Issue 20
November 2020
I had already written a newsletter this month exploring how investments would react to a potential vaccine. Considering we have received a number of readouts with positive data, that newsletter is a little stale. That said, I want to highlight the advantage I have with an investor base willing to look through short-term volatility and focus on long-term goals. The benefits of this alignment bore fruit in November as our portfolio was positioned to take advantage of COVID recovery plays, rather than COVID beneficiary plays.
Throughout this newsletter I have written about how important it is to have a long investment horizon. 2020 serves as pretty solid evidence the ability to predict things in the short-term is minimal, at best. It also why I look to partner with people willing to invest for the long-term. Having partners who trust me to act in their best interest, has allowed me the freedom to make investment decisions with a focus on maximizing long-term returns.
This alignment allowed me to position the portfolio to benefit from COVID recovery plays. The thesis being certain investments are trading at very cheap valuations, attractive economics, long growth runways, and known catalysts over the next 3-12 months. In the short-term these stocks have been volatile and not in a good way. However, those willing to stomach these gyrations benefited from strong stock appreciation in November. The outlook for 2021 is equally robust with news this morning breaking of the MHRA in the United Kingdom saying Pfizer’s vaccine is safe to rollout and 800,000 doses will be available this month.
The freedom to make these types of investments stems from conversations like the one I had back on March 10 with an existing partner.
____________________________________________________________________________
Bill: While the move in the market over the last month has been painful, please know my focus is on helping you reach your long-term financial goals. It is during these periods of uncertainty we need to focus on our plan and what we can control …
I know it is painful seeing your account down so much over the last month. However, I have attached an updated Retirement Plan Scenario like the one I gave you when we first started working together. Using fairly conservative return expectations, and high growth in expenses you are still on track to be able to meet your long-term financial goals.
Partner: Thanks very much for the updated information.
We have been in the market long enough to know that we just have to ride this out, but it's nice to know that you have our back.
____________________________________________________________________________
In April, many investors were thinking about how they were going to do in 2Q20. In my March newsletter I wrote, “My attention has turned to focusing on the next few chapters. I am looking for businesses and industries that will come out of today’s environment stronger than they entered.” Only by having this alignment with my partners and my investment process could I take advantage of some of the dislocations in the market caused by COVID-19. Fast forward eight months and this advantage is bearing fruit.
An example of this mismatch between short-term stock price movement and long-term fundamentals can be seen in Marathon Petroleum ($MPC), a name I mentioned in my August issue. As the chart below highlights, Wall Street is not focused on what this company looks like in 3-5 years. Rather it is focused on what it will look like in 3-5 months.
If we look at the 2020 EBITDA estimate for MPC it has declined ~67% this year from $8.1b to $4.2b. If we look at the 2022 EBITDA estimate for MPC it has declined ~18% from $10.7b to $8.7b. The average Wall Street price targets for MPC has declined ~42% from $79 in January to $45 today. The key insight being Wall Street expectations are more highly correlated to near term estimates, not long term. This dynamic eliminates a lot of competition. Few investors have capital willing to patiently hold through short-term uncertainty (aka volatility) like we saw in 2020. This eliminates a lot of competition.
I like playing games where I have a competitive advantage. Just ask my roommates from college. I kicked all their butts just about every night in Mario Kart 64. I bring that same competitive edge to investing.
Interested in learning more about me and my investing strategy, I would love to talk with you.