Sorting Through the Opportunity Set
And a new company I'm buying
In the markets, we regularly go through periods where it feels like prices bear no relation to underlying fundamentals.
AKA getting the Ralph treatment from the markets.
Then again, this is why opportunities exist, and our job isn’t to moan about the current state of affairs in a sector but position for where things are heading.
Short-term predictions are a fool's game,
When talking about conviction, timeframe is key.
Whether it's coal or oil, I’ve never had any edge in the short term (the occasional quick returns are pure luck).
Conviction is often a function of time.
3-6 months, 50% conviction at best, so a coin flip if we get a positive outcome.
One year, 65% conviction.
Two years, 80% conviction.
Three years, 90% conviction (supply-demand) has to matter.
This is my sweet spot, where I have a real edge since it's too long for most fund managers/smart money, which need to show returns monthly/quarterly.
This quote is quite old, but I believe it to always be the case:
"In his 35 years in the business, it is easier now to construct portfolios you have confidence will do well over the next 5 years, but more challenging to do the same for a 6-month horizon. In other words, volatility is the price you pay for returns in this market."
- Bill Miller
It pays to enter a trade with the mindset it will take three years to play out, and if it works earlier, it's a bonus.
With that out the way, let’s jump into some short-term observations!