Investing Desk picks #2

Recessions are good & Mohnish Pabrai tech question to Buffett

October 23, 2020

Snir's investing desk is a newsletter focused on intelligent, value investing for the individual investor. The subjects are evergreen and deals with the essence of investing, mental models, and concepts.

Things I read

Recessions Are A Good Thing, Let Them Happen

This article describes how recessions are a healthy part of the financial cycle and how, in more recent times, the fed acts in every way to avoid recessions altogether.

I think this issue is of special interest to us as value investors. Recessions are the main generator of value opportunities.

Without recessions, and with cheap money circulating the market, the speculative run of the markets just goes on and on and on. Allowing bad companies access to cheap capital, which makes them never test their business case on "real" conditions.

One of the side effects of these conditions is the runway availability for unprofitable companies that don't need to test their business model on "real" world conditions. I'm thinking of conditions like Uber had, where they subsidized the rides with VCs money for so long that when the point came to move to profitability, they discover the customers are not that loyal with higher prices.

These kinds of companies are never good "value" companies, as we can't assess their business reliably. And as long as we don't have recessions, we can't know which companies are good enough to survive them.

Things I watch

In the 1999 annual meeting of Berkshire Hathaway, Mohnish Pabrai asked Buffet and Munger about the tech sector stocks. That was before the dot com bubble crash.

I extracted a specific gem from Buffet's answer that I think is timeless, and we can all learn from regardless of the 1999 stock market situation:

Picking good businesses vs. good stocks

Buffet makes a distinction between good stocks and good businesses.

A good stock might perform well in the near future, mainly by selling it to the next group of investors that will buy it at a higher valuation.

In 1999, regarding tech stocks, he says that may be possible and even easy at times, to recognize a stock that you'll be able to sell to the next investor at a higher price.

But finding great businesses out of those is hard. Buffet says he doesn't know anyone who can tell which company of the tech sector back in 1999 will succeed as a business.

This is an important point: In the short run, it might look like certain stocks are doing well just due to the next group of investors' willingness to buy them at a higher price. But in the long run, only great businesses will keep their value and will compound over time.

Things I tweet

Every week I tweet some threads with key insights about value investing.

Here are some of my Twitter threads this week: (Click on them to get to the full thread)