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thoughts on the 2020 market correction

3/12/2020

1 Comment

 
It isn’t often we see market actions like we’ve seen over the past few weeks. This is the kind of market where you see almost no correlation with corporate-specific data and individual stock prices. A company like Veeva (VEEV) - down from $165/share on February 20 2019 is trading at $135/share on March 12 2019 after announcing an outstanding quarter on March 4 (revenue up 34% Y/Y, earnings beat by $0.02, etc.). What is one to make from such markets? What protection is there in these conditions?
 
First, we recommend having confidence in the companies and managements that make up your portfolio. At Nintai, we seek out companies with high returns on capital, equity, assets, high free cash flow margins, deep competitive moats, and management who know how to create long term investor value. We can assure you that corporate operations, strategies, or management skill sets have not collapsed because the markets have entered bear market territory or the coronavirus has reached pandemic scale.
 
Equally, we are confident our investment partners are aware they still own a set of outstanding companies in their portfolios. Each of our portfolios have generous cash positions which provide both downside protection and the ability to add to existing positions as prices become increasingly compelling. Equally, companies in their portfolios have no debt that forces them to make desperate - and likely poor capital allocation - decisions. Occasionally you here about investors who became rich by selling at the top (like Joe Kennedy selling after his shoe shine boy recommended Hindenburg - “the moment a shoe shine boy gives you stock recommendations it’s time to get out of the markets”)  
 
But the vast majority of investors who outperform the general markets build up cash as the markets reach rarified levels, take their profits, build up cash, and await the inevitable crash. Yes, it’s the buy low, sell high concept. It doesn’t take a lot of intellectual quotient (IQ), but it takes a heck of a lot of emotional quotient (EQ) to successfully achieve this model. Here at Nintai Investments, we might not be the brightest lights on the block, but we firmly understand the concept of holding cash, buying low, and selling high. As I’ve mentioned before, we have a tendency to not make our money in bull markets, but rather preventing permanent capital losses in bear markets.
 
As for Veeva (VEEV) which I first discussed in this article, the company has no debt, roughly $1.1B USD cash on the balance sheet, grew revenue 25.8%, earnings by 50.3% and free cash flow by 60.4% over the past 5 years. Management has a clear view on where growth is coming from over the next 5 – 10 years, and are outstanding capital allocators. The fact the price has dropped by 18% in three weeks would suggest this rapid decrease represents increased value rather than increased risk.
 
As value investors - regardless of the knot in your stomach and that feeling of flight over fight - we live for moments like this. These are the days that test an investor’s ability to live by value-based credo – buy low, sell high, look for quality and value at a discount to your estimated intrinsic value, be patient and keep your emotions in check.
 
Our markets have survived a Civil War, the crashes of 1896, 1901, 1907, 1929, the Great Depression, two World Wars, the Cuban Missile Crisis, the 1973-1974 crash, the technology bubble, and the real estate bubble (just to name some!). At Nintai we believe that as prices continue their drop, opportunities at acquiring outstanding companies at a discount to their intrinsic value will provide some great opportunities going forward.        
 
By remaining calm and seeking out investment opportunities, we believe we can provide our investment partners with their best chance at long term market outperformance. As value investors, it’s what we do best. 
1 Comment
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4/26/2020 10:56:07 pm

Talking about the economy of our country, I know that my knowledge about this matter is pretty limited, so I got nothing but advice to say. If everyone will be eager enough to help the economy and they will not prioritize their self needs, I am sure that we will become nothing but a prosperous country. We need to encourage people to do something better not just for themselves but for the whole country as well. If we will do that, we will be happier.

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    Mr. Macpherson is the Chief Investment Officer and Managing Director of Nintai Investments LLC. 

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