🧠 Sea Change
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Friends,
Let’s talk about two destructive phenomena — one benign, one dangerous.
- Moths flocking to lights: Moths die by the millions getting too close to light bulbs.
- Diabetes: Between 1990 and 2020, the incidence rate of Type II diabetes increased by 50% in highly industrialized countries.
For over 99% of Earth’s history, moths had two reliable compasses to navigate the night: the light of the stars and the moon. Using transverse orientation, they made their way through their environment.
For over 99% of human history, people unknowingly followed a simple rule to make sure they didn’t go hungry: when sugar is available, eat it!
In both cases, a general rule was reliably helpful. They worked for millennia.
The problem: our environments have changed drastically. But when the environment changes, we are often very slow to change our rules.
Thus, the armor that protects us too often becomes the guillotine that ends us.
It’s a maddening problem — and the same is true in investing.
We have spent the vast majority of our investing lives in a zero interest-rate environment. It’s the only water we’ve ever swam in.
The general rule that we learned during this time period was “de-emphasize valuation.”
In other words, the quality of the company (moat, management, growth…etc) was far more important than the short-term valuation. Buying a great company — even when it was “insanely expensive” — became the rule to follow.
Until recently, this ‘rule’ worked great.
But, over the past 12 months, the environment has changed. The simple rule that aided our success has quickly turned into a liability.
Over the last year, we’ve acted like a moth flying towards the sun, only to discover the painful way that it was, in fact, a light bulb that we were after.
Famed investor Howard Marks called this a “sea change.” We whole heartily agree with that assessment.
Now, that doesn’t mean we’ve abandoned our core investing principles — but it does mean we have to look at our environment with new eyes.
We’ve been forced to unlearn the rule “de-emphasize valuation” and replace it with “emphasize valuation.”
When the environment changes, the rules that once protected you come to harm you.
A quote by John Maynard Keynes sums up this lesson nicely:
Wishing you investing success,
– Brian Feroldi, Brian Stoffel, & Brian Withers
In Partnership with Tim Urban
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One Simple Graphic:
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One Piece of Timeless Content:
Are you a fan or Peter Lynch? You can listen to his classic book “One Up On Wall Street” for free on this Youtube video.
One Twitter Thread:
If you’re a dad (like the three of us are), you’ll love this thread by SaveYourSon on 20 life lessons to teach your child:
January 6th 2023
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One Resource:
Need to send someone private information? Check out 1time.app. This free tool allows you to easily share encrypted information with a friend or colleague (like a user name or password).
One Quote:
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More From Us:
👨🎓 The reviews of Valuation Explained Simply are fantastic! We are considering offering access to the video replays. Would that interest you? Click here to let us know.
📗 If you’ve read Brian Feroldi’s book, he’d love a review.
👨🎓 The next cohort of Financial Statements Explained Simply launches in May. Click here to join the waitlist and be notified when enrollment is open.
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