Inner Self vs. Outer Self

The other day I saw video of Mohnish Pabrai presentation and Q&A with UCLA student investment fund (see here). There’s always something worth listening to when Mohnish talks. In the present talk, Mohnish talks about a key to success, and that being the importance of aligning the inner self with the outer self. He gives an extreme example of an individual who is Hitler on the inside trying to be Gandhi on the outside is bound to fail in both endeavors of being either evil or good! According to Mohnish it is better for an individual to rather endeavor to be a great evil if thats what he is inside.

This got me thinking on who I am on the inside as an investor and whether my actions on the outside justify that. The year 2020 offered a real time opportunity for me to answer this question for myself. We witnessed all three market cycles playing out: extreme bearish; extreme euphoria and markets moving sideways.

I am intrinsically attracted to value stocks, i.e., OK companies trading at cheap valuation (for example, low EV/EBIT multiple) or stocks of great businesses that have fallen on hard times in terms of valuation due to some mis-steps, which are easily fixable (think Boeing with the 737 Max debacle or Chipotle with the e-coli fiasco). As such, I am excited when markets fall and the opportunity set to find companies meeting my valuation criterion increase and I struggle in a booming markets, especially in times of euphoria closing in on bubble territory such as we are facing in the markets today.

For 2020, this would mean, I should have been active in the markets buying when there were opportunities abundant in the depth of COVID induced recession in late March and as the markets continued to recover, my buying activity should have slowed down. In order to assess whether this indeed happened, I plotted the chart below, which overlays my trading activity over the price action chart for S&P 500 index. The lines in green indicate buys and lines in red indicate sells. The height of each line indicates number of stocks traded on a given day.

 

A few trends are evident

• I have been quite consistent in my purchases on the micro-market dips.
• That meant, consistently missed the market peaks for selling and bottom for buying. Clearly timing the market is not my strong suit
• The first half of the year was led to a big buying spree for me, on the backs of some big sales earlier in the year.
• Unfortunately for me, I was early to get into the COVID induced market drawdown and by the time we reached bottom in March, I was almost out of all available dry powder to invest.
• As the markets have continued to trend upwards, my sells have started to outpace buys, to a point where I am currently sitting on a ~18 % cash position in my portfolio. See below

Clearly, I am finding the current market conditions extremely difficult for my style of investing! On the positive note, above analysis suggests, I am quite aligned with my inner self in terms of my investing style!

Bullish on Gold

For more than a year now, I have been bullish on gold and I have been gradually increasing the percent allocation to gold in my portfolio. My primary thesis for owning gold was as an asset diversification tool. My analysis has shown that having some exposure to gold allows for decrease in portfolio volatality (risk) with no measurable reduction in performance. However, since March, I have become increasingly bullish on the yellow metal as a hedge against inflation and weak-dollar. I mean, all the monetary and ficscal policy induced money printing going on in the markets, must eventually lead to inflation and weak dollar! The fact that there seems no evidence of CPI-inflation does not mean we are not seeing inflation! Have a look at the stock markets! For that matter, the housing markets as well.

Any skepticism I have had about investing in Gold was washed away after I heard a recent interview with Dr Thomas Kaplan on Real Vision. He believes gold offers a generational investment opportunity in 2020 with the potential to offer 10x-20x returns. As he presents his bullish case, he notes that he does not even look at the macro environment, rather the micro environment surrounding gold mines and gold production tells all the story! According to Kaplan miners are depleting their reserves of precious gold as the demand for gold is increasing across investor pool of all classes. Even sovereign nations are demanding access to physical gold out of vaults from London and New York. He goes on to argue that increasing the supply of gold is not a trivial matter. Fiat-currencies can be printed at will, as we have seen during the pandemic and the spigot of oil can be turned on or off at will through the whims and vagaries of OPEC cartel, not so for gold. According to him the gold production at 26 of the worlds largest miners is forecast to decline 13 % by 2022 and by as much as 47 % by 2027. He argues that bringing gold to the market–from discovery to permitting and development is a multi-decade process.

If Kaplan micro thesis is true, and coupled with the global macro picture surrounding fiat-currencies, it should not take a lot of imagination to see that golden days for gold (pun intended) are in the near future!

So, how do I intend to play this trade. For starters, I will continue to increase my holdings of paper-gold asset through the purchase of gold-trust ETFs, such as IAU, GLD, BAR and GLDX. At the same time I am looking for exposure to gold mining companies and also considering holding some physical gold. Gold is currently at about 2.5 % of my total-portfolio and I can easily see that growing to about 10 % of my total portfolio within the next couple of years!

IPO Mania

Last week two gig-economy businesses went public, Doordash (ticker: DASH) and AirBND (ticker ABNB). AirBNB IPOed at $68 to only close at $144 by end of the first day of trading, thats an astronomical 111 % gain for one day of trading. And Doordash IPOed at $102, to close at $189.51, up 85 % by end of its first trading day. I was not trading actively during the go-go days of dot-com bubble, but having read about the dot-com bubble and the aftermath, it sure does smell the same to me. Just as the companies of that era, todays crop of hot stocks are technologically innovative companies. These companies share two other traits with the go-go firms of the dot-com bubble days: (a) stratospheric valuations (b) money-losing enterprise.

Along similar lines, I read a very interesting blog post by Chris Mayer, titled, A Tale of Bubbles Past. In there he talks of companies such as Marimba, Orckit, Zoran, and Ariba.. all potential world-beaters of the day, nowhere to be found today. Giving the specific example of Ariba, he writes, circa 2000, Ariba had sales of $62 M with net loss of $37 M and carried a market cap of $25.6 B (which is about $37.38 B in todays money), a near 413 times sales. While ABNB and DASH are not trading at that crazy valuation (each trading at about 20 times sales), there are companies in todays markets trading at completely insane valuations such as never seen before. Case in point NIO, which has seen a 1000 fold increase in its stock price in the last year and is now trading at about 48 time book!

Video/Book/Article/Audio for the Week

• Blog: Wall-Street Journal list of 10 best books for 2020
• Podcast: Bill Brewster (he hosts Value-after-hours podcast with Tobais Carlisle and Jake Taylor) has a new podcast, The Business Brew
• Article: Vanguard economic and market outlook for 2021