David Merkel over at The Alephblog is a wonderful resource on investment knowledge thanks to his sharp accounting skills and copious experience in capital markets. His September 1, 2016 post “The Cash Will Prove Itself” is worth your time as an IOI Investor. David is especially focused on credit/debt analysis and cycles as indicators of general market risk. For an IOI Investor, and for David I think, “risk” is about the risk of losing money, the risk to our investment principal. While volatility is part of that, obviously, volatility itself is not this kind of risk.
Cash is really the most important outcome of IOI’s valuation process because that is where the value of any business comes from. So a company’s ability to generate cash AND use it wisely is particularly crucial to us as investors in a business. That’s what got us interested in reading this piece. Warren Buffet’s quote about “only when the tide goes out do we learn who was swimming naked” is a reference to having cash when downturns come – which they inevitably do. This quote is true for companies, household finances and investment portfolios, and maybe a variety of other things where having some “reserves” in place is important.
Here are just a few highlights from David’s post that are relevant for you and, hopefully, will inspire you to take some time to read his thougths.
- “Good investing and business rely on the concept of margin of safety.”
- “The only way to survive in a credit crunch is plan ahead by getting adequate long-term financing (equity and long-term debt), and keep a “war kitty” of cash on the side.”
- “We are in the fourth phase of the credit cycle now — borrowing is growing, and profits aren’t.”
- “That is why I am telling you to pull back on risk, and review your portfolio for companies that need financing in the next three years or they will croak.”
If those few quotes don’t get your attention, well, that would concern me in and of itself. David’s blog is worth a spot on your web reading list at any time, but this piece is particularly helpful in helping us to see the bigger picture of what’s happening. These big picture kinds of trends are important when we look at individual companies – particularly on the balance sheet liabilities vs. cash and Owners Cash Profits. Watch what’s happening to these metrics in your portfolio companies!
Your Next Step: You can have a look at the DOW 30 Companies updated IOI valuation models here and see where each of the Companies in your holdings lie. Questions? Reach out to IOI using the form below!
In the meantime, invest intelligently!
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