In his latest 2021 Semper Augustus Letter, Christopher Bloomstran explains why the process of getting and staying rich in investing should be boring. Here’s an excerpt from the letter:
Blackjack is the only casino game where the player can wield an advantage over the house. For this, the casino is trained to spot those playing with an edge. Once spotted, the card counter is politely, or not so politely, excused from the game.
Despite being played in a casino, played properly, there is no gambling or speculating when counting cards. The counter adjusts bet size and method of play at rare moments when the deck is flush with high cards, particularly when the dealer is in position to go bust. In those otherwise less than advantageous moments, which is most, basic strategy involves minimum wagering and nondeviant basic play.
I learned several things spending far too much of my early 20s in casinos counting cards and observing human nature. First, gambling is speculating and involves hope, greed and fear.
Second, gamblers delude themselves into thinking they have an advantage over the casino. Third, casinos know this and take advantage of that knowledge. Only when I began to understand value investing did I realize the stock market is also a casino. Promoters know this and prey upon the delusion of the speculator’s hope and greed.
Speculation and promotion run rampant at secular peaks. One requires no map to spot a bubble. When the populous embraces the casino, you are here. The last two years saw a proliferation of speculative excess and charlatan promotion.
SPACs, brokerages encouraging option and cryptocurrency trading, meme stocks, promises of impossible returns, research reports grounded in pixie dust and lacking understanding of accounting or reason, billionaires launching themselves into space and selling their shares to the speculator the next day, outright frauds operating as public companies with “legitimate” boards of directors – we saw it all.
Similar behavior and promotion pervaded the late 1990s leading up to the tech bubble and subsequent collapse. Having invested through the earlier bubble and navigated both it and its aftermath well, it appears to me that 2000 has nothing on 2021.
Our approach to investing can be described as boring, at least by those who don’t live to scour financial reports and footnotes. The process of getting and staying rich should be boring. Investment returns follow the fundamental economics of businesses. It’s the casino and its speculator participants that ultimately create value for the patient investor. Money always chases what’s hot and flees what’s not.
Until very recently, you would have been hard pressed to find investors interested in cyclical businesses, particularly those operating in the oil and gas industry. Others selling value to chase growth introduces opportunity for those with capital that can take advantage of bargains. The fool sells the out of favor. Inside of the last two years we paid prices at less than one times the cashflow some companies are earning today.
You can read the entire letter here:
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