🧗 Our Investing Journey (#4): "I am the beginning and the end"
Exploring decision-making in a world bound by the finite time and inspiration
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Welcome back to 🧙♂️ The Hermit 🧙♂️
ICYMI:
🧗 Our Investing Journey: The Zero-Sum Game May 2024
📝 Company Updates: Cardlytics Dilution March 2024
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Quick Macroeconomic Note
It would be easy to deliver a not-so-brief note on macroeconomic factors that could take up the entirety of this post. BUT (and that’s a BIG BUT for a reason), as the people who know me know, this is not that type of post.
In fact, I will take the time to restate that basing investment theses on macro predictions is futile (paraphrasing the great Peter Lynch). I’m probably going to get punched for that one.
On a more serious note, understanding macro(economic) factors is important and neccessary. Governmental intervention (or its absence) played out through regulation, and fiscal and monetary policies can lead to the creation of fertile hunting grounds for investors.
I usually arrive at interesting opportunities using a bottoms-up approach, this translates to first understanding the company and then approaching the sector as part of the context. However, sometimes an inverted approach (known as top-down) can provide rich opportunities. To illustrate the point, here are some of the events affecting Argentina and Eastern Europe that have led to opportunities in recent times.
The “Milei effect” could be an interesting opportunity for capital deployment. In the summer of 2023, I conducted a broad search of major retail brands with a focus on traditional LATAM exporters.
The thesis for investment in the country/sector is contingent on the restoration of the rule of law and the competitive advantage provided by the low costs associated with labor. To illustrate the point, if Argentina becomes a cost center, the global food supply could be altered due to the abundance of farmable land and local agricultural expertise. The food production and distribution sectors have been historically one of the hardest hit by trade tariffs and internal price controls. For us investors, one of the branches that stands out could be the high-quality organic meat production. The sector is ripe to become a global powerhouse with incredibly free cash flow generation potential.
Another consequence of Milei could hover around natural resource-related companies in Argentina. Oil and gas companies have historically been involved in scandals, corruption cases, and other political schemes. These have led to both nationalization, subsidization, and mismanagement of the entire value chain, e.g. drilling, discovery, production, transportation, refinement, and distribution. The new wave of privatizations and the removal of politically appointed managers, known by Argentinians as “empresaurios”, could unlock value for investors.
Opportunities can be spotted derived from the Western hemisphere’s punishing of Russia for its actions against Ukraine. On the economic front, their actions have led to retaliation via the sanctions in all things related to the country and its citizens. Trade barriers create scarcity that can be exploited by importers and exporters. On our end, a few opportunities popped out from the super high-end apparel sectors in Eastern Europe. The two best candidates are lingerie shops that have doubled their operating margins since the start of the war. Both companies plan to continue profiting from the lack of competition and abundant demand for the products.
I identified a few opportunities in all the above-mentioned “hunting grounds”. These shall remain unnamed as the point is precisely evaluating these investing “hunting grounds”.
The One That Matters
Not to quote the Bible, but quoting the Bible (hehehe)
I am the Alpha and the Omega, the First and the Last, the Beginning and the End (Revelation 22:13)
I have been thinking about processes, and, most importantly, the reason behind most of what I do. What is the End? If I were to look at reading about macro, reading the papers, watching news, consuming YouTube, etc. based on time spent, I would say the process is a massive failure. Arriving at the conclusions described in the section above has probably taken hundreds of hours, and yet, if you read carefully, you will notice I am saying absolutely NOTHING of substance.
I believe there is a severe lack of emphasis on the disparity between research and execution. The essence of the investing process leads to the continuous, or infinite, research process and the discrete, or finite, execution process. In terms of tangible results, only execution matters. Philosophically,
When the student is ready the teacher will appear. When the student is truly ready... The teacher will disappear - Tao Te King
In real life, this however is much more complex, and even if one were to be 100% prepared, the chance could never arrive.
The intangible research process yields no results per se but can usually lead to partial certainty as one builds up a thesis by quantifying known unknowns. One can acknowledge that some items, correlations, or events will remain unknown completely. However, with experience and the will to push through, even these can be unveiled.
In our field, this usually happens after you purchase the shares, which is - for lack of a better word - not ideal. With that in mind, and contrary to my previous beliefs, once you know about 50% of the story, you can jump in at the right time aka if the price is right.
Timing is everything.
Let me stress the importance of that point.
Timing. Is. Everything.
Ideally, preparation leads to moments of realization that appear more mystical and closer to clairvoyance than to fundamentally driven logical decision-making. This drives us to conclude that a tangible result (e.g. 10% performance) is highly dependent on luck and the art of investing. My question is, how do I make more of these transcendental moments happen?
Thus far the only answer to this question is ironically having an exciting life and dedicating less time, with a greater focus, to researching. Excitement, a curious mind, and a lack of stimulation through information lead to moments of great inspiration.
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