Investment Opportunities in Every Market

“In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment” – Charles Darwin

2016 ended exactly how we predicted…..or perhaps the opposite of that. Election results contradicted most polls, and the market’s reaction to the Republican win was not the Armageddon that I expected. In fact, the Dow, Nasdaq and S&P indexes all improved more than 2.5% from the election to year-end.  Benjamin Graham, the man considered to be the father of value investing, taught that “stocks aren’t pieces of paper or lottery tickets; they are units of ownership in real businesses whose underlying value does not change thousands of times a day.” The metaphorical “Mr. Market” has mood swings that may reflect euphoria or misery and those moods then determine stock prices. But stock “prices” don’t affect the underlying “value” of the companies. And that is why we don’t worry about what the market does or try to predict up and down movements. Instead, we focus on investing in outstanding companies at attractive valuations. Cheap is good. But buying a great company for cheap is even better! If we invest in great companies, when market environments change, these companies will adapt and evolve (as Charles Darwin stated) to survive and win!

I never fear market uncertainty or market turbulence as these factors create opportunity. If you can think back to the financial crisis in 2008 and 2009, the world felt like it was upside down. I was working as a Vice President at an investment bank when Lehman Brothers declared bankruptcy and Bear Stearns was headed in the same direction. The fear on the street was that they might drag down the entire U.S. financial system. I had a personal portfolio that I managed at the time. And while I tried to avoid monitoring the balance too often, it was painful to peek in and see the value dropping every week as if some sinister individual was sneaking in at night and writing checks to himself. It was February 2009 when I felt the peak point of pain. At that point, I decided to take a step back and consider the opposing view. The appropriate questions to ask were, “Is the world really going to end?” and “Did I waste all of my savings investing in worthless companies?” I came to the quick conclusion that we would somehow find a way to work ourselves out of the problem. And if things did get bad, what I would really need is guns and canned goods. Since I have lots of family in Texas, I knew I had easy access to items in both categories. I also knew that the companies I had invested in made real products that had value and would continue to have value in the future. So it was time to get past the fear and search for opportunities. What I found was a world of companies that had been discounted indiscriminately and were now on sale. I took all of the cash that I had sitting in an account from a recent bonus payment and I invested it in railroads including Burlington Northern Santa Fe and Canadian National, and tobacco companies such as British American Tobacco and Philip Morris International. I bought shares in a Mexican Coca-Cola bottler that I had been researching for some time as well as a few others. All of these stocks were selling at a discount to their historic prices and I strongly believed that railroads, cigarettes and soda (particularly those companies internationally based) were industries that would survive and thrive in what could be a prolonged economic downturn. The market bottom occurred about a month after, and the investments I made at that time turned out to be some of the best investments I had ever made. Over the next 18 months, the cigarette stocks returned 45% plus strong dividends. The railroad and bottling stocks were up over 100%. I also held onto our shares in a pizza oven manufacturer whose shares rose over 240% during that period. This company continues to be a core holding for our portfolios.

In some regards my timing for these decisions was fortuitous, but the bigger picture is that we should always take time to consider the opposing view during times of uncertainty and look for opportunity. I look back on that time and realize that with the knowledge and experience I have now, I could do even better if given the chance!

Now that the U.S. political landscape has changed, I believe there will be new opportunities available including, perhaps, a more favorable business environment for our stock holdings. The economy remains strong as we continue one of the longest economic expansions on record. Economic growth is supporting a tight labor market and the oil and gas sector has shown stability. There are no signs of any excesses that can cause a slowdown or kill an economic expansion. However, we should continue to monitor economic policy. As I discussed previously, I still believe that American consumers could be harmed if import tariffs were significantly increased to “protect” American workers. Such a move would reduce competitiveness, deter new investment and hurt wages across the economy. But it could also open new areas of investment opportunity!