What’s your view on the part of the cycle we are in?

By | June 11, 2018

This was a question to me the past week from a Co-CEO of a major asset management firm. The embedded message was almost: since we are in the late stage of a cycle, what’s your approach to investing? Coincidentally, Warren Buffett used a baseball metaphor last week when asked the same question: the economy is looking very strong and we are probably in our 6thinning and the slugger is just coming to base.

I have to admit that I don’t fully get the reference to slugger in baseball game but I vaguely understand that 6thinning is middle part of a baseball game that usually has 9 innings (with tied score, you can have a few more innings in one game). However, the underlying concern or question is the same: are we going to be unwise to invest if the game is going to end soon?

Timing is nothing in investing

This statement is bold. Actually fundamentally, timing is the only thing in investing: you only want to invest in a business ahead of its future growth, ahead of its series of dividends, ahead of the significant re-valuation of its shares; and you want to sell out of a business ahead of its decline, ahead of its bankruptcy, ahead of its cash flow problems. However, timing is unknowable factor in investing.For the factors that are important and unknowable, we should not spend any time and resources into it. Rather, our skills, resources and knowledge should all be spent on factors that are important and knowable.

That’s why worrying about which part of the cycle we are in is fool’s game. A better way is to worry about:

  1. At what price, my capital in a target investment opportunity can earn a normalized return on equity, regardless of the risks in macro economy or in business cycles.
  2. With what kind of management team, my investment will not only deliver a reasonable return on equity, but also expand and grow overtime?
  3. Do the particular target investment opportunity have the safe and sound balance sheet that it can weather significant slowdown in economy or any setbacks in its line of business?
  4. Do the business we are targeting has the durable competitive advantage that it is harder to be disrupted by competitors entering the space or future technology improvement?
  5. Do the target investment opportunity demonstrated a successful record of execution in the past many years, during years good and bad?

These 5 considerations essentially were around the only five things that matterwe discussed in previous blog post. These should serve as anchor grounding your approach and portfolio. The companies picked through this criteria are most likely to contribute into a strong portfolio that can weather any kind of external shock and come out relatively better than the rest of the market and even take advantage of the challenges by grabbing more market shares along the way.

Everything else (including the questions about which part of the cycle we are in) is less relevant and they may be simply created by market pundits to encourage buying and selling rather than promoting long term holding among investors.

Leave a Reply