Market Insights

Q2 2018 Investment Update -- The Forest Through the Trees

In his latest Chairman's letter for Berkshire Hathaway, Warren Buffett lays out his rationale for owning stocks, "Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their "chart" patterns, the "target" prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly...In America, equity investors have the wind at their back."

I include this quote as a reminder as to what our own goals and expectations should be in regards to investing. Of course, Buffett makes it sound simple. But what experience shows, however, is that investing is simple, or at least should be simpler than we often make it. It is not too much of a stretch to say that, when it comes to investing, it is the keeping it simple that is hard.

Trying to find successful businesses to invest in is what Arrival Capital does for its clients every day. This process is often a mix of the qualitative and quantitative. What products are generating buzz? What products and services are other business leaders using to help their businesses run better? What are my kids doing in their spare time? How is technology changing which businesses are likely to be more or less profitable in the future? Having business names to investigate is only the beginning of the exercise, however, next comes the key determination of the right price to be paid and how this price (the intrinsic value) compares to the market (stock) price at a given point in time.

This entire process must be undertaken amidst the swirl and constant noise of geo-political events, natural disasters, even presidential tweets. Media outlets get unduly optimistic and then just as pessimistic about industries, countries, and sometimes life in general. That is when Buffett's advice comes in handy. Look at the longer term, keep focusing on businesses and what they do to earn profits, tune out the noise. At Arrival Capital we think of it as not losing the forest (successful investing) through the trees (short term issues and moods). And it isn't always easy!

Even today, in the midst of a general market pullback, there are a myriad of worries -- rising interest rates, slow sales of the iPhone X, trade disputes, and Washington DC dramatics to name a few. All of these may matter in the next week, some will matter in the next few months, but not many will meaningfully impact a given business' profitability and shareholder return if the business, itself, is managed well and has a collection of know-how, assets and/or brands that are intrinsically valuable and hard to replicate.  So even as we try to see the forest, we also seek to know the trees, that is being aware of short term issues that may be driving the market price of good businesses down and, occasionally, may actually drive down the intrinsic value of a business.

The last part of the investing equation for Arrival Capital is, after finding promising businesses, to craft and manage a client portfolio made up of a diverse set of businesses that can protect and grow wealth given the uncertainty inherent in today's economy.  But through it all, we, and all investors, should keep Buffett's long term optimism about America in mind.

Enjoy the Springtime!

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