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What would we do with a million dollars?

July 2, 2020 | Bogumil Baranowski
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Little over a year ago,  at an intimate investor conference in Zurich, I gave a talk about the next decade of stock investing (here are some ideas I discussed: Fighting the currents; a metaphor for the next decade of stock investing). Over lunch, one of the attendees asked me an interesting question: “What would you do with a million dollars right now?”

In the context of my talk, it was the perfect question to entertain. In my prepared remarks, I had highlighted five widely-held principles or tactics that have worked well over the last decade, and explained how they may get many investors in trouble over the next decade:

  • Diversification of investments is not enough; holding cash matters
  • A “buy and hold” investment approach may not work, but stock-pickers will do well
  • Passive investing may fail as active managers could shine again
  • Balancing short-term promises vs. long-term success
  • Volatility is not risk; it’s an opportunity in disguise

But for investment managers like us, it’s always useful to apply principles to a practical problem, and this was a question that comes up frequently in our field. Whether a family fortune amounts to one million dollars or a hundred million, we are all navigating the ups and downs of the stock market along with economic and political uncertainty, not to mention the broad variety of business opportunities and risks we face in our holdings.

As a backdrop, it’s important to remember that today (mid-2020), we are almost back at the top of the longest-running bull market ever, while the underlying fundamentals have deteriorated. Naturally, we have nothing against bull markets as such; that’s when most wealth is created. Similarly, though, bear markets are the periods when most of wealth vanishes. In the last 50 years, seven bear markets wiped out half or more of the preceding bull markets’ gains.  On three of those occasions, more than 100% of the bull market gains were lost (Source: UPFINA, Farnam Street Investments).

In March of this year, we had a taste of it, when three years of gains disappeared in a matter of three weeks, only to show a record recovery sponsored by an unprecedented fiscal and monetary stimulus (Read: more cheap debt).

With the past incidents in mind, it’s impossible to draft a plan for a million dollars without first understanding the possible risks. To us, the big risk is a permanent loss of capital, like spending $100 to get a $50 bill. Eventually, the market will price that bill properly, and when that happens, we’d face a permanent loss of capital. Seen that way, no one would buy a $50 bill just because its market price went from $100 to $130. Yet somehow when it comes to stock investing, it’s easy to lose track of that vital fact, and want shares of a hot company just because the price has been going up.

As value investors who like finding $100 bills that sell for $50 or less, we have a peculiar challenge in the current market. The conditions that challenge us are markets that keep rising for less and less convincing reasons. Easier times are those when markets continue to drop for less and less convincing reasons.

But whatever the state of the market, a million dollars needs to be put to work. Even “parking” it in a zero-rate checking account is a decision. If we become responsible for that million at the market top, we will do our best to first preserve it, and second grow it. Our investment approach remains the same through all markets. We look for value, and if we can’t find value, we wait until it appears.

What we have done in recent years, and what we’d do with a million dollars today, would be the following:

  1. We would put as much cash to work as possible without compromising our long-term goal – growth and preservation of capital.
  2. We would maintain a well-selected portfolio of the best-quality stocks acquired at attractive prices. The majority would be in well-established businesses that likely pay a dividend, and have good odds of prospering through a prolonged economic downturn.
  3. We also like to hold a small number of companies with an even more promising trajectory. They can be growing or misunderstood businesses that the market doesn’t appreciate at the time. (We often mention that we like to hold cyclical businesses when the time is right, but given that we are at the top of the cycle for most industries, with very few exceptions, our cyclical holdings are currently relatively small.)

It’s true that in the last few months we’ve put more money to work by buying a significant number of new stocks. Still, we’ve been acting slowly, often building starter positions and leaving plenty of room to add over time.

To succeed at collecting more quality businesses at good prices, we don’t need a broad market sell-off. We often take advantage of pockets of opportunity, when segments of the market drop significantly due to a shift in a sentiment and investor short-sightedness.

As we often write, we don’t claim to be faster or smarter than anyone else, but we are definitely more patient than most. We are patient in both buying and selling. And while it is tempting to chase the short-term races that the market sets up for those suffering from the fear of missing out, we would prefer to diligently follow our holdings, and continue to learn about the businesses we like and own.

When the opportunity arises, we have our finger on the trigger and we can act without hesitation. December 2018, for instance, opened a brief window of opportunity when market prices dropped by around 20%, but we have seen other times, including January and February of this year. March 2020 was an equally opportune time.

We are skeptical about portfolio managers who hold extreme opinions in today’s markets, both negative and positive. On the whole, we trust the expertise of active managers like ourselves, who actually know what they own, and why — instead of passively and blindly riding out a wave that may break any time.

Good or bad, easy or difficult, there is always a way to invest, whether your fortune is a million dollars or a hundred times that. If you have a long-term investment horizon, if that’s all the money you have, and you can’t afford to lose it (as it is the case for our clients) we would hold a selected group of quality stocks bought at the right price, and an ample cash reserve to take advantage of the opportunities ahead. There will be many opportunities, but likely they won’t be where the majority is used to finding them.

Happy Investing!

Bogumil Baranowski

Published: 7/2/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a clientspecific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.