Alright, well, the name of this podcast is the Foundation, the Building, the Win. And what's the most important structure of a house? I have some friends that are in the building industry, and the answer is simple: it's the foundation. It's the part of the house that's not seen, but it's critically important. It's what everything is built upon. If it's not right, everything else that's built upon it will eventually crumble. Well, this is also true in the world of investing. If a business's foundation isn't right, the company will eventually crumble.
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So, what goes into a solid financial foundation?
There are three words: management, management, management. Great management must not only be great visionaries, but they must also be great executors. Not only do they see a particular niche that no one else has filled, but they're able to execute on it. They possess the qualities of visionary, risk taker, and prudent navigator. And this is a rare skill set, so when you find it, you want to own it. But before I go into this, I want to talk about economic storms. And in particular, the storm we're in right now, that being one of high inflation and this looming sense that a recession is right around the corner.
In conditions like this, there's a saying that goes, "he who loses least wins." That's a sad testimony in the market today, but there's a lot of truth to it. I've seen multiple storms over the course of my career.
- The 1987 crash when the Dow dropped 600 points
- The 2000 tech bubble
- The '08 housing bubble
- The COVID crash
- This current inflationary period
These crashes all have the same common characteristics: a sudden rapid off the cliff drop. There's another saying and if you haven't noticed by now, I like to use sayings and cliches but it goes like this: "stocks go up on escalators and down on elevators." This is also really true. Great companies, they'll get shaken by the storms, but they won't lose as much when the tide goes out. And in big blowdown markets, I like to look for the trees that are still standing. Even better yet, maybe they're up slightly on big sell-off days. Conversely true though, watch out for wobbly stocks on those big up days. These storms can produce tremendous opportunities.
So, when you recognize an opportunity, don't be afraid to nibble away on it on the buy side. There's a regulation removal that's bothered me for a long time and really could avoid some down volatility but the powers to be really aren't interested in changing that regulation.
Joseph Kennedy and shorting stocks show how influential government rules and regulations can be
Currently, the head of the SEC, Gary Gensler, is more concerned with climate change than something that would help small investors. I'm gonna go off a little bit on a tangent here. But here's an example of big government working at the behest of big business. There was a rule in place that was created after the 1929 crash called the uptick rule. The rule was designed to prevent another 1929 event and prohibit layering on another short sale without a positive uptick in the stock. So, for those of you who don't understand how shorting works, it's a simple process of selling something first at a higher price, with the hopes of buying it at a cheaper price later. Imagine standing on top of a mountain top and stomping your feet with skis on. If you stomp hard enough and long enough, you can create an avalanche. This is precisely what was done in the 1929 crash that exacerbated stocks to fall to pennies on the dollar. One of the primary benefactors during the '29 crash was none other than Joseph Kennedy. He understood the dynamic of shorting stocks and done with enough leverage on the short side, you can cause a stock to crater. So after the dust settled, he was able to buy these positions back on pennies on the dollar. So, the president at that time was FDR. He decided to form the Securities Exchange Commission to prevent such a catastrophe in the future. When he appointed none other than Joseph Kennedy as the first commissioner of the SEC, many eyes rolled. There's a saying that went like this: he was asked why he chose this man who profited so much from short stocks; he replied It takes a thief to catch a thief. Wow. Anyways, this uptick rule stood in place right before the 2008 housing bubble collapse, I'm fully convinced that the removal of the uptick rule was a major contributor to the incredible freefall in the market. If you ever want to understand anything about Washington, just follow the money. All right, I'm done with my rant now.
Introducing a winning investment strategy, finding the 'Value Plus Catalysts'
Let's get back to what makes for a winning investment. As I previously mentioned, its management and its ability to execute its vision. A phrase I coined is "value plus catalyst." So, what does this mean value is a simple proposition of looking at a company's balance sheet. Do they have enough cash on hand? Do they have low debt? Do they have a high return on equity? These are hallmarks of a good company and good management. Are they building cash? Are they burning cash? I like to look for companies that are cash builders. Do they have a unique product niche and command high margins?
Let's drill down into this notion of catalysts. What does that mean? I think a catalyst really is the golden goose to hitting the ball out of the park. If you can find a particular shift in innovation, buying patterns, regulatory changes, and if you can get into the right company, it can make you a fortune. Think of Steve Jobs and the personal computer. IBM didn't recognize the advent of the personal computer, but Steve Jobs did. On a local level, there's a company right in our own backyard, Daig Corporation in Minnetonka. At the time, they developed best-in-class introducers and steerable leads for stent placement in the early innings of the medical industry, when there was a seminal shift into how to treat blocked arteries. You could have bought that stock, and I had a number of people, including myself, that did in the late 80s and early 90s, for less than $3 a share. Eventually, you would have had to wait about 25 years, but it went 300 times on the money. So, a $10,000 investment turned into over 3 million. Now I got to mention one thing that I didn't hold mine for that long of a period, but I did make a lot of money on it. Let's look at another example on what I mean by value plus catalysts. Back in the 90s, I invested in a company that had a great balance sheet and it also had a catalyst. The name of the company was Lowrance Electronics. The balance sheet and the profits fit the bill. The unique twist of the business fit the catalyst bill. They were introducing the notion of GPS into the recreational fishing market. Today, that doesn't seem like a big deal. But back then, the only product on the market was sonar driven.
So, I'm not a big fisherman. But I remember thinking that if a person could locate the very place they were in the last time they caught the big one, I'm sure that would be a significant add-on to the industry. So, the stock though over the course of a handful of years went from $3. And eventually, it was bought out for $35 by a yachting company. I don't remember the name of the yachting company. But it was pretty neat. So, the stock went more than 10 times on the money. This is what I referred to as moving the needle on one's investment account. You don't need many of these 10 baggers over the course of a lifetime to really build wealth. If you hit a few of these in a career, it's really a game changer. This is what we do at Van Clemens. We search for unique situations that can make multiple times on the money. It's not an easy task, but when you lock in onto one it can be a wonderful ride. Thanks again for listening.
The discussions contained in and referred to in this podcast are provided for educational, information, and entertainment purposes only. The information, statements, comments, views, and opinions expressed or provided are not necessarily those of Van Clemens and may not be current. Van Clemmons does not make any representation or warranty as to the accuracy or completeness of any of the information statements, comments, views, or opinions contained in this podcast. Any liability, therefore, is expressly disclaimed. Van Clemens does not undertake any obligation whatsoever to provide any form of update, amendment, change, or correction to any of the information statements, comments, views, or opinions set forth in this podcast. You should not make any decision, financial, investment, trading, or otherwise, based on any of the information presented in this podcast without undertaking independent due diligence and consultation with a professional broker or financial advisory. You understand that you are using any and all information available on or through this podcast at your own risk. You've been listening to Investing Beyond the Noise with Mike Ross, president of Van Clemens and Company in Minneapolis. Visit van clemens.com or call 612-758-9140.