• Glenn D. Surowiec

What should I think about as the year ends?

Are there any financial or investment-related activities, questions, or concerns that I should be thinking about or addressing as we approach the end of the year and the beginning of a new year?

This is a good question, but the short answer is no. This is a theme that comes up for me repeatedly: as a value investor, the same underlying principles apply to my decision-making year after year. Yes, the market will run into unexpected events, and there will be risks in 2022 that we’re not thinking about today. But there are very specific determinants to long-term value; and if I can get those right, short-term financial events just don’t matter as much.


In other words, if my approach to investing means that I’m going to focus on companies that are poised to do well over a long period of time, I’m not going to agonize over the Federal Reserve’s next move in interest rates, or what consumer sentiment will be in next quarter. I focus on factors that are more discernible and more predictable.


Don’t get me wrong. This is definitely a time of year when it makes sense to be a little more mindful about our financial decision. In fact, people tend to make more financial changes in the December-to-February timeframe than almost any other time of the year. This fact may be responsible for the so-called January Effect, which is a perceived increase in stock prices in January following an increase in end-of-year buying.


But I don’t have any specific recommendations at this time of the year. If I have any end-of-year advice, it’s simply to avoid overly complicating what you need to be thinking about for the next year.


When we start trying to weave together a company-specific puzzle (is this company a good buy?) with a larger economic puzzle, it can become very cluttered as you try to weigh factor so many different questions and factors.


As long as an asset meets the baseline requirements for a good value investing-oriented buy – that means identifying qualities like sizable moats and a degree of margin of safety, a strong underlying value proposition, and it’s at a price with which I’m comfortable – then there's not anything happening right now from economic standpoint that would prevent me from moving forward. It’s not going to kill me if inflation turns out to be 4% versus 5%. By contrast, if it turns out I’m wrong about the company having a certain moat or business proposition, that’s going to hurt a lot more.


That’s why I say I try to de-clutter the decision-making process by focusing on the company-level.


Inflation maybe deserves special mention here since it’s been getting so much press attention. Earlier this year, in my mid-year investor update, I quoted actor and philanthropist Will Rogers, who said, “Invest in inflation. It’s the only thing going up.”


In one sense, I’ve done that by making sure I’m focusing on companies with strong moats, good pricing power, and low capital expenses. I am not, however, trying to beat or game inflation. If your goal is to make money around inflation, you have an equal chance of getting burned as not. You're confusing leading indicators (stock prices) with coincident indicators. When inflation peaks, those stocks will have already gone down. In other words, a lot of investors underrate the degree to which economic issues like inflation are already reflected in asset prices. The time to play short-term inflation trades was six to nine months ago.


Ultimately, all of this is to say, the question you need to be thinking about going into 2022 is the same you were thinking about in 2021, 2020, 2019, and so on: “What separates a good business from a bad business?” If you can answer that question, you’ll be well positioned to make good financial decisions next year and every year after that.


-GDS

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Glenn D. Surowiec
Registered Investment Advisor
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