How to Stay Convicted When the Market Says You’re Wrong

During their recent episode, Taylor, Carlisle, and Matt Sweeney discussed How to Stay Convicted When the Market Says You’re Wrong. Here’s an excerpt from the episode:

[Matt] I mean, look, a lot of it is redoing the work, right? But, you know, when things are going wrong, they redo the work to whatever extent you can. But a lot of it is just like a high level fundamental belief that if you have a business and a team that is going to do well over a reasonable period of time, things like tariffs are not going to change it.
So, you know, I mean, two ways to kind of illustrate the example. One, going back to what I said earlier about the good set up, you know, the stock could trade down because of tariffs. But if they kill off that money losing business, tariffs aren’t going to matter.

You know, like maybe you don’t get the same multiple expansion you would have otherwise. But if the earnings power doubles, you know, like earnings power doubles and you think it should be worth 16 times X, but because of tariffs, it’s only worth 14 times, you know, like you’re going to be fine. And then the other one I often think of is just like, you know, high level.

And there’s an argument I’m cherry picking here, but go back and look at Walmart in the 1970s and everything they dealt with inflation and oil prices and, you know, all sorts of economic hardship. And there were periods in that, you know, through the 1970s where Walmart was flat, you know, the stock didn’t perform well, it was down at times. But at the end of the day, they just had a much better mousetrap.

And if you have a better mousetrap, everything else is going to, you know, fade into the background on any sort of reasonable timeline. So, you know, there are people out there that make careers, you know, trying to bet on these sort of things. My goal, when I go into an investment is to try and just reduce it down to the one or two variables that are going to matter, and that you can have a reasonable path to understanding who is going to control those variables.

So, you know, best case, it’s a CEO who has levers to pull that can, you know, normalise earnings power, and then understand their incentives. And it’s a lot easier to do that, I think, than to try to guess what, you know, the next headline out of the White House is going to be or how tariffs are going to impact things. And, you know, there are definitely exceptions, there are definitely ways you can make money around the fringe of those sort of more macro policy decisions.

It’s just not what I do. I think there’s easier ways to make money than to try and be right on things that you really can’t control.

[Jake] When you think about the betting on the horse versus betting on the jockey, does you find that you’re get attracted more to being the predictability of jockeys these days than kind of feeling like you know where a business is going to be five years from now, but you know that the person running it’s probably still going to be smart?
[Matt] Yeah, I mean, it depends. Everyone is unique, right? Especially for me, because like I have in the portfolio, typically some sort of mix between, you know, what you might label a compounder versus a special situation or something that’s more event driven, and in the special situations, and, you know, the event driven stuff, it’s typically more the people and the event path that are going to matter for a revaluation, whereas the compounders, it’s typically more the business, but not always, right? I mean, you could look at businesses that were not really all that remarkable, but they had great capital allocation from a very skilled management team that did very well.
The stocks did very well over time due to the people involved. So each one is unique. I think you have to be open to the full spectrum of, you know, event paths, and the people, and the business, but I do think it’s important to know which one you’re betting on so you know when you’re wrong, right?

If you think you’re going to be right because of the way a person’s going to behave, and then that person is not doing what you want them to, but the stock is still going up, like maybe it’s time to reevaluate or exit. Maybe not, but you have to kind of, I think, be honest with yourself up front about what the thesis is and what the process was to get to that thesis, and then not believe that it’s right or wrong based on stock performance. You have to believe that it’s right or wrong based on, you know, the real world tangible things that we could see, you know, execution, et cetera.