What does it take to exploit a market? This is complex query for it requires both methods as well as personal traits.
First the methods: It is obvious (though not commonly followed) that capital market portfolios should be low turnover based, comprising of stocks based on sound business principles that generate dependable cashflow.
This would be the method, but the key personal trait is one of self-reliance. Forecasting is a mug’s game, yet everyone indulges in it, eyeing and vying for capital gains based on forecasts that often turn out to be wrong. In the age of information overload, there is a surprising paucity of common sense principles and the one of self-reliance (based on the philosophical essay of the same title by Emerson which he wrote in 1841) comes out on top.
Operating on ‘first principles’
Community is a distraction to self-growth; in other words, following the herd invites a regression to the mean. Solitude involves the courage to act on one’s own principles; economic self-reliance implies allocating capital where the cashflows are dependable, long-term in nature and not as subject to the vagaries of the economic cycle.
It is in through this lens that one must look at the recent spate of IPO offerings (including the upcoming announcements by Salik and Empower). The facts of the investment case are a) high dividend yields are being offered; b) the business model is simple to understand c) is inelastic to the vagaries of the business cycle and d) management has been competent to grow revenue streams without being distracted by the “need” to move away from first principles that made the business profitable in the first place.
Tabreed proves a winner
Given these pre-requisites, commentary and opinion becomes unnecessary. Over time, these principles exert a gravitational pull on portfolios, such that wealth starts to compound. We have the example of Tabreed (another district cooling company listed on the capital markets) that has outperformed both the S&P 500 as well as the Nasdaq indices over the last three years.
Let that sink in: a utility company has outperformed all the frenzied activity of the technology sector merely by sticking to first principles. When explained to the median investor, the common reaction is either one of disdain and/or disbelief.
Yet, the principle of self-reliance requires the mental strength to overcome such criticisms; the ability to overcome the attention grabbing headlines and to zoom in on what they have skipped. Everyone is focused on the ‘new, new thing’.
Buy anything
Against the backdrop of near zero interest rates, the cost of exploring new ideas became lower, and experts tell clients to buy something, almost anything. The least skeptical clients ended up making the most amount of money, even though no one really understood how the money was being made.
Capital allocation went out the door, replaced by fancy jargon to “explain” what was going on. Meanwhile, sensible businesses continued to plod quietly forward by reinvesting their profits as well as returning capital back to shareholders, which was not easy in the era of “anything goes”.
However, as both interest rates and inflation started to rise, capital sloshed out of these ideas and back to real assets, a process that is still underway. At base, it is the self-reliance that validates this long term stance.
The current spate of IPOs (both actual and prospective) will (and should) become the cornerstone of portfolios for both the retail and institutional investor alike. Thus it turns out that the way to exploit a market is not through arcane formulae, computer programs or signals flashed by price behavior.
Rather, it is through good business judgement (stemming from the core principle of self-reliance) along with the ability to insulate oneself from the noise. Not all IPOs will be profitable or valuable.
But the ones that are currently on the anvil more than meet the criteria. Investors would be well served by keeping these basic facts in mind as they navigate the road ahead.
