Welcome
Welcome to the 300+ subscribers who have joined the Co/Investor Club Community in the month of March! We hope that you will find value in our weekly newsletters and for those of you who are Premium Members, we look forward to sharing more investment opportunities with you.
Top 50 Microcap Investor List: Mark Tobin
For this week’s Top-50 feature we present Mark Tobin, Founder of Coffee Microcaps. Mark has been “passionate about finding ‘undiscovered’ microcap stocks ever since he began his career as an equity
analyst in Sydney. Working at Sydney based fund manager Wilson Asset Management, a small and microcap specialist manager, he was part of an investment team that was dedicated to finding undervalued small and microcap growth companies.
Read our feature on Mark Tobin Here
Risk and Expectations
In June of 2008, financial historian Peter L. Bernstein published an article in The New York Times titled “What Happens if We’re Wrong?” In the article, Bernstein wrote:
The average annual inflation rate in the United States was only 1.4 percent from the end of 1954 to the end of 1965. But in 1965, who could have imagined that inflation would average nearly five times that rate over the next 15 years?
In short, our forecasts are wrong from time to time.
That observation sounds like a platitude, but consider the kinds of questions it provokes. How will we deal with surprises—outcomes different from what we expect? What are the consequences of being wrong in our expectations? This is the point when risk management begins to live up to its real meaning. Risk means the chance of being wrong—not always in an adverse direction, but always in a direction different from what we expected.
Bernstein’s inflation example is one that’s relevant again today. For decades, the United States, and most of the developed world, have been living in a period of low inflation and low and declining interest rates. The inflation narrative has recently changed, especially during the last few months. The Fed has conceded that inflation will be less transitory than they previously promised, but still likely to return to lower levels before too long.
But what happens if they’re wrong?
Absolute levels of inflation and interest rates are terribly hard to predict, and we thus won’t venture a guess. But we’ll make some observations:
The supply chain issues of the last couple of years have caused manufacturers to plan for onshoring some production. The move away from lower cost markets will raise costs, and thus either lead to a rise in prices or lower profit margins (or, more likely, some combination of the two).
The cost of labor has increased, and unlikely to revert to previous levels.
Moderate-to-high inflation has historically been bad for stock markets. And stocks markets don’t currently seem to be expecting much durability in higher inflation levels. While lower than where they started the year, earnings multiples on the major indices remain elevated, and those multiples are placed on what are still all-time high profit margins.
Given the above, it may be worthwhile to think hard about how your investments would perform if inflation persists higher—as well as what would happen if it doesn’t. And it may be worthwhile to add some companies to your portfolio that are well-adapted to an inflationary environment. Warren Buffett described those types of companies in his 1981 Letter to Shareholders:
Businesses that are particularly well adapted to an inflationary environment…must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.
There are many technology and software companies that seem to fit those characteristics—if you can find ones at reasonable prices with truly durable competitive advantages. And there are other types of companies that may also do well under higher inflation such as Berkshire Hathaway itself, which owns more assets than any other large company in America, has made significant investments in long-lived assets over the last several years which won’t have to be replaced any time soon, earns a regulated return in some of its major businesses, and has lengthened and locked-in debt on its balance sheet at rates well below the rate of inflation.
Again, we observe, and don’t make any specific recommendations. But we think that a more durable and higher-than-historical rate of inflation is worth thinking about, whether or not it actually ends up being what we experience over the next few years.
Tweet of the Week
Planet MicroCap Showcase
The Premier Event in MicroCap Finance
The Planet MicroCap Showcase IS GOING BACK TO LAS VEGAS! They bring together the most promising companies and the top dealmakers in MicroCap Finance for three (3) days of company presentations, 1x1 meetings and educational panels.
Click here for more information
In Case You Missed It…
William Green speaks with Howard Marks: Lessons from a Legend
Big World of Microcaps w/ Ian Cassel
Terry Odean: Who's on the Other Side of the Trade?
Jake Taylor — Getting Better at Decision Making
DriveBid™ Live Trade-in Marketplace Helps Dealers Find, Bid and Buy Vehicles Direct from Consumers
If you have not already upgraded your membership…
Avenel Financial Group, a merchant banking and advisory firm located in Charlotte, NC, launched a new business venture called the Co/Investor Club. The Co/Investor Club is a community of value-oriented investors that collaborate on investment opportunities and ideas. You are receiving this newsletter because you are a Free or Premium Member of the Co/Investor Club!
Chat with Mike
Whether you’re an executive with investment opportunities or a college student looking to network, we would love to chat with you!
Email our Founder, Mike Pruitt, at mp@coinvestorclub.com with questions and ideas or schedule a meeting.
Don’t forget to follow us on social media too!
Twitter:
LinkedIn:
For our disclaimer, please visit our website
Have friends that want to join? The Co/Report is public, so feel free to share!
Thank you for reading. Co/Report grows through word of mouth. Please consider sharing this post with someone who might appreciate it.