My family and I recently returned from a bucket-list vacation, a weeklong trip to Paris for the Olympics. As a life-long swimmer, I wanted to see Summer McIntosh win some gold medals, and she came through like a champ, winning three gold and one silver. Years ago, I swam with Summer’s mom on a team in Toronto, so there was a tiny personal connection there. (Her mom was much faster than me, so while we were on the same team we didn’t exactly share a lane!)
iStock-2160695759
Bear with me, this will shift to an investment theme. While at the Olympics, because of the time difference with Canada, and the fact that the market went through severe gyrations while we were in France, I found myself (as always) thinking about investments. While in Paris, I made the following Olympic-Stock connections:
Sometimes, all the research (preparation) in the world doesn’t help you at all
Our family had tickets to the men’s individual gymnastics final, where Canadian Felix Dolci had high hopes. Mr. Dolci was very experienced and likely the best Canadian gymnast on the team. Medal hopes largely rested solely on him. His horizontal bar routine was spectacular and aggressive — it needed to be to score high — until it wasn’t. Dolci’s hand grip broke mid-routine, and the crowd gasped as he plummeted face first to the ground. Judges granted him another chance, but he fell again. Showing true Olympic spirit, he got back up on the bar, did some spectacular spins, and finished his routine. But it was too late. He finished 20th. Investment lesson here: Sometimes, all the preparation or research in the world doesn’t help you much. Things go wrong, in business as well as in sports. Who hasn’t researched a stock to death, and bought with extremely high confidence, only to lose a bucket-load of money when things didn’t go as planned at the company?
Chinese stocks (and athletes) are still given a discount in the market (pool)
It is no secret that investors have avoided Chinese stocks for years. Few investors trust Chinese accounting standards or regulatory process. Thus, I felt a bit sorry for Chinese swimmer Pan Zhanle. In Paris, Mr. Zhanle smashed the world record and destroyed the field in the 100 metre freestyle for the gold. But, because of prior drug allegations with Chinese swimmers, many competitors were bitter and ‘didn’t believe’ the result. But Mr. Zhanle was tested repeatedly, being woken up in the middle of the night for random drug tests. All medalists are also tested. But, like Chinese equities, despite his success, his performance still gets ‘discounted’ by others.
Even the best companies (athletes) in the world can still fail
Still in the pool, one of the disappointments in Paris was Quinn Haiyang, a Chinese swimmer and the current world record holder in the 200-metre breastroke. Being the world record holder, he was of course favoured to win the event. But… he didn’t even make the final. Being the best in the world just wasn’t good enough that day in France. This miss painfully reminded me of Crowdstrike. Crowdstrike is widely regarded as the best ‘end point’ cybersecurity company in the world. But as we arrived in France, half the world was shut down, due to a global system error caused by a Crowdstrike software update error. Global damages were estimated at $5 billion, some of which Crowdstrike is going to be responsible for. It has already been sued by customers. The stock lost 45 per cent of its value in less than three weeks. The investment lesson: even the best companies in the world are not immune to messing up. If you have a giant stock winner (as I did with the stock) remember any company can experience a problem and see gains disappear fast. Make sure to take some profits on the way up.
Being good at one thing can bring glory
A highlight of the Olympics for me in the non-swimming category was the ‘Pommel Horse Guy’, Stephen Nedoroscik. His selection for the U.S. men’s gymnastics team widely was criticized. The team event requires all-around athletes, and Mr. Nedoroscik is really only good at one thing — the pommel horse. People worried that his selection was going to be a disaster. Nerdy, with thick glasses, Stephen was caught sleeping against the wall only minutes before his big event. But then, he showed up, and aced it. His performance — when it was needed most — was spectacular, helping the U.S. team win its first gymnastics medal in 16 years. Mr. Nedoroscik became a hero, a meme and a National celebrity. Good for him. The investment lesson here? It has long been said that a company that focuses on one thing — providing they do it well — can be one of the best investments. Think Shopify, Starbucks, or Constellation Software. These companies don’t try and do it all. They pick a niche, do it right, and generally prosper. Too many companies try and diversify their businesses, and this often results in lower margins and bloat. Maybe for your next stock look for the ‘Pommel Horse’ stock: a company that does one thing, but does it perfectly.
Young companies (young athletes) can still ‘outperform’
One theme in July was the sudden market rotation to small cap stocks. Investors all at once decided small caps were great again, after years of underperformance. Being a ‘small cap guy,’ this was very welcome news to me. Small, young companies can move faster, are less bureaucratic, and have more leverage to single contacts and deals than a large company. It is hard to move the needle on earnings for a $3 trillion company, but young companies can double, even triple their earnings if things go well. Let’s tie this back to our hero Summer McIntosh. Sure, she had been to one Olympics before, at the ripe age of 14 — but she was competing against grizzled veterans Regan Smith and Katie Ledecky, much older, wiser and experienced Olympians. Like small caps in July, Summer crushed the wider-known favourites. Investment lesson: Young, smaller, lessor-known companies often trade at a discount, despite ‘faster’ growth. Want to boost portfolio returns? Don’t ignore the ‘up and comers’.
Comments are closed.