Wrapping Up 2020
Happy New Year everyone! We hope you all had a great Christmas and holiday season and are safe and healthy heading into 2021.
If at this time last year we were given a million guesses as to what 2020 would bring I doubt Matt or I would have gotten a single element of this past year correct. From a 100-year global pandemic to near-zero interest rates, briefly negative oil prices, and a roller coaster equity market, we’ve seen years of economic cycles compressed into months. As Matt highlighted last week, nobody really knows what’s going to happen in the financial markets, macro economies, or in the short term in general. It’s for this reason that when people ask me what I think about the market and what it might do in 2021, my answer is “I have no idea”. You can drive yourself crazy trying to time the market with any semblance of consistency or predicting exogenous factors you cannot control. I’ll never shy away from an opportunity to cite some of my favorite quotes about prediction:
“Forecasts usually tell us more about the forecaster than the future” – Warren Buffett
“There are two kinds of forecasters, those who don’t know, and those who don’t know they don’t know” – John Kenneth Galbraith
I’m not a believer in forecasting the future with any precision, yet I spend my time investing which inherently deals with the future. How do I reconcile this? As we head into a new year with even more uncertainty than usual here are a few ideas that I think can give any investor with the right temperament some comfort reconciling this dichotomy.
Focus on the micro, or individual businesses, rather than the macro. As long as I find a handful of businesses that I understand what drives growth, profitability, industry dynamics, and competitive position, I don’t need to worry so much about what the short term macro future holds. For us, this means studying businesses where we can gain a good understanding of incremental returns on invested capital, reinvestment opportunities, and capital allocation policies. If we can’t nail down those variables, we move on.
Invest in companies where you only need to be generally right over the long term, not precisely right over the short term. It’s much easier for me to answer questions like; will people travel more or less five years from now? Will people continue building more houses in the future? And, will the general level of wealth and spending increase across the globe in the decade to come? These are much easier questions to answer than; what will interest rates be in one year? How will valuation multiples expand or contract in the next six months? Or what will the price of oil be at this time next year?
If you care to find general questions that are easier to answer and in turn grasp who might have a structural advantage in that area, you may find a business and stock worth studying. This framework will cause us to miss out on the next Tesla, which we’re ok with. We don’t intend to swing for the fences as that’s how we end up striking out. We do think this framework can continue to give us a fundamental and enduring advantage over long periods of time. It’s not a way to get rich quickly, but we think it’s a great way to get rich slowly.
These ideas have everything to do with why we write this blog – something we have not discussed since consistently posting here. We thought the start of 2021 was a good time to provide an overview of how we think about our blog. There have been countless blogs, podcasts, newsletters, and substacks launched over the last several years with the intent to build a business off of the publication. Our purpose is very different, we write articles for a few main reasons:
1. Improve our investment process and craft. By spending focused time diving deeply into company filings, transcripts, and industry publications, we can become a little better every day and week at understanding what drives business value, what types of business models are within our circle of competence, and how to value different businesses. We spend most of our time doing fundamental research which is why most of our posts relate to individual businesses. It’s here where we think we can add value occasionally, rather than pontificating about generalities (like I did at the beginning of this post; can’t win ‘em all right?).
2. Build our “shopping list”. We spend a lot of time researching and writing-up companies whose stocks are not “cheap” at the time of writing. But, if we don’t spend time getting to really understand businesses before they are “cheap”, we a) won’t know how to define when they are cheap (10x earnings may be dirt cheap for one company and wildly expensive for another), and b) likely won’t have enough time to study the business in order to buy it at an attractive price when there is a downturn. As anyone investing in March can attest, it’s difficult to sit and comb through annual reports and past earnings calls when the market is making 10% moves on a daily basis. At that point, you need to “dance with the girl you’ve brought to the dance”, and be ready to buy what you already understand. Some of our best performing investments that we made in March and April would never have found their way into our portfolio if we hadn’t done the research on the companies in 2019.
3. Writing is fun for both of us. While I’m certainly no professional writer, I enjoy attempting to get my thoughts down on paper. I also don’t really know if I understand a business well enough until I try to write it up. Matt and I enjoy getting questions and thoughts from those that read our blog, and it provides us a sense of accomplishment when finished. When our investment style can be described as slow, bordering on sloth, (if we buy two stocks in a quarter we consider that a flurry of activity) because good ideas just don’t come along every day, having a tangible gauge of progress is helpful, and the blog provides something along those lines for us.
Of course, ancillary benefits include some free marketing for Eagle Point, as we’ve had several new investors join us after reading some of our posts. But, at the end of the day if no on reads what we write we’d still do it because it makes us better at what we do.
Early in 2020 Matt and I agreed to try and post to our blog weekly for the rest of the year, and we’ve written a weekly post for 46 weeks in a row now. Our goal is to continue what we’ve been doing, though we may not post every single week indefinitely. Readers can expect consistent posts, but we want to avoid posting just to post and make sure we have something valuable to say. To that end, if anyone ever has an idea they think may merit a deeper dive or a write-up, we’d love to hear from you.
Despite all of the challenges of 2020, it was a year of significant growth for our small firm, and we thank everyone that has been a part of that. We never would have guessed how well our portfolio would perform in the face of a global pandemic, recession, and political drama that unfolded this year, and we think that’s a testament to owning high-quality businesses purchased at reasonable prices – or maybe we can just thank the Fed – either way, we’ll take it. We are sincerely grateful to those that have entrusted us with their capital in the most uncertain of times, and we look forward to continuing to hunt for value in 2021 and beyond.
Thanks to everyone who reads what we write, and though we are not even a small drop in the ocean of the internet, we genuinely appreciate the consistent following we’ve built this year. If you enjoy what we write, please share it with others that may be interested.
A few notes on retirement accounts as we flip the page to a new year. You can now make contributions for the calendar year 2021, and any contributions made before April 15th can also count towards 2020 if you did not reach your contribution limit last year. Contribution limits can be found here. Also, if any readers have an “orphaned” IRA from an old job, a spouse, or otherwise, and need someone to look after it – give us a call. We’ve found retirement accounts left at former employers are often neglected assets and we’d love to look after them alongside our capital.
We hope everyone has a great start to 2021 and we look forward to the world returning to normal in the months ahead.
Disclosure: The author, Eagle Point Capital, or their affiliates may own the securities discussed. This blog is for informational purposes only. Nothing should be construed as investment advice. Please read our Terms and Conditions for further details.