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  • Writer's pictureChris Mayer

Fire and Ice

All the concern over inflation reminded me of the late Barton Biggs, the long-time strategist at Morgan Stanley. He used to write about inflation and deflation using his metaphors of fire and ice.

Fire represented inflation and rising interest rates. Ice represented deflation and falling interest rates. Biggs seemed inspired by Robert Frost’s poem “Fire and Ice,” which includes the lines “Some say the world will end in fire; Some say in ice.”

It’s a colorful metaphor and Biggs used it to good effect. In preparation for writing this blog post, I read over three notes Biggs wrote from the late 1990s on the fire and ice theme. (They’re compiled in Biggs on Finance, Economics, and the Stock Market).

Reading over these old notes, I drew three conclusions that apply for us today:

First, there are two sides to every story and each can seem very compelling, even though neither side really knows anything. The earliest of these notes, from April 1997, is called “The Fire and Ice Debate.” Biggs wrote it in the form of a dialogue between Fire, making the case for inflation, and Ice, making the case for deflation.

The effect this dialogue had on me is probably not one Biggs intended. I read it and thought: both sides sound intelligent and persuasive. But neither side really knows anything about what will happen next. They are guessing. Which side you find more compelling says more about you than it does about the arguments themselves. In other words, you will see what you want to see. Confirmation bias at work.

Second, the whole fire and ice thing seems like a distraction. What does any of this have to do with finding great businesses I can own for many years? Great businesses, by definition, are “all weather” businesses. They have pricing power and growth opportunities and strong balance sheets. Instead of spending all this time trying to figure out whether inflation or deflation is coming, whatever those terms may mean, it seems to me Biggs would have been better off looking for the next 100-bagger. (Think of all the wonderful stocks you could've bought in 1997 and held on through today...)

Anyway, subsequent events seemed to render the debate moot, or at least kicked it off center stage. The bursting of the TMT bubble, which peaked in 2000 and didn’t trough until 2002, dominated fire and ice concerns. Whether you thought fire was on the horizon or ice, didn’t really matter if you were an equity investor. With the benefit of hindsight, Biggs seems like a man looking left who got plowed by what hit him from the right.

Third, even if you guessed right about inflation and deflation, I’m not sure it would’ve helped you. I am reminded of a point made by Michael O’Higgins, the president of O’Higgins Asset Management, an advisory based in Miami.

I wrote about this in my book, How Do You Know?:

In a July 2016 blog post titled “If We Had a Crystal Ball,” [O’Higgins] posed an interesting question about gazing into that crystal ball.

He asks you to suppose that on January 31, 2006, you knew with certainty that the price of gold would more than triple over the next five years, from $569 per ounce to $1,900 per ounce. Knowing that, might you have invested in Newmont Mining, the world’s second-largest gold producer?

Odds are high that you would have gladly bought Newmont shares. With that kind of surge in the price of gold, buying shares in one of the world’s largest gold companies would seem like a no-brainer.

Yet, the share price of Newmont fell 5% over that time.

O’Higgins ran through several other examples...

Suppose that at the start of 1973 you knew that the earnings of the Dow Jones Industrial Average would rise 50% over the next two years. Seems you would bet on the Dow, right?

Well, the Dow got cut in half.

Say you could know ahead of time which companies would make money and which would lose money. You’d likely invest in the former. In 1999, the stocks of companies that actually made money declined 2%. Profitless tech startups soared 82%.

And here’s one more example.

“In 2016,” O’Higgins wrote in July of that year, “Brazil’s senior leadership has been embroiled in a vast corruption scandal, President Dilma Rousseff’s powers have been suspended due to impeachment proceedings, Finance Minister Joaquim Levy has been forced to resign, and inflation is in double digits. Brazil suffered its worst GDP contraction since 1990.”

If you had known all that was going on, you probably would’ve stayed away from Brazilian stocks. Yet, the Brazil iShares ETF was up nearly 60% through July.

So, that’s that. What’s the takeaway? Here is O’Higgins:

Even if we had a crystal ball, the investment implications of future events and conditions are unknowable.”

And that is an unappreciated nuance of the dangerous practice of trying to position your portfolio to profit from your crystal ball gazing about macro events. Fire and ice is a nice metaphor, but better suited for poetry than investing.

*** On Corporate Culture

I like to talk about how I prefer the companies I invest in have a “good culture.” What this means is hard to say exactly. It entails, among other things, long-term thinking, good treatment of employees, a certain transparency and a sense of fair play.

It’s hard to quantify, too. Even so, there are some quantitative clues. For example, low turnover among employees can be a sign that a business has a good culture. But mostly, culture is something you get by talking to people and getting a sense for what it's like to work there.

I recently read a book about Mainfreight, the New Zealand based logistics company titled: Ready, Fire, Aim: The Mainfreight Story - How a Kiwi freight company went global by Keith Davies.

I’ve admired this company from afar, but never owned it. The stock has been a steady and strong performer: up 4.5x over the last 5 years and nearly 8x over the last 10. A big part of the secret sauce here is the culture. There is a generous profit-sharing plan, where 10% of profits are shared equally among employees. And there is a lot of transparency and an aversion to bureaucracy. An excerpt:

The founder, Bruce Plested, imbued the company with these attitudes from the beginning. One theme that runs through the book is how Plested and his team worked hard to keep that culture -- and plant it in companies they acquired -- and how it was not easy. As Mainfreight grew, they have to repeatedly hack away at what Plested dubbed creeping “big company syndrome”:

(Love the detail about "blue rinse in the toilets"!)

I’m not necessarily recommending the book to you. I read it because I was interested in learning more about Mainfreight. And also because I’m interested, more generally, in these LTL logistics companies (such as Old Dominion Freight Lines) as potential investments someday. The book is good for those purposes.

But I share these notes because they give you more tangible examples to look for when thinking about and looking for “culture.” Mainfreight is a good case study in this regard.

*** Brown & Brown: Still Holding

Widespread stock ownership can be another clue to a good culture. At Brown & Brown (BRO), 60% of employees (“teammates” in Brown lingo) are shareholders. The board and management own ~17% of the stock. And employees own an estimated ~13%.

Anyway, Brown is a company I’ve mentioned before in these pages -- in fact, early one when I started writing the blog. I owned Brown & Brown when my fund opened its doors in January 2019, purchasing my first shares at ~$27 per share. The stock has doubled since. I still own it. And I have added a lot to the position since 2019. I intend to own it for many years.

I like many things about this business including the resiliency and consistency of free cash flow and its ability to reinvest all of its free cash flow into acquiring smaller insurance brokers.

The insurance brokers generally have been good investments -- see the 5- and 10-year charts for Aon, MMC, etc. I see no reason why they shouldn’t continue to pound out good results.

Brown reported earnings last night and they were solid, as usual:

I like it, too, because Brown is another example of a kind of humble business delivering market-beating results over time. Insurance brokers? Not anything sexy about insurance brokers. But the stock is up nearly 3x over the last five years and over 5x in ten. It’s done that without a lot of drama, too. Good ballast for a portfolio. All you gotta do is leave the stock alone. Easier said than done, but the key to earning multi-bagger returns.

Thanks for reading!


Published July 27, 2021

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