• One by one, Europe’s nations are failing. The only country seemingly not at risk is Germany, whose ingrained culture of discipline kept it fiscally and economically prudent while its neighbors did the opposite. Germany will have to decide whether to bailout Europe and save the Euro or break up the union (read Michael Lewis’s controversial take on it here).
• US economic growth has stalled, unemployment is up, housing is sputtering, and the Fed is running short on its magic bullets.
• Over 65% of US government spending is payments to individuals (see WSJ chart), which creates an illogical dynamic where the government’s #1 job is to subsidize peoples’ lives. The downgrade of the US as a creditor is probably the beginning of a series of negative events, not the end.
• There is a panicked feel in the financial markets, best reflected by the VIX volatility “fear” index reaching historical highs last week.
These are structural issues that will be around for years (with the probable exception of the notoriously volatile, volatility index). They affect our decisions and our finances, but there isn’t anything we can do to change them. Instead, we can incorporate these issues into our decision-making process and take advantage of the opportunities created. We’ve all heard the many variations of, “buy when people are panicking, sell when they are exuberant”. It sounds pretty simple, but it's difficult to execute when the headlines are blaring the world is about to end. It requires a high level of discipline, an avoidance of greed, and the ability to confront fear.
No matter what is going on in the world today, one thing remains the same: the importance of investing in quality businesses. Potential return, deal structure, and everything else are all secondary to quality. A strong business will perform in all economic cycles, and more importantly, will be around after this cycle is over to fight another day. These are companies that offer a highly desirable product or service that customers value and would not easily substitute. These businesses strive for integrity and excellence in all of their endeavors, and have shown repeatedly that they can win.
It is crucial to remain prudent and cautious at all times, good or bad. During times of excessive optimism, don’t forget that challenges are just around the corner. When the problems do come, don’t let them render you immobile. Times like today can offer the greatest opportunity. Apply the same rigorous analysis and diligence that you always do, while following the principles of integrity, diligence, and discipline. You might surprise yourself.
