What to expect in 2018
“It’s tough to make predictions, especially about the future” Yogi Berra
“I follow the Noah rule: predicting rain doesn’t count; building arks does” Warren Buffett
At Somar we are excited for 2018. Not because we can accurately predict how the year will unfold. But because throughout 2017 we have focused on what we can control. In 2017, we set out to build an extremely high-quality portfolio for 2018 and beyond. We like our chances under a wide range of scenarios. In 2018, we will continue to relentlessly search for opportunities to upgrade our portfolio. We see a lot of innovation delivering step improvements in customer value propositions.
At this point you are probably inundated with macro-economic predictions. We don’t believe that incremental macro-economic changes will have a material impact in the long-term investment returns for Somar. Macroeconomic growth tends to be a rounding error for the fast-growing companies we tend to invest in. We have seen investors lose very attractive investment opportunities by trying to play the macroeconomic cycle. Throughout our career there has hardly been a year where some pundits didn’t predict an impending recession and cautioned investors to wait. As Paul Samuelson, an economics Nobel laureate said: “Economists have correctly predicted nine of the last five recessions”. Judging for the air time business media give to economic data such as jobs reports or interest rate changes, you would think all great investments spring from tremendous foresight into these variables. But do you remember what the Fed Funds rate and unemployment rate were once you discovered the tremendous business opportunity created by smartphones, online search, e-commerce, ride / home sharing or social media? Did it matter whether the Fed was preparing to raise or decrease rates? Did the economy go into recession after you invested? Do you care?
Rather than fret about the weather or the market, at Somar we spend our energies on the things we can control. We believe we are in the golden age of investing (please see our June 2017 letter) driven by an unprecedented pace of innovation and worldwide consumer adoption. Entrepreneurs are leveraging technical innovations such as the internet, smartphones, cloud computing among others to offer consumers a step change improvement vs. incumbents in the value proposition. The big risk for us is missing investment opportunities. That is why every day we search relentlessly for new investment opportunities under our circle of competence to make sure our portfolio always reflects the best risk-reward we can find. Our 2017 hunt was the most successful in our career. By the end of the year, our portfolio presented a superior risk-reward than it did at the beginning of the year. For 2018 we will continue the same relentless pace. That is what you can expect from us and it is entirely under our control.
Every investment decision stands on assumptions about the business future performance. We strongly prefer to anchor our expectations in assumptions that have proved their validity across time, macroeconomic scenarios and geography. You can build your strategy and portfolio around them. They work for you in most conceivable scenarios. Here are a few illustrations of this:
- Consumers prefer more choice than less choice
- For consumers of non-luxury goods, customers prefer lower prices
- For the same price, consumers prefer more service than less service
- A good investment occurs when the cash deployed is significantly less than the stream of cash flows generated in the future discounted to the moment of investment
These may seem simplistic or even childish, but they are very powerful. Take the preference for lower prices. It may be consensual that these businesses benefit in recessions as people trade down to save money and extend their budgets. But these businesses also capture share in macro expansions. Sure, some customers will trade up. But a lot of customers who couldn’t afford the product and therefore were “non-consumers” can now start to buy the product. Price competitiveness therefore allows companies to gain market share under different macro-economic scenarios.
So, the time has come for us to make some “predictions” for 2018:
- strong innovation around the world, including diffusion and adoption of best practices in different geographies
- continuing execution and roll-out of the innovative companies already in our portfolio
- relentless search for new investment opportunities by Somar
- continual upgrading of Somar’s portfolio expected risk-reward
As you can see we are focused on building our Ark. One that takes advantage of the favorable winds we see but also that protects against several different scenarios.
We wish you success in your other businesses and hope you are finding as many opportunities as we are. Feel free to reach out if you want to discuss any opportunities that pique your interest. We are honored that you have enlisted our help in searching for the best opportunities to deploy your financial capital. It is the golden age of investing and we are excited to navigate it with you.
Happy investment hunting in 2018. And above all: Happy New Year!