We are in uncharted territory in investing, says Charlie Munger.
Munger is Warren Buffett’s right-hand man at Berkshire Hathaway (NYSE: BRK.A) and a key player behind the rise of the conglomerate that is worth over US$660 billion today.
Despite their stature and experience, the duo readily admitted last month that they do not have all the answers for what is going to happen next.
The thing is, nobody does.
Yet, with the proliferation of COVID-19 variants, we have to be ready to live with the presence of the virus for the foreseeable future.
Everlasting investment principles
We may not be able to predict the future, but there are still key characteristics that will serve us well when we invest.
Here are three of them:
Strong market position: Tough market conditions will affect all industry players in the same way.
As such, focusing on the market leaders with a dominant position is a good place to start.
If all the companies within the industry are impacted, chances are, the strongest ones will survive the fallout better than the weaker ones.
For instance, DBS Group Holdings Ltd (SGX: D05) took its lumps last year, recording S$3 billion in allowances for credit and other losses for the period.
With the economic conditions on the mend in 2021, Singapore’s largest bank wrote back S$190 million in general provisions during its first quarter.
As a result, the bank was able to post a 72% year on year gain in net profit for the period.
Cash on the balance sheet: Most companies run into trouble when they run out of cash.
As such, focusing on companies with strong balance sheets will tilt the odds in your favour. Cash will help companies keep the lights on.
For 2020, Venture Corporation Ltd (SGX: V03) experienced a 17% year on year decline in revenue. Profit also fell by over 18% for the period.
Despite the setback, the contract manufacturer had a strong balance sheet with close to S$930 million in cash.
As such, Venture was never in any financial trouble through last year.
Instead, the firm decided to pay out S$0.75 in dividends for 2020, up from S$0.70 in the prior year.
Strong operating cash flow: Again, cash is key.
Companies with long histories of generating strong operating cash flow are more likely to weather the economic storms and come out stronger.
Capital expenditure can be delayed, freeing up valuable cash for ongoing expenses.
UMS Holdings Limited (SGX: 558) has a long history of being a consistent generator of free cash flow.
The company did not disappoint in 2020 as well, posting S$45 million in free cash flow.
The steady cash generation enabled UMS to continue paying out a dividend of S$0.035 for 2020.
Get Smart: Keep learning
Munger said that if you are not a little confused by what’s going on, you don’t understand what is happening.
Despite his decades of investing experience, he readily accepts that the pandemic is a new scenario and that we should always keep an open mind as to what could happen next.
As investors, we would do well to follow Mungers lead.
What we can do, as a Smart Investor, is to keep our focus on the business behind the stock ticker, accepting that we don’t always have the answers, and staying alert to any structural changes that might happen to the companies we own.
For more on Munger’s thoughts on the lessons from COVID-19, check out the video below:
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Disclosure: Chin Hui Leong owns shares of Berkshire Hathaway and DBS Group.