Downturns are a test of strength

I hope that everyone had an excellent weekend.

In today’s posting I wanted to reveal what I believe to be one of the secrets to making long-term as an investor. Namely, that investors make most of their money in an economic and financial market downturn, but that they just do not know it at the time. This secret is not my proprietary secret, but instead comes from the wisdom of Shelby Davis, the founder of the firm for whom I used to work: Davis Selected Advisers.

The logic behind the secret is very straightforward. For example, if you want to measure the strength of a professional sports team then look at how they perform when there is a lot of adversity; such as:

• when the weather is unfavorable, a road game
• when they have had to travel a lot during the season
• against a great team
• when there are a lot of injuries

Or likewise, in your personal life, when you want to know about a friend’s personal development as a human being then look at how she or he responds to real personal crisis.

The same acid test exists for businesses and investors, too. What I am trying to communicate here is that right now is when folks should be looking at prospective investments. Why? Because during this kind of economic and financial environment weaker businesses are struggling to maintain cash flows, to pay creditors, and to satisfy shareholders. Whereas strong businesses are launching new business lines, expanding into new markets, and making acquisitions. Once the recession is over, these firms will have far exceeded the capabilities of their competitors and emerge on the other side as much stronger businesses. So an investment strategy in this economic environment is to identify those businesses that seem to be relatively indifferent to the current economic conditions and who are moving ahead with plans of growing the business for the future.

I would love to see a return to comment posting on ze blog, so if you have identified a business that seems to be sailing these choppy seas well then please feel free to post the firm on to the blog’s comment section.

Here’s to a wonderful week for each of you out there!

Jason