Whatever measure of success I have had in life I owe to reading.
I read a lot. I always have and hopefully always will.
I read everything I can get my hands on…
Trade journals, newspapers (foreign and domestic), research reports, annual reports, quarterly reports and academic studies are all consumed during the business day.
After work I turn to fiction in the evening. We do watch some TV (I watched One Night in Miami last night and I highly recommend it), but most nights I read.
During the pandemic I have devoured almost all of Wilbur Smith’s impressive production. In addition to being entertained I know more about Africa and its history than I did when I started 20 some books ago.
I have also read a lot of World War II novels from authors with a reputation for solid research.
There’s something about reading about war that made it easier to suffer my task of sitting at home, washing my hands, and wearing a mask in crowded stores.
Most importantly, I always make it a point to read information from people that think differently than I do.
My opinions must be tested by people smarter than me as opinions that stand up under attack tend to lead to better results.
For instance, Louis Navellier is a pure growth and momentum investor. He tends to be very optimistic while I am much more skeptical.
I am valuation sensitive to say the least and Louis only cares about growth rates, analyst upgrades, and margins. He pays little to no attention to PE ratios or any of that “nonsense.”
But nonetheless, I read everything the man writes. Sometimes I agree with him and sometimes I do not. But no matter what, he challenges me and makes me a better thinker.
The same applies to people like Scott Galloway, James Grant, Nassim Taleb, and others. I do not always agree with them but I always read them as they force me to think things through from different angles.
It makes me a better investor and often a better person as well.
How to Learn To Think
What do you do though when two people who have proven themselves to be brilliant and accurate have wildly conflicting opinions?
This is when you must learn to think.
Let me give you an example.
I have a lot of respect for, and speak often about, Henry McVey of KKR. He and his macro team have been very accurate over the years.
In their outlook a few weeks ago they said:
“For 2021 we are using an S&P 500 fair value of 4,050, compared to our December 31, 2020 estimate of 3,600. As such, our 2021 target represents a 12-13% of upside. We see several forces at work, including high-efficacy vaccines, no major tax increases, and a less confrontational approach to trade tariffs. Meanwhile, central bank policy remains supportive (the global policy rate is at historically low levels with ongoing QE), and additional fiscal stimulus is expected even if the scope/scale is narrower. So, with policy uncertainty on the wane, we expect the equity risk premium to stay benign.”
Very positive stuff for stock prices.
I also deeply respect Jeremy Grantham Of GMO Asset Management. Jeremy naturally has always been a serious contrarian. His firm even thought stocks were cheap for about a hot second back in March before the markets came roaring back. Younger investors may think he is a perma-bear since he has been leaning against rising prices for some time now but in addition to calling the crisis and getting out of stocks, he moved back in aggressively in 2009.
He and his team wrote this month that:
“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”
Ouch.
So here we are. We have two brilliant individuals with two wildly opposing opinions that are well delivered and backed up with supporting evidence.
What do we do?
We have to think.
First, let’s consider time frames.
McVey freely admits that although he sees positive tailwinds in 2021, there are still risks from China, higher interest rates, and a weaker dollar that could cause significant disruptions in 2021.
Grantham, on the other hand, freely admits that some of his valuation calls have taken some time to play out. It is quite possible we see solid gains in 2021 with a nasty bear market surprise coming sometime in 2022.
My conclusion is that they are both right. It will be a matter of time frames. A vaccine driven recovery is going to lift stock prices but eventually we have to hit a wall.
What do we do?
We make sure our companies are strong enough to survive.
We make sure that our companies can benefit from world changing trends.
We make sure our companies have strong, high conviction shareholders that are more likely to buy a decline than sell in a panic.
We track activist and private equity purchases to exploit possible special situations that lead to profitable takeovers.
Most of all, we will be prepared to react to whatever happens.
You can get just as rich riding a bubble as you can buying a bear market bottom.