I love cycle
We can use cycles in a myriad of sectors to invest in quality businesses and assets, run by outstanding managers, at bargain prices.
There are many breeds of investors out there. Each different from the next. Different styles reflect different educations, different life experiences and different personalities. Now there are also algo-investors, which reflect different timeframes and theories for Alpha generation.
We at Cobas deal with what people call Value Investing. But even within this narrower field there are multiple shades of grey. Some say they invest in value but quality comes first. Others say they invest in deep value. Others favor small caps. To be clear, tags are just tags – we just care about common sense, what things are worth, what one needs to pay for them and what risks are involved. This is no different from buying shoes, cars or flats, or from paying for holidays, all things that people do in their daily lives.
As we scour the World looking for hidden gems we have to be realistic – top gems, in plain display in a reputable store in the High Street will ask for top dollars. That is great quality regardless of price. There is no skill in that to be honest…and that is not the job an asset manager charges fees for. We work hard to unearth gems hidden in forgotten places, or discarded gems which have value for different uses, or even better gems which just need to be polished and cleaned up to show their true worth. Our gems will be businesses run by good managers, profitable businesses which are unlikely to disappear in the foreseable future and which also hopefully own concrete valuable assets such as cash, land, buildings, stakes in other companies etc. We do care about quality a great deal. Both quality of businesses and quality of investments – the price paid for them being a key driver or the latter.
One great way to find hidden investment gems without compromising on quality is to look for them when the tide is periodically going out and the others run away in case a tsunami is coming next. These are cyclical gems. It is surprising that such market inefficiency exists but it is there. Cycles aren´t bad though, they don´t impair quality. They are no different from the cold, or the rain or the wind…Rain is bad in your wedding day…and great for agricultors. And what about wildfires? They clean up the veld and make room for green shoots. Equally cyclical fluctuations are good and needed in some industries – they separate the grain from the chaff, make surviving companies stronger and more dominant and keep overinvestment in check. Business cycles can even work as entry barriers discouraging new entrants as they have to get timing perfect.
Cycles are simply part of the nature of some businesses and also part of the market. They have always been there, and they always will be. So we expect them, we deal with them and we use them to our advantage. Our job is to understand the fluctuations and tell apart cyclical changes from structural issues. Within that we strive to identify the companies which will profit from the cyclical pattern, based on their historical track record. Also we try to gauge how far can a cycle turn, how much grass there is to burn before the wild fire will extinguish itself. When the market overreacts to the short term we get our chance, the chance to use our greatest advantage of all – our longer investment time frame. This is how we can use cycles in a myriad of sectors to invest in quality businesses and assets, run by outstanding managers, at bargain prices. I wish there was a sticker for my car like this – I LOVE CYCLE.