to week market action. Almost all financial market commentary may be summarized by saying “it goes up and down.”

This gives us time to hunt for bargains, think about trends on the horizon, and work on your plans and planning. All of these are more worthwhile uses of our time than attempting to explain why the market went up or down yesterday, or predict what it might do tomorrow.

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

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.

Deepwater Disaster and Expectations

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A decade ago, perhaps the biggest environmental disaster in American history began to unfold. The Deepwater Horizon drilling platform in the Gulf of Mexico exploded in a fireball from high pressure methane gas coming up from the well.

Eleven workers were never found; seventeen were injured. Two days later, a slick began to form. It was the harbinger of the biggest oil spill ever, over 200 million gallons.

Day after day, the nightly news and cable channels showed images of oil billowing up from the sea floor. It was like a never-ending horror show, dragging out for eighty-seven days. Environmental damage to the waters of the Gulf and its beautiful beaches would clearly exact a heavy toll on the fisheries and tourism industries.

The well owner, BP, was rightly vilified for operational lapses and safety practices. Civil penalties and restitution were bound to be in the many billions of dollars. Many people wondered how the company could even survive, or do business afterward.

In the face of these challenges, it is not surprising that the price of BP stock was more than cut in half in less than three months.

The surprising part is that the stock bottomed and began to move up even before the oil stopped billowing into the Gulf.

There is a lesson here about expectations and unfolding reality. When the consensus expectations got below the reality that would eventually emerge, the stage was set for unexpected gains. As a company, BP did pay in many ways for its failures, in amounts that did get into the many billions of dollars.

But reality almost had to be better than the expectations, since the expectations were so low.

(This is not a recommendation, or a recital of our research prowess. We never advocated for the purchase of BP stock near the low point, believing it to be too much to ask of you.)

Near this tenth anniversary of the disaster, we recall this history to note that taking the contrarian approach against the prevailing consensus may sometimes be a fruitful way to invest.

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

20% – 30% – 40% Off!

© Can Stock Photo / PaulMatthew

Some say the seeds of future gains are planted in the downturns. The future is always uncertain, but the past is not: we know many investments can be owned for less money today than last month or last year.

As we go about our work, we are seeking three kinds of bargains.

  • Great companies available at good prices.
  • Cyclical companies at low points in their cycle.
  • The best bargains in the investment universe, wherever they are.

Often, the companies we most admire seem expensive. We know farmers that are always excited to talk about buying their favorite iconic tractor maker. We hear the same thing from parents about the entertainment conglomerate that makes the movies and runs the theme parks their children enjoy. Downturns sometimes reduce stock prices to attractive levels.

Everyone knows that recessions usually hurt company revenues and profits. We are thinking how the inevitable recovery might improve revenues and profits. That long view improves our appetite for temporarily depressed cyclical companies.

Some of our favorite past bargains have come from the sector politely known as “high yield bonds.” (You and I can use a more descriptive term, junk bonds.) From time to time, at rare intervals over the past twenty years, we have found something we believed to be investable hiding in the junk pile. Times might be ripe for that again.

Now is the time. We are studying and thinking and researching to make the most of it.

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

Making Money the Old-Fashioned Way

© Can Stock Photo / stokkete

Years ago, the Wall Street firm of E.F. Hutton advertised “We make money the old-fashioned way. We earn it.” This tag line evoked a world of indepth research into securities and markets, and investment analysis by experienced professionals.

E.F. Hutton disappeared into a series of mergers, and making money the old-fashioned way is increasingly scarce. One popular theory now is that security selection does not matter, only the allocation of money across the different sectors of the market.

Combined with the idea that past patterns of volatility and past returns by sector should dictate what one should own for the future, many modern ‘investment advisors’ pay no attention to individual company stocks or bonds.

It seems to us that owning stock in a failing chain of department stores is a lot different than owning the world’s largest online retailer. A few automakers survived, hundreds did not. Buying a corporate bond for 50 cents on the dollar is a totally different proposition than selling it for 50 cents on the dollar. Owning some of everything is different than being selective.

Our experience says security selection DOES matter.

One of our strategies is to try to find ownership in great companies at decent prices, to buy and hold. Looking for cyclical companies at low points in the cycle is another strategy. And simply seeking bargains anywhere in the investment universe is a third.

This is not easy. Conditions are always uncertain. There are no guarantees. It takes a lot of effort and energy. There is no assurance that the old-fashioned way will make money, as E.F. Hutton claimed.

But we are trying.

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

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.