Scuttlebutt Mailbag - Letter #1

by Scuttlebutt Investor

It has only been a short time since launch, but I have already started getting questions from readers.  So I have decided to respond to investing questions from readers with concise (I was told my last article was a bit long!) and easy to understand responses.  This first question comes from a reader in South San Francisco:

Q: "Will this bull market continue for several more years?"

A: To put it very simply, I don't know and I won't purport to know which way the market is going.  Mark Twain said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."  You can probably find about a thousand economists, "experts" and CNBC talking heads out there that are willing to provide an opinion on the way the market is going to go, but the reality is that they don't know either.  The few "experts" that do end up getting it right will do so primarily due to dumb luck (although they will pass it off for skill after the fact).  The truth is that cycles will never stop occurring so this bull market will inevitably come to an end at some point and be followed by a bear market to be followed by another bull market and so on and so on.  There are many technical indicators (e.g. Shiller PE ratio) that have been used to predict when these turns will happen, but for every "expert" that tells you the market is expensive using statistical data, you will find another "expert" that will tell you the market is cheap using other statistical data.  

So how do you confidently invest amidst this uncertainty of the macro future?  Well, first you accept the fact that you can't and won't know what the macro future holds.  Then, you invest in a way that doesn't require perfect knowledge of the macro future.  For example, the investment thesis that I recently put out on Visa and MasterCard is predicated largely on a secular trend of people moving from cash payments to card/digital payments.  That secular trend was uninterrupted by the great recession of 2007 to 2009 as we saw both Visa and MasterCard's revenue rise (double digits in most cases) in those years.  And with ~85% of the world's payments still made by cash or check, I fully expect this secular trend to continue for at least several more years .  Now, does that mean that Visa and MasterCard's stock prices or even revenue definitely won't go down if the overall market takes a downturn?  No, of course not.  In the short term, stock prices (and revenue/profits) are often impacted by macro events, but in the long term, business models with a durable competitive advantage will remain intact and continue to generate strong profits.  If we knew for sure when the market was going to take a downturn, surely we could sell and even short to make even larger profits.  However, the reality is that no one realistically knows when a downturn will happen so investing based on the illusion of knowing when is a fool's errand.  

In summary, I nor anyone else knows if this bull market will continue, but we can invest in a way that doesn't require us to know the macroeconomic future to be successful.  We can do this by investing in strong businesses with a durable competitive advantage and low leverage (debt) that can outlive short term economic downturns.  Seeking a margin of safety in price relative to value doesn't hurt either.