Unique Research - Learnings from a Most Unique Year
Updated: Sep 21, 2021
NS Capital has created a research network that gives us access to one-on-one expertise on a global scale. Better Information = Better Decisions!
Important research insights are not exclusive to industries or countries. Perspectives on decision-making and judgement are just as…if not more…important. After all, successful investing is entirely dependent on thoughtful reaction to unexpected events. 2020 certainly provided enough unanticipated situations to last a lifetime. While unpleasant, we find these times to be valuable learning experiences and impactful to how we prepare for future conditions. With that in mind, on January 4th, the Investment Committee contacted our Alpha Ring manager-partners and posed the following question:
As you look back on 2020, what was a key learning/lesson about yourself, your firm, your strategy, or the companies you invest in that you have identified and plan to incorporate into your approach going forward?
Below are their responses:
Peter Thompson (Coho Partners)
“Few, if any, money managers have invested through a pandemic. One-time events like this challenge your investment disciplines and might change your investment horizons. Those who change their investment disciplines will lose and those that do not might survive. Investing is a marathon, not a sprint.”
Marcelo Lima (Heller House)
“I think the biggest mistake most folks make is to look for simple cause-and-effect mechanics when the world is complex. Complexity means that you cannot break things down into pieces; there are layers upon layers of feedback loops and changing one factor has unpredictable effects on the workings of the system. More recently, forecasts surrounding SARS-CoV-2 and the elections have been similarly mistaken. At the bottom in March, many folks were forecasting the economy at the end of the year by using simple extrapolations ("we'll have mass unemployment and recession" or "we'll be back in arenas by Q2"). In October, many were forecasting doom if the democratic nominee won, resulting in higher corporate taxes. These are a few examples; it is impossible to make forecasts of complex systems, but we keep trying, nonetheless. It's an important lesson to remember.”
Nels Wangensteen (MayTech Global)
“I was very happy with how seamlessly MayTech was able to respond to the crisis and maintain operations while working from home without missing a beat. This highlights the competitive advantage of companies which have invested in up to date “cloud based” technology. This was also an opportunity for each of us to learn which of our activities are “non-essential.” We all learned that a lot of the business travel we do can be replaced with on-line meetings. Additionally, media news broadcasts can be very negative and repetitive which can lead to a very depressed feeling about the future. It is very important to stay informed but also to filter out all the noise. During a crisis, it is important to look beyond the fear, own companies that are well capitalized and well run, and have services that provide value to their customers.”
Chris Mayer (Woodlock House)
“One lesson (re)learned in 2020 is that owning unique, trophy assets can provide a margin of safety during times of stress and can give you confidence to buy more. Usually, investors think of margin of safety in terms of price and value alone. But if you own one-of-a-kind assets -- think Ferrari or Universal Music Group (which owns ~40% of all recorded commercial music) or ownership of exclusive rights to Domino's Pizza franchises in the UK & Ireland -- these can become even more desirable during troubled times because of their reliable earnings power and strong competitive positioning.”
Matt Haynes (Sprott Asset Management/George Family Foundation)
“Benjamin Graham taught generations of investors many timeless principles over the years, and we continue to hold these as basic investment truths in helping to guide us through tumultuous periods like 2020. Paraphrasing one, in light of the volatile year just passed, is “you are neither right or wrong because the crowd agrees or disagrees with you. You are right because your data and reasoning is right.” The very nature of markets guarantees that security prices will regularly deviate from reasonable estimates of fair value. Avoiding self-doubt during dramatic market declines, such as we had in February and March, comes from analyzing the data and reaching a reasonable conclusion with confidence. Maintaining an unemotional long-term approach to investing in this manner helped us to selectively buy low during the market swoon, and to sell high into recent strength.”
Dan Lysik (Miller Value Partners)
“Our deep knowledge of our holdings, business model, balance sheet, asset base and free cash flow focus became very important, providing a significant margin of safety to navigate during the year. The knowledge of our holdings provided us confidence to add to positions of companies experiencing the greatest dislocation and bring in a new holding whose share price was at a deep price gap to their underlying intrinsic value. Prior experiences from 2000-02 and 2008-09, along with the ongoing dialogue with our management teams became very important as it provided insight on how the companies could modify their business model/strategy to navigate the downturn and accelerate in some cases their business transformations. From our 2018-2019 experience we have also remained disciplined on maximum position size allowing us to add incremental performance during 2020 by reallocating some of the position sizes of very successful holdings into better reward/risk opportunities. Finally, we are also incorporating these learnings/experiences to help us locate additional investment opportunities with similar potential.”
David Marcus (Evermore Global)
“The biggest lesson that I learned during 2020 is really more a re-affirmation of something that I have always believed. Simply put it is that crisis creates opportunity. The lesson is that this has proven to continuously hold true regardless of the underlying crisis. Covid-19 / Financial Crisis / Nasdaq Bubble Burst (back in the early 2000’s), Asian Contagion (late 1990’s). Each time the so-called experts and geniuses tell us that this time is different. However, we see that each of these devastating periods was the foundation for an incredible opportunity to take advantage of panic, stress, distress, and all kinds of fear trading. And because of these thousand-year floods…that seem to occur at least once every decade…new investment cases come along. Situations that might never had been available if the crisis had not occurred.”
While all had individualized answers, one core learning came through…belief in their analysis was empowering. Having worked together, we saw the benefits of their belief in March and April. They were prudently yet aggressively buying during the downturn, which paid significant dividends throughout the rest of 2020.
We are a learning committee. We gain insights from our own analysis and combine that with the experiences our trusted network. This enables us to constantly “dial in” our approach across strategies. Much like our manager partners, the following are our lessons from 2020: believe in our approach, stay committed, do not forecast, thoughtfully react, and…where possible…take advantage of turmoil. We are hopeful this serves us well in 2021 and beyond.