December 26, 2012
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Hands down, my favorite part of this job is getting to see how things are made.
Don't get me wrong... data, billing and design centers all have their virtues. But they lack the unexpected poetry found on the factory floor: a gentle rain of salt falling on cracker dough; the glow of a blast furnace; or, in the case of our last visit, the molds for fiberglass boats, as eerie as horseshoe crab or cicada molts.
Out there on the factory floor is the reality that our spreadsheets struggle to capture.
The week before last we were in Florida, visiting two of Brunswick's manufacturing plants - one makes Boston Whalers, the other, Sea-Ray yachts. The Boston Whaler is the more well-known brand, famous for its "unsinkable boats."
Not "unsinkable" as in the empty promise that was the Titanic, either. These boats are literally unsinkable, as in "saw it in half and it still floats." Or ride it over rapids (even, legend has it, Niagara Falls) and it still floats. All thanks to its unique construction of a double hull filled with foam.
All of this newly acquired knowledge on boating unsinkability had me wondering if there is some magic foam we can inject into our investment process, something along the lines of creating "unsinkable conviction." That's because conviction is necessary to ensure clear decision making and success in our business.
After all, investing is part facts and figures (where debates are fairly easy to settle), and part squishy things, like trying to predict the future and trying to quantify how much fear or greed is already reflected in a stock price (lots of controversy, unsettleable by facts). Without conviction, emotions trample decision making - and there you are, stupidly selling fear (cheap) and buying popularity (expensive), rather than buying hatred (low) and selling euphoria (high).
Today, and even though the VIX (a measure of volatility) is down a lot this year - meaning that markets in aggregate have whipsawed much less than last year - individual stock names can still be plenty volatile. There are a number of reasons for this, from the large number of short-term investors who dominate the investment landscape today, to the fact that news simply gets discounted faster (some argue more precisely) than before.
Whatever the reason, when you combine that with data suggesting that low volatility stocks, the winner of the long-term performance sweepstakes, are hideously expensive (another newsletter topic, perhaps) it means that to find value you have to seek out stocks with high volatility.
[Translated into English: Stocks that don't go down and up a lot, but are instead very steady in the long run, have historically ended up outperforming those that have violent rises up (typical of expensive high-growth darlings) and down (when growth disappoints, valuation gets crushed and sometimes both never recover). The point is, if you want to find value today, it's probably going to be accompanied by a large dose of seasickness.]
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