A Comment -- General Comments From an Expert (A Commentary)

Telecom space has certainly been under pressure. Discount plans have been offering deals, creating internal churn. Serious headwind of reaching peak phone purchases.

Safe stock: generally pays a lower yield, has a cheap/modest valuation, lower levels of volatility.
Volatile stock: associated with a compounder, traditionally pay low/no dividend yield, high volatility, premium valuation.

The key factor is that many investors equate volatility with risk. But really, volatility can just be the engine of compounding. Some of the best-performing stocks over the last decade have all had a 50% drawdown at some point. That’s not always a reason to sell.

He did an analysis across 1000+ stocks. Stocks that have compounded the best over the last decade look nothing like what most investors are comfortable buying. Most want a good dividend yield, low volatility, cheap valuation. Actually, some of the best-performing names have high valuation, lots of volatility, and low/no yield. These names typically take FCF and reinvest it back into the business for future growth. Nascent companies often have lumpy earnings, but the long-term trajectory is intact.

There are a lot of behavioural and psychological aspects to investing. Investors really prefer investing with the herd. It’s uncomfortable going outside the norm, but most $$ is usually made by being a contrarian and thinking critically. There’s a quote that “Comfort is the enemy of returns.”

For example, being uncomfortable during the “liberation day” drawdowns and investing anyway paid off quite well.

Globally, the oil industry has underinvested in sustaining capital to the tune of ~$1B per day. It doesn’t become a problem until it becomes a problem. When the Strait of Hormuz shut down, 20% of world oil supplies (but, more importantly, 50% of world export oil supplies) got shut down. That reduced productive capacity meant that we had to begin rationing by price. 

The high prices we’re seeing today are in anticipation of shortages. On a global basis, we’ve thus far been able to maintain consumption of crude as a consequence of floating inventory and strategic reserves held in various countries. If the conflict goes on for 2-3 more weeks, you will see oil rationed by price. That will be very scary. 

If the conflict goes on, the prices you see today are a mere harbinger of things to come.

He thinks so. Some countries like Japan have 200-220 or so days of supply. Other countries like Sri Lanka and Pakistan have one week of supply. The price escalations that we’ve seen are anticipatory, they don’t reflect actual shortages.

We’re going to run out of strategic supplies and floating inventories very, very quickly if the floating reserves stored north of the Strait of Hormuz aren’t released soon.

We saw in the aftermath of the Arab oil embargo that higher energy prices acted as a non-governmental tax on other investment arenas and also on the consumer. That left less capital for other sectors of the economy. Proved to be very negative for the economy and contributed to higher inflation during the 1970s.

If the crisis is prolonged (and he’s not suggesting it will be), the potential for a shock in the economy and to inflation is greater than people recognize. He’s not trying to be a harbinger of doom, and you don’t have to rearrange your life. He’s not a geopolitical analyst. But it’s a contingency that people have to consider.

One outcome of the Gulf conflict is that (at least in the near term) it will tip the worldwide economy into some form of recession. Seeing weakness in the copper market now as a consequence of higher interest rates wreaking havoc with copper speculators. Also seeing weaker worldwide demand for all kinds of inputs (at least inputs that aren’t being transported through the Gulf), and copper is one of those. 

There’s a dichotomy between his very near-term outlook (weak) and his 5-year outlook (extremely strong).

Loves the whole space. It’ll do surprisingly well over the next 5 years. The way that copper mines are financed includes selling byproduct streams on gold and silver. The really big transactions are still ahead, and the market doesn’t recognize that yet.

It wouldn’t hurt his feelings to see Canadians have 10% or slightly more in energy. Traditionally in Canada, oil & gas has constituted about 4% of retail portfolios. So most Canadians are woefully underweight Canadian energy and need to top up. The industry is very efficient and offers high yields.

People who have been listening to him on BNN for the last year are probably already at maximum allocation.

For those investors willing to do the work to understand metals markets, he’d like to see portfolios have at least 5% in base metals. Three years from now, he’d probably like to see that number come up to 10%.

As a consequence of decades of underinvestment in productive capacity, we’re coming into a period of having to ration base metals by price. It’ll be very different from where we are today. He suspects we’ll have a bit of an economic reckoning between now and then. So there will be time to enter the base metals space.

In 3-4 years, base metals will be in the same position that oil was a year ago.

Holy cow, what a ride! We've had a country taken over, we're still in the midst of a major war, now there's stuff going on in Iran, the Fed is in discombobulation, tariffs are on, tariffs are off.

He can't recall having gone through anything like the last 3 months in terms of geopolitical volatility.

Unquestionably, it's this Middle East conflict. We still can't even begin to think about the unintended consequences (second- and third-derivative effects) of what's gone on over the last 30+ days.

Ships that were moving crude, nat gas, and fertilizer and left 37 days ago are now in ports. But there's nothing coming behind them. What's that going to mean for global crops and production of all kinds of things? Gasoline prices in small and emerging economies? They're really hurting.

We can estimate how much this will take off global GDP, but we really don't know at this point.

This ceasefire is very fragile. He wouldn't want to handicap an outcome.

As an investor, it's easy to get caught up in the noise. But when you think about it, what has happened?

Everything else being equal, oil prices are going to be higher moving forward. Insurance won't cost the same as it did in February and before. Will there be tolls? We don't know. They're talking $2M per ship that goes through. That'll just increase the price.

Put all this stuff together, oil prices are now higher. That has an impact that will carry through, but we don't know to what extent.

Take the semiconductor industry. They need helium. What is that going to mean?

It's really hard to know the exact impact but, basically, global costs have gone up. So growth implications have to be ratcheted down. The market hasn't factored all that in yet.

Hard Assets, Low Obsolescence. 

In this kind of environment, cashflow is king. Best cashflow comes from hard assets -- you can look at them and determine their value in terms of what they're producing in terms of revenue/cashflow/dividends.

Low obsolescence means that they have somewhat of a moat (as per Warren Buffett) around themselves. Nobody can replace it in the near term. It's not going away. 

Those are the kind of assets you want to hold at certain times, get paid with that dividend. If growth comes, that's great. But it's going to be there 5 and 10 years from now. You're not worried about 5 days, 5 weeks, or 5 months.

These things survive all kinds of uncertain times. And we're in one now.