Slow Money, vol. 87

portfolio eight point zero

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Subscriber,

Several days back, JPMorganChase CEO Jamie Dimon termed US stock prices “kind of inflated.” He is kind of right (see above and below).

But for now other bubbles are bursting. Two-thirds of billion dollar bankruptcies last year were private equity-backed companies. The reckoning for the $8 trillion in deals made primarily when money was artificially cheap/easy and primarily to generate fees for money managers is upon us. No one has yet taken me up on funding a fund to dig through the nascent bargain bin, but there’s probably no rush. Because even with $7.5 trillion in private equity investments languishing in deal purgatory, the total is still growing thanks to lazy and corrupt public fund managers even as the “animal spirits” supposedly released by the new administration are looking a bit, well, dispirited. Here, for example, is what happened last week when Venture Global, the second-largest LNG exporter in the U.S., launched the fourth-largest IPO since 2000, per CNBC:

The company had priced its initial public offering of 70 million shares at $25 to raise $1.75 billion for a total valuation of about $60.5 billion. But the stock opened 3.8% below that price at $24.05 when trading began on the New York Stock Exchange on Friday afternoon.

Even before that opening trade, Venture had already steeply slashed its IPO price from its original target. The company had originally planned to offer 50 million shares in a range of $40 to $46, which would have raised about $2.2 billion at the midpoint for a total valuation of $110 billion.

In other words, Venture’s investors got a $50 billion haircut on their way out.

So the question on the intelligent investor’s mind should not be if or when to bargain hunt but whether, as in whether they should do it themselves or leave that up to the professionals, say Berkshire Hathaway’s Warren Buffett or Pershing Square’s William Ackman.

The answer is complicated.

Something I’ve learned from teaching Ben Graham is that investing questions that are facially simple, even binary, become as complex and conflicted as the personalities making them. And fast! When I started writing this newsletter I was kind of flippant about the personal stuff. Of course one should do it yourself because that is the whole point of intelligent investing, I thought. As Graham wrote, very few professionals will actually invest for you (as opposed to speculate or piggy back). And investing can be learned rather quickly and the math is basic and so on and so forth. Graham’s big caveat, that everything rests on the investor’s character, and therefore not everyone can become an intelligent one, has often been sidelined here in my zeal to share methodologies. I’ve since learned, from managing other people’s money, the primary importance of character.

So Buffett and Ackman both offer compelling alternatives to DIY. They are publicly available and their characters are well-established and battle-tested. And yet…their success puts both at a serious disadvantage (particularly Buffett) by virtue of their funds’ enormous sizes. Giving them your money is like jumping from a speedboat onto a supertanker. But if you lack confidence in your judgment or discipline or both, the fastest way to get there is slowly.

On the other hand, if you can believe in your own judgment versus the market’s at any given time, which is to say if you are willing to decouple the ideas of value and price—and if you can maintain confidence in your own judgment when prices move against you, then jumping from a nimble boat onto a behemoth would be not only foolish but wealth destroying.

So there’s the trade-off of the great sell-off.

In the meantime, having just finished my analysis of the UK and Australian stock markets, I’ve come up with a new portfolio of ten durably profitable and attractively priced publicly-held companies. As with previous portfolios, I’ll update this one (lucky number eight) when necessary and track its performance versus the S&P 500 benchmark all year. You’ll find its components, along with this week’s cigar butt, behind the paywall. You’ll also find the updated list of twenty-five Cheapstakes, i.e. the investable stocks with the most quantitative value relative to price.

Spoiler alert: only three of the portfolio’s ten components are based in the United States. This may change as I begin my analysis of American stocks later this month, the portfolios being reallocated every few months, though I wouldn’t count on it. The problem with American stocks, as with nearly all things American, is that they are simply too expensive at the moment (see above). I say “at the moment” because few things remain expensive for long. Of course it’s tempting to pay a premium for a company that’s listed on an American exchange, that you read about in The Wall Street Journal or Bloomberg, whose CEO gives interviews on CNBC, and so on and so forth, just as it may be tempting to pay $300 for a designer t-shirt or $180 for a limited-edition* Trump pickleball racquet (or maybe not!) but whatever. Keep in mind that it was Oscar Wilde and not Warren Buffett who could resist everything but temptation. Also that the most primal of animal spirits is fear. Greed is not even close.

Finally, remember Venture Global as Texans remember the Alamo. Because scalping is unpleasant, or so I’ve read.

James