If you want to invest in transportation companies, it’s important to have a firm understanding of intermodal. Retail banks? Net interest margin. High growth companies? You must understand how the market discounts future earnings and cash flows back to the present, especially in an inflationary environment.

Each of these examples are nuance. If you’re an income investor bent on utilities and packaged food companies, you don’t have to know any of these things.

But if you invest in any companies, regardless of sector or growth profile, you must understand risk.

Below are a two lenses through which to contemplate risk and what risk means for your investing practice.

Risk = Loss of Capital
Let’s say that this morning the <org> reported a jump in the Consumer Price Index, a measure for the cost of typical household items. The market will likely respond with a sell-off touting inflation concerns. The market is pricing in the risk that higher future prices will hamper future economic activity. Stock market drops.

If you and I understand “risk” as “any bad news that might make stock prices drop,” then we would do well to sell along with everyone else. But if we think of risk as the permanent loss of our investment capital, then most news-related drops become either a buying opportunity or an occasion to sit on our hands.

Over the last century of investing, this strategy alone has garnered incalculable returns.

Risk = Ability to remain a functioning adult
Investing is for anyone, but it’s harder on those that perpetually worry or doubt themselves. While financial independence in the future is a worthwhile goal, mental stability in the present is also pretty important.

The graph above is the secret scrawling of your psyche if you cannot identify risk as anything other than permanent loss of capital. No judgment here. Just an acknowledgment that viewing volatility as risk will force investors into the calculus of “how long can I continue to feel like this and still function as a person/employee/spouse/parent, etc.?”

Fear of volatility is destabilizing, but shame can be downright crippling. Investors that let self-doubt creep in compound shame on top of fear. All light-hearted jibing aside, this can lead an investor down some very dark paths:

“I’m stupid.”

“I should have known better.

“I should have followed my gut.”

(You’re not.)

(You couldn’t have.)

(Your gut is a coward that always tells you to do two opposing things just to cover its bases.)

Permanent loss of capital or temporary loss of sanity
Whether you’re assembling a portfolio of utilities companies yielding 4% or tech stocks you expect to 4x over the next 10 years, you need to decide not just your risk tolerance, but your definition of risk itself.

The majority of my capital is in retirement accounts, so my time horizon is just under 20 years. What money I do have in taxable accounts is money I don’t need in the immediate term. For these reasons, I’m capable of taking risk and keeping my hat on, but only because:

  • My main positions (about 35 companies, each representing 2-5% of my overall portfolio) are companies that I believe will not fail. While many will have swoons of 20% or more, and some will have crashes of 60% or more, they will continue to be excellent companies led by ethical, responsible management. They will continue to represent leading companies in important industries. They will continue to possess some form of competitive advantage—be that price, brand, patents, switching costs, market dominance, high barriers to entry, etc. — some advantage will keep them relevant in the market. Thus, I will never* risk permanent loss of capital.
  • The remaining companies are lottery tickets. They very well may go out of business tomorrow. Their management team may be a gaggle of hoodie-wearing, Rumi-quoting narcissists with a bad gambling addiction. Their products may never clear FDA hurdles or may get eclipsed by a more competent company’s offerings. Their office building might burn down, and since Kyle didn’t take a screenshot of the design specs like I told him to, the widget they invented that would someday change the world is lost to the ages. In short, anything can go wrong.

    If you pooled them together, I’d be amazed if they constituted more than 5% of my portfolio. If I were 20 years younger, that percentage might well be three times greater. But being in my mid-40’s, I need remain a functioning adult. My wife needs me, my students need me, my cat needs me. So I keep the lottery ticket weighting laughably low. As Monish Pobrai said, “Heads, I win. Tails, I don’t lose much.”

*Earlier in this post I used the word “never.” Know that “never” is a relative term. “Never” means “unlikely enough for me to worry about it. Nothing more.

Being early is indistinguishable from being wrong: Ford Motor Company

There have been a number of companies I’ve owned multiple times in my investing practice, among them Amazon, Home Depot, Apple, Walmart, and Ford.

While all but the latter have delivered satisfactory gains, Ford seems to be the one that I always seem to get wrong. But was I wrong or was I just early?

I was wrong.

My first position in Ford was in the early 2000’s and I barely have a memory of it because I didn’t start tracking and journaling about my investments until 2006. So, let’s call that initial position a mulligan.

The second time I owned it, the company was emerging from the Great Financial Crisis (2007-2009). CEO Alan Mulally took the helm in 2006 and in a stunning act of clairvoyance, mortgaged Ford’s assets to secure billions in loans in order to strengthen the company’s balance sheet and provide capital for a makeover of the company.

It’s better to be lucky than good.

The Great Financial Crisis, which included Torquemada-like scrutiny of loan servicing operations (like those of car companies that both build the car and provide the financing for consumers to buy said car), resulted in the bankruptcy of two of the three major auto companies. Of the “Detroit Three,” Ford was the only one that did not require government assistance.

In other words, I really liked the leadership of the company. So in 2010 I took a stake in Ford yet again at around $12. I held it for two years, watched it drop to $9, rebound to $12, where, fatigued, I sold it for a modest loss.

This is where I should say something to the effect of “but if I held it for a long term, patience would have paid off.” But it wouldn’t have. At this moment, Ford trades at around $15, so a long-term position in Ford would have netted around two and a quarter percent year-over-year gain…hardly a windfall.

And yet, as the title of this post suggests, I believe that Ford is worth looking at. They were not early to the electric car market, but they’re taking it seriously, and I believe they could hold a #2 market position within a few years.

