Cash profits are the tell
In every bear market the value of some businesses are destroyed forever. (And yes, this is a bear market.) In the 2000-2002 bear, it was the Dot-Com stocks without business profits that never recovered. In 2008, it was the financial stocks that had “pretend profits”— Citibank fell from $550 to $10, and is now trading at $45.
Below is a table of the best performing stocks of 2020 (in green) and their losses since the beginning of 2021 (in red). This truly is the center of the storm. The losses range from -98% to -50%. (A more readable version is attached)
What do these 58 companies have in common? Mostly non-existent business profits or at best, falling profits. They all traded mainly on increasing sales, holding out the promise of profits once they reached a certain point of success, sometime in the future. The profits failed to materialize, and those who speculated on these companies are now forced to sell.
Our portfolios have not escaped without significant damage. However, while reviewing company cash profits in our weekly investment meeting, all our portfolio holdings have remained profitable and the prospects for further profit growth haven’t changed. Our experience in navigating markets like this one assures us that the value lost in our companies this year is temporary, not permanent.
How temporary? That we don’t know. But we have learned in over three decades in this business that knowing what will happen is more important than knowing when.
Daniel A. Ogden