Truth and Investing
Friday, 1/31/2025 09:10
Price matters, even when distorted...
TRUTH, said the American jurist Oliver Wendell Holmes, is tough,
writes Tim Price of Price Value Partners.
"It will not break, like a bubble, at a touch; nay, you may kick it about all day like a football, and it will be round and full at evening."
In a quote attributed to Mark Twain, if you tell the truth, you don't have to remember anything. So the only real question remains: for investors, can there be more than one truth?
We're not sure there can be. There are clearly various styles of investing, just as each and every one of us has a different personality, needs, objectives, and fears. But fundamentally, we think most of us are probably after more or less the same thing:
Decent, inflation-beating returns, probably allied with some form of income, and without incurring too much downside risk and notably the risk of ruin.
To any value investor, the one fundamental truth is the price. The market price of any traded security is dictated every day between willing adults, buyer and seller. But there is no compulsion to accept that price. If we don't like the price on a given day or hour, we can always wait for a better one, or look for something else.
It cannot be said too often: the most important characteristic of any investment you make, be it property, stocks, bonds or anything else, is the price you pay when you first buy it. Overpay, and you are likely to regret it. Buy it cheaply, and you will likely do well.
The French scientist Blaise Pascal once suggested that all of humanity's problems stem for our inability to sit quietly in a room alone. He was more right than he could possibly have known – especially in a world of digital connectivity, smartphones, the wireless internet, and 24/7 social media.
The problem for the 21st century investor is no different to the problem for the 17th century physicist: too many distractions, almost all of them triggered by our own essential curiosity and inability to sit still.
Which is why we now find ourselves increasingly drawn to the Stoics. We don't remember being taught anything about them at school. We suspect we first came across them during The Silence of the Lambs when Hannibal Lecter (Anthony Hopkins) alludes to Marcus Aurelius:
"Of each particular thing ask: what is it in itself? What is its nature?"
The Stoic approach to life can be summed up in Reinhold Niebuhr's Serenity Prayer, which has been adopted by Alcoholics Anonymous:
"God grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference."
There is much utility and wisdom in that short phrase – for investors as for everybody else.
After 35 years of working in the capital markets, the principles of investing seem, if anything, to get simpler by the day. The most important drivers of return in portfolio construction are asset allocation and then security selection.
Asset allocation is "simply" finding the optimal (or perhaps satisficing) mix of different types of investment types to ensure you have a sensibly diversified portfolio. It makes sense to own assets that aren't correlated to each other, and yet which all offer the potential – based, in almost all cases, on the truth of price – for decent returns over the medium and longer term.
For us, those asset types are 'value' stocks; systematic trend-following funds; and real assets, notably assets related to the monetary metals, gold and silver.
Except as a source of liquidity, both cash and bonds no longer feature materially in our portfolios given their comparatively low yields relative to their credit risks, and our expectations of an uncomfortable inflationary future not experienced since the 1970s.
The one common thread that links everything within the portfolio is that we want them to be at least somewhat resistant to a market crash. In the case of the equity component, while we can't immunise everything against "crash risk", we can at least ensure we don't consciously overpay for investments, and we can also try to ensure that they possess what Ben Graham famously described as a "margin of safety" that will, to some extent, possibly insulate them against grievous market falls.
And don't expect all of these types of assets to work all of the time, because life's not like that, and neither are the financial markets.
Trend-followers, for example, made pretty heavy weather of things during the years of ZIRP. But that wasn't a huge concern, to the extent that their "crash-proofing" credentials weren't realistically required when equity markets essentially delivered the goods.
Security selection, again, should be driven primarily by the truth of price. In the world of listed equities, for example, we favour companies run by principled, shareholder-friendly managers who are also expert at allocating their own corporate capital (ie, deciding whether it is best spent on corporate acquisitions, or on stock buybacks, or on dividends), and where the shares of those companies are not obviously trading at any great premium to their inherent net or book value.
But the emotional and psychological challenges stay with us. Inasmuch as the politics and economics of our time influence the investment debate, you could plausibly argue today that the challenges are more extreme than they have been for several generations. The Covid crisis alone has lifted up a giant rock in the middle of our political and media culture, and we doubt whether anyone anywhere much likes what has been revealed scuttling around underneath it.
The re-election of Donald Trump, and the emergence of Elon Musk as a social media icon, have sent twin unconventional wrecking balls into the world of both domestic and international political protocol. The global financial crisis (now almost two decades ago, though we live with its aftermath still) has ushered in wholly unconventional monetary policies like quantitative easing (QE), zero interest rate policy (ZIRP) and negative interest rate policy (NIRP) which many of us found wholly morally questionable but nevertheless massively distorting upon asset prices.
Which is where the Stoics come in. If we're frankly unable to change the things that concern us (the woke mind virus; the economic insanity of 'net zero'; foreign wars) then it makes more sense to concentrate on the things that we can change – which is not just our investment choices and our investment strategy, but also how we choose to respond to those external world events.
In many cases, as the likes of Rolf Dobelli have suggested, the best response to those things, particularly those things brought to us by the news media, is simply to ignore them – or, even better, never even to be troubled by them in the first place. The essayist and trader Nassim Taleb claims never to read newspapers or to watch news, on the basis that if anything truly important is going on, he'll always find out about it through friends, say, at a drinks party.
Drawing on extraordinary investing facts highlighted by the US market analyst Michael Batnick a few years ago:
- The less you look, the better off you'll be. Tracking your portfolio returns in real time will be injurious to your mental health.
- When you were born trumps just about everything else in the significance not just of your investing experience but your investing outlook as well.
- Cash flows are better than commodities. (But own both. And own real assets anyway.)
- The stock market is not the same as the economy.
- You can calculate everything yet still not know how investors are going to feel. In other words, focus solely on the truth of price, and let other people worry about the "macro".
- And we strongly recommend buying a copy of Ryan Holiday's The Daily Stoic.
These are dark times, and being able to draw on tried and tested psychological sustenance is an absolute godsend.
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