Well, the title of this podcast is 'Let's go boating.' Memorial Day weekend marks the official kickoff to summer. And like most Minnesotans, one of our favorite activities is boating.
Identify the big investing waves and dips caused by seasonal or cyclical change
I was thinking about this and came to the conclusion that really stock ownership is like a boat ride. It's a process. It can be very fun. But it can also produce a lot of seasickness. A smooth boat ride will have a smooth functioning engine. So think about this, and think about companies, and a good company, they're gonna have predictable profit engines reflected in their earnings. And the market always gives higher valuations to companies that demonstrate a consistent track record of predictable earnings. Another characteristic of a good boat ride is does the boat steer straight in a nice straight line? Like I previously mentioned, predictability is the key. It's important to understand the nature of the business you're investing in. Is it a proprietary business? Does it have a unique niche? And can it command big profit margins? Or is it just another meet to business with little barrier to entry and little to no profit margins? Does the company determine the pricing of their product or do outside forces? Commodity companies will have pricing out of their control. A good example of this is the energy sector.
Few years ago, the US was a net exporter of energy. These stocks were extremely cheap. The weather to the boater is like government policy changes to an investor. Under the Trump administration, we had a pro-fossil fuel production policy which kept competition high, energy pricing low. Under the Biden administration, there was a policy shift towards more renewables and away from fossil fuels. Everybody can see that at the pump. A good investor will always keep an eye on the weather--on the changes in policy that will affect their business. So really, though, when given the choice, it's always better to invest in companies that control their own pricing. Don't get me wrong, though, you can make money in commodity stocks, and I have, and I've lost money too. Just be aware of the climate that you're in.
This leads to my next point is the business seasonal or cyclical? Think about a boat storage company. They're busy in the spring, putting in boats in the fall taking boats out, but they're dead in the middle of winter. It's important to know the seasonality and the cyclicality of a company's earnings. An example of this too would be maybe medical service providers. They'll build in provisions for reimbursement from insurance companies and then rectify them at calendar year in generally showing a big change in earnings. Also, know the cyclicality of an industry. For example, chip equipment, companies will have big multi-year cycles to them. They'll produce a lot of chips, and then it'll create an environment of oversupply and excess, and then the cycle turns down for a few years. Leading to the next stop on our boat ride: good management.
Good management that run their companies like a tight ship have these traits
A good boat ride will be experienced when you have a good captain of the ship. Good management is like a good captain. They'll demonstrate good and consistent decision-making. A good captain will also just accurately tell you the truth about the condition of the boat or the weather, something out of their control. A good captain will always be grounded or aim to be grounded in the truth. There's a little saying I like to throw around: truth without mercy is harsh, and mercy without truth is unkind. Picture a reckless captain: he's disconnected from the truth, says everything's fine about my company, and yet we're standing on the deck and the water's waist-deep. So, just the truth please. Also, does the captain have ownership in the boat, or is he selling his interest? I like to see insider buying not selling?
To determine the quality of the boat ride we must give inspection to the ship, the captain, and the environment. Does the ship have a dragging anchor or any holes in it such as big debt or lawsuits? Avoid these pitfalls whenever possible. Debt-free companies will always fare better, especially in interest rate-rising environments. Does the captain have a good track record, or has he run a few other ships-- that is companies--aground? Finally, are the conditions good for a favorable experience? Is the tide dropping for a particular industry? Or are there tremendous regulatory headwinds? A good captain will consistently be making small course corrections but will not take his eye off the end destination. And that's really long-term consistent return of shareholder value, which by the way is completely opposite of today's ESG style of investing. And if you haven't heard of it, it stands for environmental, social, and governmental. Firstly, I think it's a lot of nonsense that we're being bombarded by. And I really think this is a Trojan horse to learn big government regulation. I think this is freedom's ticket on the Titanic, personally.
So, let's just say we decide now to buy your ticket on the boat ride and own a particular stock. Tepid ownership at the first sign of rough water, well, you're gonna jump ship. Dogmatic ownership, they blind you to the obvious that the boat is sinking. What is required though, is a constant eye on the ship, the condition, and the captain. What we need to do is accurately monitor the experience by being in the moment, honestly assessing all functions. Really, this is the key. It takes a great deal of honesty, humility, courage to be in the moment. It also takes a lot of work to correctly assess the situation. I think one of the hardest exercises is really being humble enough to admit that we made a mistake and minimize our loss, or patient enough to hold and maximize our gains. That by being connected we cannot only be a help to ourselves but a help to others financially, and really in all aspects. You could say our boat ride in life will be so much richer. Thanks for listening.
Related: Learn more stock market keys to success (previous 5 podcasts below)
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 Clemens 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 whatever 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.