Round Trips and Second Chances
A long time ago, I was having sushi at a tiny restaurant in a less touristy part of Tokyo. It was just my Texan friend among mostly local clientele and me. We stood out. Everyone was sitting around a revolving sushi bar with chefs working in the middle. If you liked something but missed it, the same dish would likely come around in a little bit. You just had to be patient. If you can’t be patient in a Zen-filled Tokyo sushi restaurant, I don’t know where you can. Investing is similarly full of round trips and second chances that require patience and caution. Let me explain.
I often share how investing is not a one-off activity; you pick the perfect stock, it goes up 100 times, and you can quit your job and retire next week. It’s a lifelong practice. The goal is to grow the capital and compound it at a respectable rate without exposing it to unnecessary and excessive risks. It’s a mindset, a framework that helps us make individual investment decisions.
Now and then, an opportunity appears that allegedly is impossible to miss, once in a lifetime opportunity to get on board or miss it forever. It’s a frequently used narrative by salesmen. “The inventory is tight, this model is in high demand, I know it’s not the color and the interior you like, but you just have to act on it quickly, or you’ll never get to own anything like it again” – I owned very few cars in my life, but I heard this tale more than once.
The way the stock market is presented by the media, with the blessing of the salesforce of many institutions profiting from frantic activity, is a place full of once in a lifetime opportunities that we can’t miss. Act now or regret it forever!
That’s not true.
Last year, the list of FOMO (fear of missing out) fueled ideas was the longest in a while. From cryptocurrencies, NFTs (non-fungible tokens), SPACs (Special Purpose Acquisition Companies), venture capital, tech companies – the big and older ones, and those profitless new ones as well, and more. Everything was going up! Even prices of used cars. I jokingly wrote at the time that something isn’t right if you can’t lose money on a used car. And if it’s not right, it’s bound to end.
From my own experience of two decades of professional investing, I place last year in a category of its own. I have never seen this level of delusion with promised upside that never came. It happened many times in various shapes and sizes, but last year should hold some award for the scale of it.
It wasn’t just that the investments failed to go up forever; their drops were eye-popping 90-95% down from their highs, even as much as 98%. Carvana, the online car dealer (which was losing money on an average sale), followed that path. It offered an incredible customer experience but hasn’t figured out unit economics.
Stocks had a great run in 2021, but for some even that wasn’t exciting enough. The catchphrase of the year must have been “alternative assets.” Wikipedia tells me it’s anything that’s not stocks, bonds, or cash, but it could be something as “enticing” as cryptocurrencies and NFTs.
Warren Buffett sometimes writes “Only when the tide goes out do you discover who’s been swimming naked.” The majority of those high-flying investment ideas evaporated, and some are still in the process of letting the hot air out.
There is more to it, though.
In that same way, the enthusiasm of 2021 brought to the center stage some obscure and lesser know alleged investments, the more legitimate investments also flew higher than usual. Many investors gave in to FOMO here as well. They bid up highly profitable big businesses to new highs in hopes of the promise of eternal growth.
Here I have in mind a large group of mostly tech companies that have been around for a while. They seemed not only immune from the pandemic-era economic woes, but actually somehow benefitted from the sudden shift in consumer behavior and business activity as we stayed at home, stopped going to restaurants, gave up on travel, shopped online, and binged on shows. They grew, and thrived, won market share, and enjoyed higher adoption rates. Many took a significant leap forward.
Their stock prices accounted for that and a lot more. Today, the situation is different. They’ve done a roundtrip and gave us a second chance at buying them. Their businesses can be 50%, 100% bigger than before COVID, while their stock prices are right where they were during the dreaded March 2020 market sell-off or lower.
Does it mean they can’t get cheaper? No, but they definitely look the most attractive they have in a very long time or ever as they look for their new normal.
We like to repeat Ben Graham’s (legendary investor) words that price is what you pay; value is what you get. If we are getting a lot more, but we are paying the same price or lower, we are definitely looking, giving them serious consideration or even buying already.
Not all investments that made a roundtrip are worth considering, but among the many, a few offer us a second chance to own them, not for a brief flash in the pan this time, but for the long run.
All noise aside: “alternative assets,” once-in-a-lifetime opportunities, and more, it’s slow and steady that wins the race. “The fast and furious” part of the investment world is the land we completely avoided (ignored, to be honest) the last two years despite strong opinions that we are missing something.
Today, we are looking around among the dusty debris and finding some real golden nuggets that belong in our long-term patient-disciplined portfolios. They’ve been on a roundtrip and give us a second chance to own them, just like in that Tokyo sushi place, a small plate of the chef’s creations that went all around but belonged right in front of us.
All we had to do then and now was to wait!
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