If there’s anything to be learned from the last few years, it’s that unprecedented events occur much more often than one would expect. This isn’t exactly a new concept – the idea is borrowed from famous investor Seth Klarman – but the events that have taken place recently have really driven this concept home.
Since I began with Baskin in 2018, there have been several notable events that caught the world by surprise. We are currently experiencing one of them – a land war in Ukraine and the corresponding economic sanctions being placed on Russia by the western nations. This invasion was essentially deemed impossible by many geopolitical commentators only a short few months ago. There was the initial outbreak of the COVID pandemic in 2020 that shut down the global economy and continues to have knock-on effects today. Oil prices went negative. Countries closed their borders and vast swaths of the population were locked down. There was the infamous Ever Given container ship and its 6-day blockage of the Suez Canal that interrupted an estimated $6.7 million dollars worth of global trade per minute (estimates from Lloyd’s). There was the insurrection in Washington in early 2021. And if you rewind a little further, you’ll recall the missile tests in North Korea and the trade war between the USA and China.
The main takeaway for us at Baskin is that preparation is key. An investor cannot predict exactly when these events will occur or how severe the impact will be, but they can be proactive in constructing a portfolio that can weather the storm. The importance of diversification cannot be overstated – if an event occurs that causes pain in one industry, it’s very helpful to have other companies in the portfolio that operate in unrelated industries to pick up the slack. Conversely, one side effect of diversification is that not every name in the portfolio will be working at any given time (and this is by design!). Our view is that building a diversified portfolio of high-quality companies allows for more stable performance, in aggregate, over the years and over the market cycles.
In the same vein, it is crucial for an investor to stay within their circle of competence. When times are good, investors tend to overestimate their ability to understand a new business model or the nuances of investing in foreign markets. This exposes them to risks they aren’t even aware of when market or economic conditions change. As Warren Buffett once said, “only when the tide goes out do you discover who’s been swimming naked”. However, when an investor has a deep understanding of the companies they own, they will be in a position to quickly identify any companies that would be impacted by the next unprecedented event and make any changes if necessary. This could also allow for opportunistic additions to the portfolio if circumstances permit.
The world is a very complex ecosystem with numerous moving parts. Preparation, training yourself to stay the course when unexpected things happen, and sticking to the core principles of your investment strategy are key contributors to long-term investment success.