Ruminations

It’s been a while since I last wrote, so I apologize. I know you were waiting with bated breath to hear from me. That was sarcasm for the uninitiated. 😉 Let’s dive in then.

We’re living in an interesting period right of time right now. Sanity has returned to the investing world, we’re no longer having meme stocks soar 100% daily, and crypto has crashed. Multiples on profit, and revenue, everything has come back down to a more sustainable level.

With all the pain and misery that correction caused it was a very good thing. Why?

Because none of that was sustainable, in fact, one could even argue that periods of excess such as 2021 are much more hazardous to the long-term health of the country than periods such as the one we are living in.

The reason is pretty simple. When capital is free, people make really dumb decisions on where to allocate it. You could see that in every market. The deal terms, prices, and velocity all were 2 to 3 standard deviations or higher from a historical standpoint. It incentives over-hiring, and extreme risk-taking which then makes the allocation of resources misaligned with their best purpose. Even if capital is free for a period of time, we are always working with a finite amount of hard resources. This leads to imbalances that take lots of time and are hard to correct.

If you take a step back and look at history and trends from a multi-decade point of view, you’ll start to see that it acts like a pendulum. Constantly going back and forth. At the apex of either side of the swings you get extremes, however, for most of the swing from one side to another, you are in a “normal-ish” situation swinging back to the opposite side and opposite extreme.

The only thing that changes during these swings is the duration, and perhaps more importantly the amplitude from the nadir of the swing to the apex. Sometimes the duration is slow and multi-decade, other times it is months rather than years.

Either way, one does not need to know the exact time we hit the apex, nor the nadir, what one needs to know and understand is what part of the swing we are in and be able to recognize the signs that correspond with it. That part is actually easy, IF, you remove your emotions, look at the whole rather than parts AND start looking at investments (money, your time, focus) in multi-year increments rather than society’s insanity with its focus on the here-and-now.

So on to the crux of this post - with all that 👆being said, there is much irony going on right now. Investors are scared, deploying capital at a much slower rate because of the “uncertainty” Hell even Elon Musk said recently, that leveraging in a down market is bad. This is asinine. It is far better to initiate leverage into your positions in a down market than it is in an upmarket (please don’t overextend ever, that’s the single biggest killer of businesses and success). The reason is simple. The amplitude from the top of an apex to the nadir is far greater than from any other point to the nadir. Which means you have far more to lose in excessive markets than in down markets…

The best time to invest and even initiate leverage is when the markets are down and multiples have dropped closer to historical norms or below. You have excellent asymmetric risk-to-reward situations with high upside and low downside whereas, in major bull markets that are frothy, you have the reverse, a much higher downside than upside.

Right now there are a ton of excellent opportunities to deploy. Act accordingly.

Per ardua ad astra