When Donald Trump was elected president, I wrote to you about some potential risks and benefits of a Trump presidency. Since the election, two key issues that affect us as investors have come to the fore. The good news is that the corporate tax cut has made the U.S. more competitive and deserves at least some credit for reducing unemployment to the lowest levels in 20 years. The bad news comes from the trade fights the president seems to be picking with every major trading partner we have.
Free trade generally is a good thing; it makes the global economy more efficient and more productive. Yet free trade isn’t so appealing to an immature or weaker economy, whose leaders are usually more concerned with domestic employment than with global efficiency. So historically the U.S. has induced such countries to trade by tilting the deal somewhat in the other country’s favor. For example, NAFTA gave Mexico and even Canada some advantages, because we were (and are) the strongest economy and needed to provide a little bonus to get them to open their markets.
The situation with China is more complicated. Many U.S. companies can’t get into China without forming a joint venture with a local Chinese company. Regrettably, there have been numerous examples of the JV partner stealing the U.S. company’s technology. There are also concerns about the Chinese stealing technology through cyber espionage.
The president is looking to even out all of our trade deals, following his Art of the Deal playbook of bullying, threatening and ultimately falling back to a position that satisfies him and relieves the partner. No trading partner, regardless of our relationship or shared values, seems to be spared.
China is the rising power we need to address, and I support the efforts to make China play fair. It would surely be easier if we had some allies who would support the pressure Mr. Trump is applying. Yet the tariffs being implemented on certain goods from Canada, Mexico and Europe don’t really give these trading partners much incentive to support us.
How does it all play out? I suspect cooler heads will prevail. Neither side wants a trade war, and I believe there will be a solution where both sides save face. Some US companies, including some we own, may take a hit, but it shouldn’t be disastrous. Other US companies may benefit as (hopefully) Chinese markets become more accessible. Other trade disputes should end in roughly the same way, though the diplomatic damage may hurt the U.S. in other ways. The stock market will probably over-react to tidbits of trade news, but investors, as opposed to traders, can look past these gyrations.
My oldest child is a rising high school senior, and we have started the college process with him. In listening to various guidance counselors and college admissions people, I find I am drawn to a common theme I hear from them: it is an inherently flawed process. The colleges get a snapshot of the applicant – grades, essays, SAT scores, etc. Mistakes happen. Hofstra accepted Bernie Madoff, and USC rejected Steven Spielberg.
The process has some similarities to picking stocks. As analysts we have a limited amount of information: SEC documents, press releases, management interviews and any other clues we can legally grab. Mistakes happen. Imagine being an Equifax shareholder the day the company announced a major data breach (long-time clients may recall we owned the stock at one point, selling with a healthy gain long before the breach happened). Most investors realized such a breach was a risk, but who carries an umbrella when there’s just a tiny chance of rain?
It works the other way too, when a good pick is made better by a little luck. A few years ago we bought FMC, a company best known for its pesticides and herbicides. It also had an interesting little business in lithium, which is used in electric car batteries, but the unit was small and wasn’t the main reason we bought the stock. FMC’s core business has performed very well, but the stock has also benefited from the huge jump in lithium demand. That business has now gotten so big that FMC plans to spin it off to shareholders within the next year.
Just as colleges fill their freshman classes with the applicants they believe to be the best, we build our portfolios with the stocks we believe to be the best. The key, I believe, is to look at the data differently, to develop a different perspective than others. The most common difference we have in perspective is time. Investors tend to follow the hot stock, buying not because the stock is worth more than the price but because the stock “just keeps going up.” When we bought FMC, the agricultural economy was struggling with low crop prices, and there were few signs of major pest problems. However, in the long-term it was likely that crop prices would stabilize and that pests would again become, well, pests. By looking at the data differently and thinking about the company’s long-term, rather than immediate, health, we were able to buy the stock of a strong company at an attractive price.
That brings us back to the current market, where we have started to see more opportunities. While the market remains fixated on the near-term growth of momentum stocks like Netflix and Nvidia, we have the chance to buy pieces of good companies at modest prices.
That’s not to say we will never get caught in the rain without an umbrella - sometimes we will. In the long run, though, if we can make good choices through diligence, discipline and a willingness to see things differently, we should see more than our fair share of sunshine.