Important: Before considering any investments, please ensure you understand what to expect.
It might not be a panic, but there’s certainly fear about the stock market in the media. Yet, you wouldn’t know it looking at the prices.
Three times, since Buffett took over Berkshire in 1965, its price has dropped by more than 50%. During the GFC, even average home prices fell by half in some areas. The small market movements of this year’s first quarter are just noise compared to that.
The bubble is still alive and well. Investing in the market is still very risky.
If I had to predict how this bubble bursts, I’d say it’s going to start with the market for private credit. That’s hardly an original thesis (it’s been covered in Howard Marks’ latest memo), but I’ve been looking into the private credit market for some time and can’t see how this could end well. If it blows up, it’s likely going to take down private equity too, and who knows what the results of that would be.
The best protection, of course, is to ignore the broader market and even your own intuition about where prices might go and focus solely on the fundamentals of individual businesses. Buying businesses you understand at a significant discount to conservatively estimated intrinsic value (= with a high margin of safety) is the best way to sleep well no matter what the market does. In the long run, it beats every other investment strategy.
That’s why I am now almost fully invested despite believing we’re currently in a bubble. I’m not trying to time the market; I’m just evaluating the businesses in front of me. The majority of my Q1 investments were in the travel and energy sectors, where prices dropped by as much as 30% (TUI, Samsonite). At that level, I couldn’t resist despite my cautious view on the market.
Well, it’s the margin of safety, of course. In their letters, Nick Sleep and Qais Zakaria have introduced it as the “price-to-value ratio”. A ratio of .7 means your portfolio is currently valued at 70% of intrinsic value. So a drop in prices (without a drop in intrinsic value) improves (lowers) the ratio, making it more likely for the portfolio to outperform in the future. It’s such a simple idea, but few people look at it that way (and fire their manager at exactly the wrong time, after a year of “underperformance”). In a way, past performance doesn’t matter much - what counts is that you invest at a low ratio of price to value.
This whole approach relies on one thing: actually trusting your valuation work. But if you do, all you need to care about is the P/V ratio. It doesn’t matter if I’m looking at public or private companies, market leaders or bankruptcies, stocks or bonds.
Probably the most powerful feature of this method is that I’m able to invest my entire liquid net worth in 5-10 companies and still sleep well no matter what prices do. That wouldn’t be possible if I put my money in overvalued AI companies (or an index right now) on the assumption that prices in will keep rising.
My portfolio stands at a ratio of .54. If it takes three years for price and value to converge, my annual return will be about 23%. I sleep well.
This is my current portfolio - and your starting point, if you want to mirror my performance going forward. For details, see “How To Use”.
Paid subscribers received live updates on every transaction.
I have unlocked my latest live update on TUI for everyone, so have a look if you want to know more about the current situation.
Pabrai’s bet used to be a mix of coal and oil. I have recently sold the oil companies at a great profit and doubled down on the coal bet (AMR & HCC).
Check out my latest analysis on Samsonite to see why it’s the newest addition to my portfolio.
Let me know if you have any questions.
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