Slaying Dragons
The first half of 2024 is in the books. During the first six months of the year, the more big tech you owned, the better—the Nasdaq is up 18.1% so far this year, the S&P 500 is up 14.5%, and the Dow is up 3.8%. Most smaller-company indices are up even less, as the big have gotten bigger to start the year, and many companies outside the biggest ones have shown signs of a potentially slowing economy.
Businesses run into problems all the time. The world is competitive, and things don’t always go as expected.
And when those problems happen, stock prices tend to follow suit. It happened with Nike on Friday, as the stock dropped after results were significantly worse than expected, and it’ll probably happen to some company, somewhere, next week as well.
When companies run into these kinds of problems, there is potential for both big profits and big losses, depending on whether you, as the analyst, judge (correctly) those problems to be temporary or permanent.
Big problems should usually be avoided—if they can be—but solvable problems create opportunities. As Warren Buffett wrote in his 1989 Letter to Shareholders :
After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.
The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. On occasion, tough problems must be tackled as was the case when we started our Sunday paper in Buffalo. In other instances, a great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable, problem as was the case many years back at both American Express and GEICO. Overall, however, we've done better by avoiding dragons than by slaying them.
When we look at our watch lists of stocks more than 20% down from their 52-week highs, and within a few percent of their 52-week lows, there are plenty of consumer-related names on those lists, such as Diageo, Brown-Forman, Five Below, Starbucks, and the aforementioned Nike, to name a few.
We don’t have any public opinion on those stocks, but if their problems are temporary, maybe there is opportunity. Or maybe they are signaling a potential, extended slowdown with the consumer is upon us.
We don’t know the answer. But we do know that in any market, it pays to keep turning over rocks, reading, and researching—because, at some point, too much pessimism will get priced into things, and the opportunity for low risk and high returns will be there for those that are ready to act.
“There’s no easy answer for investors faced with skimpy prospective returns and risk premiums. But there is one course of action—one classic mistake—that I most strongly feel is wrong: reaching for return.” —Howard Marks
Tweets of the Week
In Case You Missed it…
Finding Great Leaders Early - by Ian Cassel
The Life Cycle of Market Champions
How To Lose Money Smelting Copper - by Will Thomson
Marc Andreessen on Building Netscape & the Birth of the Browser (video)
Best Anchor Stocks Podcast: What is a high-quality company? w/ Drew Cohen from Speedwell Research
Invest Like the Best Podcast: Robert Greene - Optimizing Your Reality
If you have not already upgraded your membership…
Avenel Financial Group, a merchant banking and advisory firm located in Charlotte, NC, launched a 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: @coinvestorclub1
LinkedIn: Co/Investor Club
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.
