Top 50 Microcap Investor List: Matthew Sweeney
For this week’s Top-50 feature we present Matthew Sweeney, managing partner and portfolio manager of Laughing Water Capital. Laughing Water Capital is a private investment partnership that “follows a concentrated approach to equity investing, typically owning 10 - 15 businesses at a time.”
Read our feature on Matthew Sweeney here
Cash and Knowledge
“There are two hedges I know of; one is cash and the other is knowledge.” —Bruce Berkowitz
The Dow Jones Industrial Average and S&P 500 closed the first quarter of 2022 down a little less than 5%, and the Nasdaq fell about 9%. While that may sting a bit for some, it may also be a relief given where we were before the March rally took hold to recoup some of the earlier losses.
High inflation and the Russian invasion of Ukraine were the topics most discussed and worried about during the quarter. And they remain top of mind as we begin the second quarter. Those investors worried that inflation may not be so transitory, or that war may get even messier, might be thinking about putting on some hedges to protect their investment portfolios.
But what’s the best hedge?
Some people like gold. Some people like Bitcoin. We express no opinion on either, but do seem to notice that they don’t exactly produce free cash flow, and tend to rely more of the flow of investor psychology, even if one does have a longer track record than the other.
Some people like options, which can be expensive forms of insurance and depend upon timing—which make holders of expired options consistently unhappy since, to use a quote attributed to John Maynard Keynes, “Markets can stay irrational longer than you can stay solvent.”
Other forms of hedges are the ones mentioned in the Berkowitz quote at the beginning of this section: cash and knowledge. Cash doesn’t earn much these days, but it’s an option on future opportunities. Whether those opportunities come nine days or nine months from now, it just waits for you to call it up and put it to use. As Warren Buffett has said: “Cash combined with courage in a time of crisis is priceless.”
Knowledge is a less obvious form of hedge. In a great interview with author William Green that was published this past week, investor Joel Greenblatt said the following:
“One of the reasons I can have a concentrated portfolio is because I understand what I own…. If you own six or eight great things, or at least great bets, that’s more comforting if you actually know what you own. If you don’t know what you own, if you don’t know how to value a business, you’re just going to react to the emotions, because you don’t actually understand what you own. But if you actually understand what you own, and the premise that you bought those things with is still intact, that’s actually the only way I think you can deal with the emotion, because you realize what you own is still good.”
Knowledge about your holdings gives you the confidence to hold or add to your investments when they are down—if you know they are good—or to sell and invest in better things that you also know well. You are hedged because you know the difference between price and value and won’t let a declining share price affect your ability to act intelligently.
Pick your hedges wisely, should you choose to pick at all. And keep in mind another quote from Keynes: “It is better to be roughly right than precisely wrong.”
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