Investor Education: Bonds
Bonds have long been considered a place of safety for investors to park their money and earn a return on their capital. This year long-term bonds have fallen more than the equity market due to interest rate fluctuations that are potentially not understood by new investors.
Read our overview of Bonds here!
Breaking Habits
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” —Aristotle
“Form good habits, and repeat everyday.” —Tom Brady
“Players who practice hard when no one is paying attention generally play well when everyone is watching.” —Michael Jordan
Breaking a habit is hard. It’s hard for people. It’s hard for investors. It’s hard for companies.
Good habits produce excellence. Bad habits produce…. Non-excellence?
In the late 1990s, investors wanted and rewarded growth. Management knew this, and managed to it, whether or not it was the good kind of growth (i.e., the kind that eventually produces profits). As an article in The Washington Post in November of 2001 (“Hooked On a Fast- Growth Habit”) described the times:
At this point, they almost can't help themselves -- it's become an addiction for the top executives of Corporate America.
Delivering double-digit earnings growth year after year is no longer simply what corporate re-engineers call a "stretch goal" for an organization, or a rare achievement to be celebrated. It's become a mandate, a benchmark, a test of corporate manhood, an expectation hard-wired into the corporate culture -- a narcotic that company leaders reach for the way most people reach for an aspirin.
Never mind that the economy is contracting, or that prices are falling and profit margins are getting squeezed, or that most industries are unlikely to grow more than 5 percent a year even after the recovery is here. The name of the game these days is boosting the stock price, and the surest way to do that is to promise -- and deliver -- double-digit profit growth to Wall Street's cadre of analysts and money managers.
… James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, says this fascination with high growth rates peaked in 1999, at the height of the stock market boom, when only 50 stocks in the Standard & Poor's 500-stock index -- the hottest 50 growth companies -- actually went up in value. In fact, these nifty 50 went up so much so that they lifted the overall market indexes with them. The other 450 stocks declined.
"At that point, investors were only paying for growth," Paulsen said. "Dividends, good cash flow, reliability -- they all meant nothing."
Oh, how history rhymes.
For some time, companies and investors repeated the mistakes of the 1990s. Reliable cash flows and prudent capital allocation were ignored. Growth—of both the profitable and unprofitable variety—was rewarded.
And then cracks started to form and put a damper on that thesis in 2021. And then the dam broke on many companies in 2022, especially the ones where profits are still more of a hope and a dream than a reality.
This past week, some of the world's largest technology companies also took a dive. Meta Platforms, the company-formerly-known-as-Facebook, is especially noteworthy. Unlike many (former) technology darlings, it’s profitable. But what Meta has in common with those former superstars is that cash is being invested and spent and possibly burned in the pursuit of trying to invent the future.
The company is in the habit of hiring and building and capital expenditure-ing. Investors were in the habit of cheering it on in these endeavors—until they weren't. After reaching a market capitalization north of $1 trillion last year, the company is now valued at less than $270 billion.
We don’t know if the cash Meta is burning investing will be a good use of capital. And we have no official opinion on the stock price at current levels. At some point, there is too much pessimism priced in, and maybe, just maybe, it's that time.
But we do think that this downturn will change habits. Bad habits will likely continue to get exposed. And good habits—whether already in place or currently evolving into form—will get rewarded.
“First we make our habits, then our habits make us.” —Charles Noble
“Giving up smoking is the easiest thing in the world. I know because I've done it thousands of times.” —Mark Twain
Co/Investor Club Founder Alumni Spotlight: Mike Pruitt
Tweets of the Week
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Earnings and Cash Flows: A Primer on Free Cash Flow
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Chit Chat Money Podcast: Subsea 7 and a Lifetime of Value Investing with Bob Robotti (Ticker: SUBC)
Planet MicroCap Podcast: Ep. 248 - Time to Look for “Fallen Angels” Stocks?
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