Pivoting

By Andy Chen

Life is never stagnation. It is constant movement, un-rhythmic movement, as well as constant change. Things live by moving and gain strength as they go. -- Bruce Lee

Since 2nd?half of 2021, the global inflation has been slapping every analysts and economists on Wall Street back and forth. “Transitory”, a favourable term to describe the inflation then, becomes a mere wishful thinking, as the high-rising inflation has been “transitory” (more precisely, lasting) for almost a year with no signs of stopping or ready to peak.

The inflation in the US even accelerated to a fresh 40-year high with the latest announcement showing an unexpected 8.6% rise in CPI in May 2022. It certainly sends out a clear signal of inevitable Fed rate hike in a faster pace and higher altitude, which leads to a gloomier picture of global economy and markets. The recession might be sooner arriving on our doorsteps than everyone anticipates.?

“Stagflation” becomes a popular term now to be used by many analysts and economists on Wall Street and it seems that they have already predicted the coming recession same way as they predicted the transitory inflation in the past. Whilst we are looking for recession-proof and anti-inflationary investment targets for a possible long period of turbulent and contracted market downturn in the future, however, we may re-examine the immediate approach and plausible solution from a longer time horizon and broader perspective.?????

Gigantic macroeconomic predictions are something I’ve never made any money on, and neither has Warren. -- Charlie Munger

Charlie Munger and Warren Buffett

It is tempting to rely on the macroeconomic outlook when deciding where to invest. Investors may use recent economic data to decide how much risk to take with their portfolio. However, the unpredictability of the economy’s performance often misleads investors on the macro level. Previous recessions and depressions have not been widely predicted during periods of growth. Likewise, many economists and commentators fail to accurately forecast a recovery during challenging economic periods.

By contrast, the Value Investing from the micro level has been adopted in various forms by world’s greatest investors.?Value Investing is an investment paradigm that involves buying securities at less than its intrinsic value. The various forms of Value Investing, deriving from the “Cigarette-butt” investment philosophy by Benjamin Graham, are taking new shape in finding the outstanding company with margin of safety in valuation.

Benjamin Graham

From micro level, facts and figures such as company debt levels, past profitability and return on invested capital can provide guidance on a company’s financial strength, barrier to entry and its overall strategy. Those criteria will then enable investors to identify outstanding companies which may be in a strong position to overcome/benefit from a recession, and to capitalize on favourable economic conditions.?To put into a more layman term: such outstanding company performs consistently well through thick and thin.

Among all those criteria, the most important one to determine which company to invest is to look at its overall competitive edge. There are many measures or dynamics to look at it by market standard, things such as barrier to entry, economy of scale, brand loyalty, product addiction etc… by the word of Charlie Munger or Warrant Buffet, is the “Moat”. According to those two brilliant legends, the only constant of these dynamics to endure the competitive edge and enjoy long-term of robust growth is the constant change. And the constant change here I reckon is not the “moat” itself, but the ability of “pivoting”.

It is the “pivoting” that empowers entrepreneurs to build their fortress to fend off the competitors. It is the “pivoting” that enables companies to outlast the cycles. The hallmarks of “pivoting” of any outstanding company can be summarized as follows:

1. The management capability of allocating/re-allocating capital and resources to right places to enjoy robust competitive edge and growth;
2. The culture of a company in a rapidly changing industry to be always a few steps ahead of its competitors, which allows it observing on the edge, enduring competitive advantage;
3. The vision of a company beyond the current competitive landscape, be able to be well adapting/enabling/leading into the current digital economy under the current wave of mega-technological changes.

There are many variables in the market that can drive the economy into different directions. The policy makers and the invisible hands have been tangling throughout different cycles. The uncertainties on the macroeconomic only create inconsistency on the investment itself. As an investor, the only way to keep the competitive edge is to pivot, allocating the capital to the right place to enjoy great compounding growth in the long run.

Value investing certainly provides a simple solution, but on a broader perspective and longer time horizon.?Recession will always come and go. Changes will be more frequent and rapid in the era of mega-technological transformation.?However, the outstanding company will always be there, pivoting, enduring competitive edge, and enjoying robust growth in the long run, together with the investors who invest in them.

（The author is the co-founder, Chairman of the Board and CEO of DL Holdings Group Ltd.）