Somewhat unique business, very uniqe management, page-38

Black Swans

My usage of the term Black Swan is as you understand it, and indeed the way Taleb intended it. I would summarize this as: an unforeseen and unexpected event that goes against past experience and empirical evidence.

No one expected to see black swans when they arrived in Australia, because all past empirical evidence indicated that all swans were white. So as applied to financial matters, the event refers to something that will cause a permanent structural shift, possibly doing damage or even being fatal to an industry or business.

As you say, this cannot generally be applied to market shocks. Market shocks are not outside our empirical evidence. The timing may be unknowable, but the occurrence shouldn't be. Frankly, to those that say we had no way of knowing that the GFC was coming, I do wonder. The exact timing could not be expected, but there were so many imbalances an d so much excess in the lead up, was it really that much of a surprise?

Imagine an individual who is unhealthy due to the combined effects of really poor diet and no exercise, and that individual is morbidly obese and diabetic, with high blood pressure. When a heart attack strikes, was it unexpected? The timing may have been unpredictable, yes.

This is why a refer to the vulnerability of technology companies to Black Swans. I think there are likely to be more unforeseeable future events that can threaten them. That is the empirical evidence. Ironically, the very nature of Black Swans is that they fly in the face of empirical evidence - so maybe I've got something wrong here...

I'm actually not concerned about market shocks so much, as I see them as opportunities.


Waiting for the Fat Pitch

Which leads us to the opportunity cost of waiting. Yes this is a dilemma. To be fair I'm not just sitting around waiting for market shocks. I'm looking for fat pitches generally.

For instance, I topped up some stuff during the GFC. But the greatest opportunity I saw at that time was Flight Centre (in hindsight ARB has turned out to have been a major opportunity, and I shoudl have topped up more than I did). The shock with FLT was as much market driven as panic over the "internet threat". At the time, Flight Centre was a much more obvious opportunity, to me. This got down to prices that assumed the business would be dead in a few years. It seemed a no brainer.

However, subsequent to the GFC I bought into another business that was suffering what seemed to me a perfect storm of negative impacts (IFM).

More recently I topped up a little during the last Greek tragedy.

When I referred to the "super cycle " I was referring to the unwinding of the commodities boom. I'm not sure that Australia has felt the full impact of this yet. In particular, for me, I'm fairly sure that ARB has had a fairly strong tail wind from this. When I look at gross earnings in the mining industry (across Australia) or gross earnings in WA, they don't seem to have corrected much yet. I'm wondering if this is a potential threat to ARB, and thus a opportunity to acquire more.

In the last several years my cash levels have been somewhere in the range 30% to 40%. Despit ethis my portfolio return has, thus far, been more than adequate.

But your point is well made and I'm aware of those Buffett platitudes. Ironically, the notion of waiting for a "fat pitch" is also a Buffett platitude. But I think paying up for quality looks more sensible to me every day.

But ultimately, "paying up" has to have some basis in sanity. If the multiple is justified largely by earnings occurring more than half a century away, well...I don't have that kind of crystal ball. Or if the multiple implies growth that can only be justified by a business tripling or quadrupling its market share in the next 30 years, in a slow growth industry, and the business already has a market share of 50%, well you see what I'm saying.

You're growth doesn't need to be too much larger than GDP, before the implication becomes, with the passing decades, that you're the only game in town.