Keeping an open mind about stock selection will be crucial next year. If investors find a good idea, they must try to ensure perceptions about the short-term macro outlook don’t inhibit their decisions. What 2020 has taught us is the importance of understanding the:
- motivations of politicians under pressure
- psychology of consumers in unique circumstances
- psychology of investors in periods of volatility, and why predicting this behaviour is difficult.
Who would have known in January that within two months, the world’s economy would effectively shut down?
Who would have known in the depths of despair in March that retailers in Australia would print some of their best like-for-like sales merely three-months later?
The point here is that the consensus view about the macro environment has consistently been wrong, and the crowd’s view has shifted materially on multiple occasions in the last 12 months.
Keeping an open mind in 2021 means that you won’t miss good investment opportunities that are hidden in plain sight. For example, if you told me at the beginning of the year that we would have invested our unitholders’ capital into Qantas, I’d have called you crazy. At the time, we were skeptical of the company’s long-term margin targets and also felt the balance sheet was strained.
When we started looking at Qantas in mid-June, the consensus macro view was that a vaccine was years away. And even if state borders were open, the broad view was that consumers would be too scared to get onto a plane, or just not be able to afford flights due to the perceived weak economy. What’s more, Warren Buffet had just sold out of his airline investments in the US, which was good enough for Qantas to be an “avoid” for all of Buffet’s Australian disciples.
Our view was that the market structure would be much better in any bounce-back in domestic tourism.
This was predicated on the fact that Virgin had fallen into bankruptcy and that the new owners would be more interested in making a profit then fighting for market share. On top of that, our view was that domestic tourism would boom when we finally came out of lockdown and state borders opened.
We thought families would get sick of toasting marshmallows at the local park and would want to head to somewhere more exotic like the Gold Coast or Rottnest Island. These two assumptions – combined with an excellent loyalty business, a strengthening moat and already one of the most profitable domestic legs in the world (Sydney-to-Melbourne) – meant that we thought that when we eventually came out of this, Qantas’ domestic business could boom.
Our problem was that we felt the balance sheet was stretched and we were unconvinced Qantas had properly re-set the cost base. We reassessed our view, and to date our revised approach has worked well so far.
Over the next year, there will be periods where stocks are out of favour and will be sold off because they don’t fit the macro narrative of the day. There may be good reasons not to own these companies. But if 2020 has taught us anything, it is to keep an open mind as the uncertainty and volatility has the potential to throw up some great opportunities with good asymmetric return profiles.
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