Sunday Finds + 3 Thoughts From Last Week?
Skechers and Green Thumb Industries
3 Thoughts From Last Week:
Can you actually limit the number of decisions you make in investing? We were doing a test run on a new show idea (you’ll hopefully hear more about it in the coming months) and I started a discussion on limiting the number of decisions you have to make in investing. The idea, which many investors talk about, is that if you force yourself to rarely or never sell positions, you limit the number of decisions you are going to make and therefore the chance of making a mistake. While nice in theory and potentially beneficial to investors for other reasons, I don’t believe deciding to never sell stocks limits your chances of making a mistake. For one, saying you are never going to sell a stock is itself a decision. What if that decision is a mistake? And two, there are more decisions investors make than just buying and selling. Every day when the market is open you decide whether to buy, sell, not to buy, or not to sell every single stock in the world. That sentence is not an opinion I have, but a fact for every investor in the world. Personally, I think these types of investing philosophies are just artificial constraints that limit our ability to try and make the most rational decision possible and are only around to make us feel safe. But maybe that’s the point.
Buying when you think more pain is coming in the near term. We all know by now what has happened in growth stock land. And given the big economic events going on in the world (stickier inflation, economic fallout from the Ukraine invasion, the Fed set to hike rates, etc.) that could negatively impact the aggregate earnings power of the S&P 500 over the next 18 months, it feels like stocks have room to fall much lower. In spite of this, I think now is a great time to be buying if you have a time horizon longer than three years. Why? Because predictions or inklings around short-term market movements are very unreliable, especially when they come from your own brain and poison your portfolio management. Does the price look attractive relative to your projections for earnings/cash flow over the next five years? Do you trust management? Does the business still have a competitive advantage? If the answer to all those three questions is yes (among other things), then you should be buying the stock, no matter where you think the market will go in the short run. So what if the stock is down 20% by the end of May. Embrace the short-term pain, it will be worth it in 2025.
Incentives that lead to poor outcomes. This weekend I watched the Netflix documentary on the downfall of Boeing. It was disheartening to see one of the business leaders from my hometown (I’m from Seattle) fall from grace, and of course, the deaths of all the passengers were tragic. If you finish the documentary, it is pretty clear the performance issue with the 737 Max can be traced to the Boeing executive team being heavily incentivized to move up the stock price. And I don’t just mean in the short run. At one point over the last 10 years, Boeing’s total return was 600%. At all-time highs back in 2019, the stock was up over 100,000% since the early ’70s. Many investors considered Boeing to be a long-term compounder with a durable competitive advantage. And aren’t we supposed to favor management teams that have “aligned” incentives and get paid handsomely when the stock performs well over multi-year periods? Like aggressively levering up to buyback shares, I think giving executive teams fat equity packages based on share price performance is just another scheme to incentivize people to try and pull-forward returns at the risk of deteriorating business quality. As we have seen with Boeing and many others (General Electric comes to mind here), the irony is that nobody, not even shareholders, win over the long run. Well, I guess the executives do pretty damn well. But everyone else suffers. I don’t have any good answers for how executive teams should be paid. I think maybe listening to Munger and Buffett is a good start. But I know the answer isn’t just throwing gross amounts of equity compensation at CEOs and thinking that everything is all well and good.
See you next week,
Brett
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