Geopolitical events and the markets

You wrote in your “Inflation, Ukraine and Portfolio Updates” letter, “An even more diminished Russia will likely have little impact upon American investors.” That is likely true per se, but at the same time, the markets have reacted strongly as different pieces of news about the invasion emerge, and events have clearly had an impact on oil prices around the world, which in turn has implications for industries across the board. If Russia’s actions are having those kinds of impacts, don’t they also have implications for investors?

The market is constantly irrational. It can be irrational for a lot of different reasons, and it can even be irrational in moments where it seems like it’s being rational. A lot of companies have gone down 30-40% just over the last 30 to 60 days. Is that rational? If it’s rational today, then it couldn't have been rational for them to price it 40% higher a month ago.

From February 1 to March 1, 2022, Facebook/Meta lost over a third of its value. Even more dramatically, back in September 2021, it had a market cap over $1 trillion. Today it’s nearly half that. Was it really a trillion-dollar company then and only a $575 billion company today? World events have changed, but Facebook is largely the same.

Rapid fluctuations (up or down) are just how the market reacts to different events that, in hindsight, just look like footnote, even if they seem to be all we can think about at the time. There's a certain myopic behavior in the market: a lot of short-term thinking, liquidity, and high levels of emotionality. That leads to a market full of volatility and inconsistency.

That’s what we’re seeing right now in relation to the Russian invasion of Ukraine.

I try not to worry about these kinds of market up- and downswings as long as the core investment continues to make sense over the long term. I also wrote in that letter something that remains at the heart of my investing philosophy: “Regardless of when that volatility resolves, though, the GDS Investments philosophy remains our guide – to invest in foundationally strong companies which are well-positioned for long-term growth.”

If you have a business that's doing all the right things, that’s growing, and that’s generating increasing amounts of earnings and free cash flow, then that business will get more valuable over time, regardless of what’s happening in the moment.

Irrationality does have an upside. A perfectly rational market would never provide opportunities to buy at value. The overreaction of the market is what separates the price of an asset from its inherent value. When the market puts prices below value, that’s when we buy.