Happy Father’s Day and Happy Juneteenth!
Investor Education
Another metric used to value a company is the Price/Book Ratio (P/B Ratio). This ratio measures the company's market value to its book value and can give investors an idea of how expensive a company is trading compared to the assets they hold on the balance sheet.
Read our overview of Price-Book Ratios
Investing Scared
“The world in each generation looks like ‘it could never be worse than this.’ There are always moments where we seem on the brink.” —Seth Klarman
Markets took another beating. The S&P 500 closed down over 5% for the second week in a row. It finished with a 5.8% loss on the week. The Dow and Nasdaq were close behind with losses of 4.8% each.
This is a market and economic climate unlike any in history. Worldwide inflation, supply chain disruptions, central bank balance sheets, lockdowns, war, energy prices…. Name your news headline and there are few precedents in history. It’s hard enough to understand the difficulty and process that goes into making a simple pencil, let alone the infrastructure and interconnectedness needed to supply energy and feed the world in a time of inflation and shortages.
In a recent interview, Stanley Druckenmiller said:
“This is my 45th consecutive year as a chief investment officer. And in 45 years I’ve never seen a constellation while I was a practitioner, or frankly studied one, where there’s no historical analog. So right now I probably have more humility in terms of my views going forward than I’ve had maybe ever.”
Like Druckenmiller, we think it’s a time to be humble. As we wrote last year and still stress today:
Often, we are just too involved in our own perspectives to be able to see things as they really are when we are wrong. We must remain humble, realizing that as much as we’d like to always be right, mistakes will be made from time-to-time. Humility fosters an open mind, and allows us to become better and better decision makers as we go along. As the saying goes: “Wisdom flows into the humble man like water flows into a depression.”
But besides humility, we also need a plan. The future is uncertain. It always is. But the future is what matters for our investing returns. The past is the past and we must keep moving forward. Aggressive investing worked for a while, but 2022 has shown that—at least for many investors—a more defensive plan might be better for their returns and their sanity.
How should one invest more defensively, assuming one chooses to do so? Howard Marks spelled out a strategy in his 2003 Memo “The Most Important Thing”:
Investing defensively can cause you to miss out on things that are hot and get hotter, and it can leave you with your bat on your shoulder in trip after trip to the plate. You may hit fewer home runs than another investor . . . but you’re also likely to have fewer strikeouts and fewer inning-ending double plays. The ingredients in defensive investing include (a) insistence on solid, identifiable value at a bargain price, (b) diversification rather than concentration, and (c) avoidance of reliance on macro-forecasts and market timing.
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“Defensive investing” sounds very erudite, but I can simplify it: Invest scared! Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing does go wrong, surely the winners will take care of themselves.
It’s okay to worry. But you want to have the right kind of worry. The wrong kind leads to panic and bad decisions. The right kind can help you get through to the other side. Stay humble. Keep your head. Look for bargains. And insist on a margin of safety.
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