A&W Capital CAPITAL HOLDING COMPANY
What we were thinking during the early stage of COVID-19 crisis?
Below is an extract from the March 2020 letter to the shareholders. It illustrates what we were thinking as events unfolded up to March 2020. Note: Company and ETF names have been changed for commercial privacy.
We spend ZERO time trying to forecast where business revenue and the market price will be tomorrow, next week and next year. No one can although they try, and if they get it right once they often don't get it right again. Keep a copy of the expert forecasts making the news and then go back and tally them up. Its a very low win/loss ratio. Instead we make acquisitions because in 3, 5, 10 years we believe the business revenue will have increased and therefore market price will follow suite. Market prices follow top line revenue a high percentage of the time. Earnings per share (EPS) is a close second.
What makes us believe revenue will be higher in the long term? The businesses we get interested in are typically well run using low or no debt. They may be founder led with large shareholdings and have founding family in management and/or board positions. They have a product or service that are the 'go to' for that requirement. It’s clear how they will increase price and/or volume of sales in the coming years. They are likely a leader in their industry group and the industry group has good growth characteristics.
Given we can't predict the future our other option is react to what we know today. It’s a subtle but hugely important difference in the thought process. So you can understand our thinking around this, here is an example of selling and buying activity in a business and ETF in the last few weeks just as covid-19 started to affect markets.
Company A
Figure 1 Selling down of Company A
We spend ZERO time trying to forecast where business revenue and the market price will be tomorrow, next week and next year. No one can although they try, and if they get it right once they often don't get it right again. Keep a copy of the expert forecasts making the news and then go back and tally them up. Its a very low win/loss ratio. Instead we make acquisitions because in 3, 5, 10 years we believe the business revenue will have increased and therefore market price will follow suite. Market prices follow top line revenue a high percentage of the time. Earnings per share (EPS) is a close second.
What makes us believe revenue will be higher in the long term? The businesses we get interested in are typically well run using low or no debt. They may be founder led with large shareholdings and have founding family in management and/or board positions. They have a product or service that are the 'go to' for that requirement. It’s clear how they will increase price and/or volume of sales in the coming years. They are likely a leader in their industry group and the industry group has good growth characteristics.
Given we can't predict the future our other option is react to what we know today. It’s a subtle but hugely important difference in the thought process. So you can understand our thinking around this, here is an example of selling and buying activity in a business and ETF in the last few weeks just as covid-19 started to affect markets.
Company A
Figure 1 Selling down of Company A
There was no crystal ball at work here. We didn't sell the week before the crash happened because we had forecasted it was going to fall off a cliff. We sold down our position because it triggered rule number 2 of our business position rules which is 'We will sell when the market values a business at greatly exaggerated prices'. We have a line in the sand we draw for each business at which point their price falls into the greatly exaggerated category. Company A crossed that line above $36.80 so we sold down on our position. To emphasise again we sold not because of a prediction but because we made a decision based on what we knew as of that day, the 25th February.
Exchange Traded Fund A
Figure 2 Acquisitions of Exchange Traded Fund A
Exchange traded fund A opened the financial year at $428.95. Seven months later at the high water mark of the bull market it had risen to $512.32. From Figure 2 you can determine we didn’t get interested in acquiring exchange traded fund A until it dropped from its opening and was 20% off its high for the year. From that point we have been gradually buying. Not because we predict the bottom is near, instead happy to be purchasing at significant discounts to recent buying behaviour in the market place. In fact we have been acquiring at market crash rates.