Top 50 Microcap Investor List: Brent Beshore
For this week’s Top-50 feature we present Brent Beshore, Chief Executive Officer and Founder of Permanent Equity. Brent leads the acquisition and diligence teams by focusing “on North American-based private companies with consistent annual pre-tax net earnings between $2.5 million and $25 million, and two or more of the following characteristics: Stable & Diversified Client Base, Healthy Layer of Non-Owner Management, Closely Held Ownership Looking to Retire, Quality Brand Name/Strong Reputation & Established Niche Expertise.”
Download our Feature on Brent Beshore here
Second-Level Thinking
Back in his younger days, Ray Dalio, co-chief investment officer at Bridgewater Associates, was very bearish on Latin America. He was right. The Latin American debt crisis was born and countries defaulted.
But Dalio lost money. Why? Because the market rallied on hopes that there would be large government involvement to stem the crisis. Dalio described one of the lessons he learned this way:
I learned not to fight the Fed unless I had very good reasons to believe that their moves wouldn’t work. The Fed and other central banks have tremendous power. In both the abandonment of the gold standard in 1971 and in the Mexico default in 1982, I learned that a crisis development that leads to central banks easing and coming to the rescue can swamp the impact of the crisis itself.
Similar things have happened over the last 13+ years. There is a risk, which comes to fruition, but central banks come in and alter the outcome.
The point of this is not to sing praise to central bankers, or to scorn them for the unintended consequences that they have created, many of which are yet to be known in full (inflation, anyone?). Rather, the point is that negative developments don’t necessarily lead to investment losses. And positive developments don’t necessarily lead to investment gains.
In his book The Most Important Thing, investor Howard Marks describes the idea of second-level thinking:
What is second-level thinking?
• First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
• First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
• First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.”
Second-level thinking is deep, complex and convoluted.
It’s not easy to be a second-level thinker. But it’s often especially dangerous to be a first-level thinker, as Dalio experienced a bit in his younger days, and many investors in highly-valued technology companies have experienced over the last several months.
And that brings us to today’s news cycle. The market has been down, and volatile, based on the latest developments in Ukraine. Whatever your opinion on where that war is heading, keep in mind that even if your opinion turns out to be correct, it may still be difficult to make money off that opinion. Market historian and investor Jeremy Grantham touched on this point in a recent podcast episode:
Suddenly the world has changed a bit. As a historian, I can say with confidence that these geopolitical events are murderously difficult to predict. If you could tell me how long it would last, even then it would be difficult. But in a month, they could have a regime change in Russia and we could be in a honeymoon period again, or this could drag on to be absolutely the start of a multi-year super Cold War and it would have repercussions everywhere. Wars are not obviously bad for stock markets. They do set in process a lot of CapEx, a lot of new products, a lot of war profiteering if you will. So it isn’t necessarily doom for the stock market. It’s a miserable time for everybody else, but in wartime, people do work harder and produce more.
For much of the 14+ month history of this newsletter we’ve stressed the risk of high valuations, the difficultly in making macro predictions, and the opportunity that there are always cheap stocks to be found somewhere. And we repeat ourselves again. Valuations have come down—significantly so in some areas of the market—but are still high on average. The severity and direction of war, inflation, interest rates and other macro factors is important, but nearly impossible to predict with accuracy, and even harder to turn those predictions into profits. But there are plenty of opportunities in individual stocks for those with the wherewithal to find them.
Tweet of the Week
In Case You Missed It…
Principles for Dealing with the Changing World Order by Ray Dalio
China, U.S. expected to reach consensus soon in audit talks
A Serious Proposal on US Energy
Yet Another Value Podcast: Louis Camhi on the opportunities in the SPAC market
Acquisitions Anonymous Podcast: SBA Loan Secrets with Heather Endresen
5 Clubs Conversation: Gary Williams & Morgan Hoffmann
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