In his latest Q2 2022 Letter, Matt Sweeney of Laughing Water Capital explains why being comfortable when everything is uncomfortable drives huge investment returns. Here’s an excerpt from the letter:
In my opinion, at present Mr. Market’s focus on inflation, interest rates, Ukraine, and assorted other boogeymen including the prospect of recession is presenting us with a lot of cheap stocks, and at the moment, the prospect for intermediate and long term forward returns for our portfolio are very good. At the same time, neither I nor anyone else can tell you what will happen in the near term, and it is entirely possible that stocks that I currently believe are very cheap can get considerably cheaper.
There is nothing unusual about this setup. The potential for attractive long-term returns and the potential for near-term declines are joined at the hip: you never really see one without the other. If the prospect of trouble or uncertainty does not hang heavy on the horizon, then stocks are typically not all that cheap to begin with.
Understanding this dynamic is easy.
Being comfortable with this dynamic is something else entirely, and in my view the ability to be comfortable being uncomfortable is a huge driver of investment results over time.
Evolution has ensured that this comfort is hard for most people to obtain. Afterall, to some extent we are all genetically hard-wired to place more emphasis on near term risks rather than intermediate and longterm opportunities. Those of our Cro-Magnon ancestors who ran for cover at the first sign of a lion at the waterhole were more likely to pass on their genes than those who stuck around to see if the lion was friendly.
However, the investing world has far more nuance than lions at waterholes, and in my view those who are unable to navigate through what was a very useful evolutionary heuristic are likely to make the desire for “perfect” the enemy of the “good enough” when considering their investments. Afterall, when the answers to all of the world’s current problems are more apparent, it is unlikely that discounts will abound.
To be clear, I have no idea what is going to happen next, and in my view anyone who claims that they do is a liar or a fool. However, I feel confident about what will happen eventually: good businesses led by good people will trade at a normalized multiple of their normalized earnings. In my view, the ability to ignore “next” and be indifferent in regard to the event path between “now” and “eventually” is the hallmark of a successful investor. At times like these, behavior is the greatest edge that an investor can have.
I believe our portfolio is filled with investments that fit well within this framework. In most cases, I believe that the idiosyncrasies of these investments are such that it is very likely that the market will come to appreciate their value within the next few years, regardless of what happens in the next few months or quarters with inflation, interest rates, possible recession, or the stock market. They can definitely go down in the near term, but I believe they are cheap enough to continue to own regardless of what happens in the near term.
You can read the entire letter here:
Laughing Water Capital Letter Q2 2022
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