The Only Game In Town

At the end of my freshman year in college (1977), my brother-in-law’s twin brother called me to ask if I wanted to go to the sixth game of the NBA Finals in Portland. I was a huge Trailblazer fan and was thrilled to sit in the top row of Memorial Coliseum, which held 12,665 fans. Not only was it an unbelievable experience for a lifelong fan (the Blazer’s won), but it was even more powerful because professional basketball was “the only game in town.” No other major professional sport (football, basketball, baseball) existed in Portland in 1977 and there is only one in town today.

Whenever we are being vetted by investment organizations we are asked what kind of stock market environment we are likely to underperform and our answer is always the same. Studies show that meritorious stock picking disciplines outperform the indexes 60-65% of the time. The historical 35-40% of the time we have underperformed usually came in a stock market environment where a narrow group of stocks were very popular and appeared to be the “only game in town.” We have been in one of these for a while and we thought it would be helpful to dig into the subject.

There are two environments where we are likely to lag. The first environment is a stock market led by companies which are cyclical, heavily indebted and dependent on sharply rising commodity prices. The era from 2004 to the middle of 2008 was lousy for stocks in general, but was especially lousy if you were not deeply over-weighted in energy, basic materials and heavy industrial stocks, which had the China economic boom temporarily behind them. We lagged that era as companies which fit our eight criteria for stock selection weren’t connected to “the only game in town.”

The second type of market we lag is when the most futuristic and exciting technology and growth companies capture the imagination of investors. Price-to-earnings (P/E) ratios and price movements get divorced from the underlying businesses as investors discount earnings very far out into the future. We believe that when you get into this situation, the gains which are made in the remainder of the bull market for the expensive/glamorous stocks will get crushed in the decline which follows. We try to avoid these companies and those closely related because we think “if there’s a hurricane coming in Miami, we don’t want to be in Palm Beach.”

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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