Cayden has shared regarding Black Swan and Value Investing in the last post. (Click Here to Read).
Allow me to share my perspective especially with regard to the application portion.
Most seasoned investors know that crisis is the time where most profits are made because wealth is not loss during that time, it merely changed hands. This is the case for stocks, real estate or almost any asset classes where you have mastery in.
Let’s go back to one of the “Black Swan” period just less than a decade ago, The Global Financial Crisis of 2007- 2008.
This is the period of time many stocks look “terrible”. If I may, they look like ugly ducklings which nobody wants. Bear in mind that there are stocks that have lousy fundamentals which we will avoid because for lousy companies, almost any price may be too high a price. When I talk about Ugly Ducklings, these are stocks that will eventually turn into beautiful swans or even better… Golden Geese. And when is it the best time to get these stocks? Exactly, during Black Swan events when they look like Ugly Ducklings.
Some examples of Ugly Ducklings
1. CarMax Inc (KMX)
When this stock started falling in 2007 and look ugly, guess what did Investors do? Lets see some records:
a. Ruane Cunniff bought KMX at an average price of $23.5, clocking about 85% increase now.
b. Warren Buffett bought KMX at an average price of $23.5 as well, clocking 85% increase.
c. George Soros bought KMX at various times at an average of about $20, clocking 108%.
d. Ron Baron bought KMX at average price of $20+ clocking around 80% to 100%.
c. Chuck Akre bought at an average price of $20, clocking around 100%.
2. Monster Beverage (MNST)
Now, who bought this ugly duckling in the Black Swan Crisis?
a. Ron Baron bought at an average of $13.50 clocking 373% now.
b. Jean Marie Eveillard bought at an average of $16.35% clocking 291%
c. Joel Greenblatt bought at an average of $9.35 clocking more than 500%.
d. Wallace Weitz bought at an average of $16+ clocking about 200%
What is the lesson here? It goes back to one of Warren Buffett’s famous quote, “Be Greedy others are Fearful and Be Fearful when Others are Greedy.”
But in order to be able to do that, we need to have mastery over our investments. Again, if you have invested in times of crisis, you would have bought many ugly looking ducklings that would have become golden goose darlings.
Of course, Value Investing is one of the methods out there that can help us profit in the stock market and in my opinion, I like it the best because of how passive it can be. Let me also share that it is really practical for a person like me who values time freedom and not having to monitor and predict the next black swan (which cannot be predicted anyway- see definition of black swan Here).
And even when Golden Geese turns into Ugly Ducklings in Black Swan periods, the cool thing is that they still lay golden eggs.
Let me just quote a few examples:
1. Coka Cola (KO)
In the period of Black Swan 2007 and 2008, you can see that Coke increases its dividend in the so-called crisis.
So in Buffett’s case, where he owns 400,000,000, he collected:
2007 – $272,000,000 worth of dividends
2008 – $304,000,000 worth of dividends
Ok, that may be a bit far fetch for retail investors like us. But what if we have accumulated 10,000 Coke shares over some years, we would have collected
2007 – $6800
2008 – $7,600
Depending on when you buy coke, this may be quite a decent income. And also, what can you do with these dividends during these times? YES! We can use them to buy more golden geese disguised as ugly ducklings!
There are tons of examples of how collecting these golden geese when they look like ugly duckling can help us ride through the next black swan period which I will never know when it will come. But personally, over the years, I have collected enough cash producing assets to ride me through comfortably.
Lastly, what I like being a Value Investor, is the relatively consistent and smooth ride in the market over years. Yes, there are ups and downs, but I am buying companies that are becoming richer every year and that means I become richer too. The stock market may not feel so at times, especially during crisis times, but well, my companies are still performing well in terms of profits and dividends during these periods even though the stock price does not reflect so in these times. But I love it because what it means is that during these times, I can collect even more good businesses at a much much cheaper price. For non-value investors, these times may look bad, and the numbers on your portfolio may even tell you that it is bad or you are losing, but the truth is as what Ben Graham says, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine”.
Let me give you the example of Ruane Cuniff’s Sequoia Fund.
Performance of Sequoia Fund
From the table above, you can see that the fund did “poorly” in 2008 wih a -27.03% and S&P did -37%. But well, Value Investors love these periods because what it means is that we can buy ugly ducklings that are in fact golden geese. They bought aggressively these golden geese during 2008, for example
That is the likely reason after 2008, you can see that their performance is
2009 – 15.38%
2010 – 19.5%
2011 – 13.19%
2013 – 34.58%
Again, do check out the results of the other investors I have shared above – don’t take my words for it, I am not always right and I don’t profess to be. I am just a comfortable investor . Most importantly, we got to be equipped for such times, I hope you are!
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Mind Kinesis Research Team