When writing an investment outlook at the beginning of a new year it can be tempting to wait just a few days more for a little better clarity so as to improve your chances of getting your predictions "right." Why write on January 1, 2021 when you can wait until after the Georgia Senate runoff elections? Why write on January 7th in the aftermath of the Capitol Hill riot when you can wait a few days to see what will be the political ramifications? Why write today when you can wait to see how the Inauguration goes? Did I mention that many first quarter profits start coming in next week? Of course, waiting for more clarity is an illusion. On some matters, there is never going to be any real clarity that can help an investor. To the extent there is uncertainty in the economic or political world, that absence of clarity is probably baked into stock prices. The dramatic moves come when unknowns are finally cleared up, at least temporarily. For example, when in early November it became clear a COVID vaccine was in the cards, economically sensitive stocks jumped. You could not have really predicted this, only ventured a guess as to the results of vaccine trials. Even more difficult for investors than the known unknowns, like the success of vaccines, are the unknown unknowns, like the advent of COVID-19 last year, which led to a swift 35% fall in stock markets because COVID was the classic "black swan" from nowhere, neither predicted nor discounted in financial markets.
If predicting the future is not a good source of investing success, a better use of time could be called aggressive observing. What is going on -- over weeks, months, even years -- that is happening out in the open but that the majority of people, even investors, do not really see? This could be trends in certain industries, like the rise in online commerce, or in the growing network effects of social media, or the use of the computer cloud and financial technology for large and small businesses in both payments and customer service. Spotting important, multi-year trends, and finding ways to invest in them at prices that do not already reflect a glowing consensus, and, in effect, becoming a partner in these businesses, is a key element of generating wealth.
Another aspect of aggressive observing is looking for opportunities created when otherwise strong companies or entire industries face short term issues that are misconstrued as permanent by the bulk of investors. For example, when a restaurant chain faces a health scare, or an industry comes under the scrutiny of regulators, many investors run for the hills, creating a meaningful discount on an investment that can be held far into the future as the short term threat dissipates.
The astute investor therefore buys some stocks with great long term potential when others do not fully grasp how game changing or disruptive a particular company will be, and buys other stocks in situations where most investors are getting lost in the short-term. You could even say being a good investor requires that you see through current difficulties and strife to a brighter future.
This brings us back to January, 2021. A question could be asked as to the real benefit of doing an update based on arbitrary dates at all, since both long term trends and short term opportunities are not a factor of turns in the calendar. An answer is that we not only think in years but we also record keep and reset ourselves as the years change. To that end, Arrival Capital assesses investment successes and failures and works to fine tune the overall approach we follow -- using value investing, broadly defined, to create a diversified portfolio, and all the while being opportunistic, flexible and prudent.
2021 begins in some turmoil, to be sure, but there is also hope for better days in the aftermath of a global pandemic. We survey a scene of amazing technology (and terrific returns for tech stocks) and a hurting main street economy of retail shops and local businesses, soaring suburban real estate and wounded central business districts. As the year unfolds, Arrival Capital will be using the tools we have, including the power of aggressive observation, to see what trends emerge out of the wreckage of COVID and inevitable rebuilding and restructuring to identify winning investments to add to wealth creating portfolios.
We're excited to share our updated website at arrivalcapital.com, a great place to get updated market commentary and more detail about Arrival's money management approach.
