There are many different views on how to invest in the stock market. We choose allocate capital when the odds of success are strongly in our favour. We do this by looking for themes with low risk and high reward. We believe that for us a more long-term approach is superior to what can be found with clients wanting results quarter to quarter.
We try to find favourable investment cases by following our view that most industries are cyclical. Although history does not necessarily repeat itself, some have a repeating pattern of booms and bust. We have also experienced that emotions play a very important role in investing. At cyclical bottoms, investors anchor themselves to a vision that extrapolates recent events into the future. With doing this they miss changes that take place just below the surface. The longer the industry is stuck in a bear market, the deeper the bias.
We see that long bear markets provide more than just lower valuations. We have seen people with industry-specific knowledge share more of their experiences than in other industries. This in order to maintain interest in the market.
Our investment style does not appeal to everyone. When an industry hovers around rock bottom, it can often take time and be very volatile. We do not necessarily believe that broad diversification in many industries reduces risk and volatility. Rather, we believe that finding an industry that is misunderstood reduces risk by giving us the opportunity to invest in valuations that give us the asymmetric risk / reward. Most investors hide in the crowds around consensus. We prefer to be outsiders.
“A Gold Mine Is a Hole in the Ground with a Liar at the Top”Attributed to Mark Twain
“Prices are too high” is far from synonymous with “the next move will be downward.” Things can be overpriced and stay that way for a long time . . . or become far more so.”Howard Marks
“Bear markets are the author of bull markets.”Rick Rule