In his latest Laughing Water Capital, April 2022 Letter, Matthew Sweeney provides seven strategies investors can use to survive periods of uncertainty. Here’s an excerpt from the letter:
I think it is best to assume that these scary headlines will be with us for some time, and I also think it is best to remember that historically the market has turned higher well before the headlines have improved.
With this backdrop there are a wide range of potential outcomes in front of us. At times such as these – where uncertainty seems to be around every corner – I find it useful to focus on the things that I know for sure rather than the things that are unknowable. Below is a list of things that I know for sure.
1) As with every past downturn and subsequent recovery, someone will be held up as the next Cassandra due to their “calls” around near-term market direction. The problem however is that no one knows in advance who will be right, so in my view looking to pundits for hints is a waste of time. Ignoring the noise is a much better strategy.
2) Now is not the time to swing for the fences. This is true because it is never time to swing for the fences. Our strategy is conservative by nature.
3) Fear is not a strategy. Roughly half the pundits out there are calling for investors to run for cover. There is an enormous amount of evidence to suggest that an investor’s best defense during difficult periods is to know what they own, rather than owning nothing. Many of our businesses have been specifically chosen due to their ability to become stronger during difficult periods. This says nothing about what their stock prices will do, but it does suggest that ultimately our portfolio will be strengthened by temporary difficulty. We should all be willing to trade near term declines for greater long-term gains.
4) While the macro backdrop may be unsettling, there are a lot of cheap stocks available to those who are willing to look through near term uncertainty.
5) Ultimately, process will prevail. All I am trying to do is tilt the odds for long term success as heavily in our favor as possible by focusing on good businesses, led by good people, when they are dealing with some sort of temporary problem or inefficiency that can be solved given enough time. If our businesses execute, we will be rewarded. Eventually.
6) The greatest advantage an investor can have is a long timeline. All of recorded history suggests that “this too shall pass,” and investors will be well rewarded for their patience. In the near term, owning cheap stocks is not a defense against macro calamity. However, over reasonable periods of time individual business performance will trump macro conditions.
7) If history is any guide, at some point in the next 3-5 years our businesses will be valued on a normalized multiple of their normalized earnings power. In some cases my estimate of the normalized multiple will be wrong, and in some cases my estimate of their normalized earnings power will be wrong. However, on a portfolio level I believe we will be well rewarded for staying the course through whatever volatility comes in the interim.
All of the above can really be boiled down to the fact that neither I nor anyone else knows what will happen next. However, while the macro backdrop is a bit unsettling, in my view there are a lot of cheap stocks out in the world right now. That does not mean they can’t get cheaper, but for those investors who are able to remain focused on the long term while ignoring the short term bumps in the road, I continue to think we will be well rewarded with time.
You can read the entire letter here:
Laughing Water Capital, April 2022
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