There is not much to do in investing these days. In fact, this whole year, I didn’t have many investing transactions. It has been that kind of year for me.
One major reason why I didn’t have many stock buys this year is because I buy when the market is going down, not when it is moving up or going sideways. This is how my dry powder investing works. I keep cash on the sidelines waiting for the market to turn sour. And then I start buying good stocks when the market drops 10% or more below its peak. 2022 was a busy year for my cash deployment, as I have previously reported here.
To quote the great Charlie Munger, who passed away a few days ago:
The big money is not in the buying and selling, but in the waiting.
2023 has been, so far, a recovery year for stocks. The market is well off its lows but not yet at its prior peak. A rough rule of thumb is that stocks would take twice as long in recovery after a prolonged drawdown. In 2022, stocks reached the bottom after about 9 months of drawdown. So I’d say perhaps it would take about two years (from October ’22 low) to reach that peak again. We can’t say for sure though.
It seems that the near future of the stock market is tied to the Federal Reserve’s interest rate actions. There is of course a possibility that a recession might occur next year. That could cause another downward slide in the market.
CEO of Oaktree Special Lending Corp. (OCSL) Armen Panossian thinks that businesses need to be cautious next year. He had some interesting commentary on economic outlook in the company’s 3Q earnings conference call. He believes that the Fed will have no reason to cut interest rates in 2024 because it will take a while (not in 2024) for the US economy to reach Fed’s target inflation rate of 2%. Unless the economy slows down so much such that it materially impacts the employment rate. In the first case, businesses that are counting on debt rates to come down quickly in 2024 will face serious issues rolling over their debts. In the latter case, if the economy goes down quickly causing a recession, their businesses will suffer due to slowing demand. Either way, weaker business could see more pain next year.
This sentiment that “rates are higher for longer” is echoed by other well regarded business CEOs as well. Steve Schwarzman of Blackstone (BX), for one. I read his economic commentary with interest too. Full disclosure, I am a shareholder in both Oaktree Capital and Blackstone.
So, perhaps 2024 will not turn out to be the bookend to the current down cycle. Who knows. Note that stocks tend to look ahead by 6 to 12 months. And remember eventually the economy will cool down enough to bring the inflation back within Fed’s target range. We just don’t know how soon it will happen.
On the topic of inflation, I recently listened to a good interview of Prof. Damodaran who is an expert in stock valuations. His take on inflation, equity risk premium, and risk-free rates was fascinating.
Damodaran also invests his own money into stocks. Today, he owns several well-known hi-tech companies. Notwithstanding his concerns over sticky inflation, he continues to own businesses that have competitive edge and durable business models that could withstand higher rates.
He also advocates investors identify good companies and then wait until their stocks go out of favor before picking them up at good valuations.
So I think many of these companies, if you wait, there is a point at which you will find them to be undervalued and you can buy them. It doesn’t mean you’re going to go buy them now…
… if you feel left out of the NVIDIA rise, I would say add it to your watch list, track it over time, and I wager there will be a time a year from now, three years from now, five years from now, where this company will be back on your radar again at the right price.
Damodaran bought NVidia (NVDA) at a “slam dunk bargain” price in November 2022. In the same spirit, I had bought Meta (META) in November ‘22 and Tesla (TSLA) in January ’23, both were also trading at slum dunk bargain prices back then. I chronicled those buys here.
Circling back to my recent inactivity, like Prof. Damodaran, I have also been working on identifying high-quality, durable businesses (other than what I already own). I might not want to own them at today’s prices but as Damodaran says they could become attractive bargains someday. Here’s my working list so far. I have not owned any of these stocks before. Nor am I ready to start buying one today. I am still studying them to figure what I like (or dislike) about their business models.
- NVidia (NVDA): founder-run, best graphics/AI compute technology
- Netflix (NFLX): founder-run, best streaming platform worldwide
- Brown & Brown (BRO): management-owned insurer-broker
- Copart (CPRT): founder-run, salvaged auto auctioneer
- U-Haul (UHAL): family-owned, moving/storage operator
- Sherwin Williams (SHW): 156-year-old paint retailer