It's the first Friday of the new year. So I'm back with my now-regular Friday format.
Have a great weekend!
Redundancy, where art thou?
(No, not that sort of 'redundancy', boss!)
Apparently, there are moves afoot to do away with a co-pilot on some commercial flights, leaving the cockpit with just one pilot.
Now, I'm no aviation expert, but that feels risky to me.
It also feels emblematic of the last three years — both government and business.
I'm all for 'efficient' government. It makes sense to get full value for our tax dollars and to eliminate waste and duplication, doesn't it?
Except when it leaves us in the lurch.
Companies face similar pressures. If they have too much cash and not enough debt, the balance sheet is considered 'lazy' by investors who are keen to juice their returns by getting the company to pay out that cash and increase borrowings (leverage — using 'other people's money' — can mean (much) higher returns, if nothing goes wrong).
You don't even have to think too hard to find examples of where this has brought us unstuck:
- We had insufficient PPE when COVID struck, and woefully unprepared quarantine options.
- We have no gas or oil reserves to absorb a price shock. (Or, frankly, a national oil and gas policy to speak of.)
- Companies like Webjet had to almost double the number of shares on issue to stay afloat during the worst of the pandemic because they didn't have enough cash on hand.
- Qantas needed a massive government bailout (don't get me started on the fact they're not going to pay any of it back, despite a billion-dollar-plus forecast profit!).
We're used to the 'r-word', redundancy, being applied to jobs.
But it applies – in a positive way – to planning.
It means making sure we have a fallback. A Plan B. It doesn't mean we need to do away with efficiency, but it makes sure we're still alive and kicking when the good times come again.
Now, I have some views on the political and policy arena, but those are for another day.
But, investing-wise, it's something I reckon we need to keep front and centre.
In two ways:
Firstly, set up your own finances accordingly. Don't use too much margin debt. Preferably none at all. And have a rainy day account, so you're not wiped out if the unexpected happens.
And secondly, think about the businesses in your portfolio. How do their finances look? Are they playing an 'all or nothing' game? Or are they making sure they're covered if things don't work out as well as they hope?
I think we want a second pilot in the cockpit of commercial airlines. And I think we need to set our finances up the same way.
Remember both parts of investing returns
As we go into a new year, I wanted to share an evergreen reminder.
There are two parts to an investment return: What happens and how the market responds to what happens.
And it may not be as obvious as it seems.
The COVID crash is a good reminder. Shares fell 38% before anything had actually happened economically. But the market was anticipating.
Similarly, the market recovered before the economy, and profits, started to move upward.
Again, anticipation.
Meaning?
Well, the general expectation is for a tougher economy in 2023.
I have no idea what will happen, but that expectation does seem reasonable, given the pressures.
And share prices?
That's trickier. And, in the short term at least, relies on sentiment.
I can't give you a forecast. I do think, in many circumstances, share prices already seem to reflect a decent amount of pessimism, so that might provide opportunity.
But I wouldn't be at all surprised if 2023 has more than its share of volatility.
Quick takes
Overblown: Predictions. No one knows what the future will bring. Moreover, the more likely the outcome, the less valuable it is. And if it's not likely, then the odds of it being right are… long. In other words? Useless, in either case. We humans love certainty. And we love the idea that maybe, somehow, we could get a glimpse of the future. But we can't. Make your peace with it.
Underappreciated: I wrote, in this space a few weeks back, about 'small wins'. But I want to expand, just a little. Life is always changing. Some of those changes get headlines. Others stop being 'newsworthy', but don't stop happening. I saw some new figures about the continued growth of e-commerce during the week. Tech job cuts are getting the headlines, but the overall trend continues. I reckon you should invest accordingly. And look for other similar trends.
Fascinating: Housing is going to be fascinating to watch in 2023. Rates have further (upwards) to go, but rental vacancies remain tiny. I'd expect prices to keep falling while rates rise, but I'm not sure how long that'll continue to be the case once the RBA is done. On the flip side, those low vacancies should support the building industry for a while to come. (We have to have a population debate at some point, too. But that's a prickly one, with too much room for xenophobia if handled badly.)
Where I've been looking: Yes, I still think there are lots of options for investors prepared to do the legwork. Everyone looks like a genius when the market is rising and (almost) every stock is going up. But when the market is pessimistic, you can assume babies will be thrown out with the bathwater. That doesn't mean success will be quick, even if we're right, but it should be worth it in the long run.
Quote: "I think we judge talent wrong. What do we see as talent? I think I have made the same mistake myself. We judge talent by people's ability to strike a cricket ball. The sweetness, the timing. That's the only thing we see as talent. Things like determination, courage, discipline, temperament, these are also talent." – Rahul Dravid
Fool on!