Mulally was a brilliant executive because he excelled at building brand equity, communicating authenticity, and he was a very good capital allocator. The not-worth-mentioning leaders of the company that followed wanted Ford to be a ubiquitous car manufacturer or a historic car manufacturer or a cutting-edge car manufacturer. But they were not concerned with Ford being a profitable car manufacturer. The current CEO Jim Farley loves cars and he loves profitability. He’s closing down unprofitable lines and positioning EVs where they will get the most traction: The Ford F-150 (a marriage of torque and utility) and the Mustang (a marriage of torque and tech).

Ford is not early to the push to EV fleets. Its stock price reflects this sentiment. Its PE Ratio of 15 is low relative to its 5-year average of 17.7. Enterprise Value to EBITDA (a decent proxy for valuation based on cash flows) is 8.2. I like to see EV/EBITDA for most companies between 10-15, but auto companies usually trade at a discount to the market in PE and EV/EBITDA (Ford’s historical average is 8.6), but this includes significant drag from unprofitable production lines that have already been mothballed.

Bottom line: For the third time in my life, I have opened a position in Ford, and will be looking to add to that position over time. Ford looks wrong…again. But with good leaders in charge, they might just be early.

Fear filled with reasons

What follows is an apocryphal sound bite from financial media inspired by the events of a day in mid-July 2021. This quote could very well take place on any given day, a few dozen times per year, with dates, parties, and events interchangeable:

A seven-day positive streak in the markets was broken with the news that Google is being sued for anti-competitive practices related to the operation of their app store. As this news broke, we’ve learned that the Japanese government decided to ban spectators from the upcoming Olympic Games because of the worrying surge in COVID cases. Additionally, labor numbers, employment numbers, news of a hurricane approaching the Atlantic coast, and a half dozen other things that are freaking us all out has led to a several-hundred point drop in the Dow Jones index.

Like I said, replace Google with Apple, replace Tokyo and Olympic with Europe and tourists, and you’ve got a whole new news day filled with reasons to be fearful. Reasons to be negative.

But are these reasons filled with fear or fear filled with reasons?

Often and especially after sequential days of positive movement in the indices, the market turns negative and starts to look for reasons to justify that negativity. The usually turn to macroeconomic indicators or force majeure headlines like extreme weather or, in the case of 2021, COVID numbers. If we see beyond this “fear filled with reasons” tendency, the mindful investor can capture the opportunity to open or add to a position otherwise avoided due to high valuations.

In order to identify these moments of market inefficiency, it’s helpful to identify what it is that you DO fear.

Here’s what I fear:

  • Long-term economic decline
  • Permanent decline in birth rate
  • Lack of faith in business and industry
  • Hyperinflation
  • Threats to democracy and the rule of law
  • Large-scale war that includes nuclear and/or biological weapons
  • Irrevocable ecological destruction brought about by climate change

Of these items, the only ones I’m legitimately concerned about are war and climate change. War could very well happen tomorrow and there’s nothing I can do about it. And if my orbit does become impacted by weapons of mass destruction, I’ve got bigger problems than my portfolio balance. Climate change probably won’t permanently impair our way of life until well after I’m dead. So, from an investing perspective, I don’t have any reasons to be fearful.

The media and the market will give you as many reasons to be fearful as you have time to dream up. Incorporate them into your investing strategy at your own peril.

In two ways, these actors are doing you a favor.

First, they are forcing you to envision the near future as something other than what it is—relatively safe and relatively predictable. The day journalists get on the news and say “Everything’s swell” is the day I will head for my basement closet.

Secondly, every time someone, whether a media personality, a politician or a fund manager gets on TV and enumerates the things you should be scared of, they present a buying opportunity for those of us fortunate enough to know what we know.

The world is relatively safe, relatively predictable, and over 80% of Google’s revenue still comes from advertising. Buy $GOOG.


You’d have to ask a biologist to be certain, but I suspect that things in nature tend toward symmetry. The left side of the human face tends to look like the right side. One edge of a leaf looks largely like the other. Not so for investment gains.

Regardless of market optimism, regardless of where we are in the market cycle at a particular moment, regardless of what you think the economy holds in store, the potential for gains is astronomically asymmetrical to the likelihood of losses over time. The reason is simple. The most you could ever lose on an investment is 100% of your initial capital. The most you could gain is infinity.

Infinity is a pretty stupid word when talking about investing. But the 10,000% gain you would have gotten from your ownership in Netflix or Amazon is indistinguishable from infinity.

Because of the asymmetry between gains and losses, it is not absurd to propose that if you make 20 investments and 18 of them turn out to underperform or merely perform with the market averages, just holding those two remaining stocks for the long term just might put you in a position of life-changing outperformance.

Imagine that. In what other context can 10% of your decisions that result in a positive outcome outweigh the other 90% of your decisions that have a negative outcome.

As investors, the odds are heavily tilted in our favor. If for no other reason, the best time to start investing is now.


My favorite tweet from the last few days:

We’ve turned the page on “Tuesday, Part 5,” and Joe Biden was officially projected to be the 46th President of the United States on Saturday, November 7. All the news networks showed footage of Biden/Harris supporters spilling into the streets. Jubilation and affirmation from the side that won, silence and disbelief from the side that lost. It has always been thus.

One thing that is distinctly different in the current scenario is how the Market reacted. In the days leading up to the election you can expect fits and starts. We mostly got starts with several +1% days for the S&P and or NASDAQ. Once Election Day came and went without a clear winner, we could have all expected the Market’s reaction: selling.

The Market abhors uncertainty. The Market more often than not reacts to an unwelcome situation more favorably than an uncertain one. So, the fact that the Market remained positive during the week of the post-election ballot counting is truly incredible. It happens that Election Day overlapped with 3rd quarter earnings season, so in a fit of uncharacteristic rationality, the Market actually did what it is supposed to do–move in relation to market-specific inputs rather than exogenous events such as elections or Twitter feuds.