BFI-3Mr. Market couldn’t seem to make up his mind in early 2016. Ben Graham famously instructed investors to consider the stock market as a character named Mr. Market who was your partner in business. Offering you a daily opportunity to buy his portion of the business, prices would vary widely based on his level of excitement or lack thereof. More recently, Warren Buffett went on to say, “the more manic-depressive his behavior, the better for you.” As noted at the beginning of the letter, Mr. Market had two vastly different emotional states in the first quarter. How else can you explain a decline of 11.4%, followed by a rally of 13.7% within the span of 3 months!?

Instructive about this episode is the fact that in the stock market you don’t get to decide how long an opportunity will last. There are things that you can control in the investment process, and there are things you cannot. How long an opportunity waits around for you is one of the latter. As regular readers know, we spend a great deal of time reflecting on and trying to improve our process, and the developments of the last several weeks did not alter our stance. We would highlight:

  • As declines in certain names became meaningful, especially in the industrial space, we began work on a number of ideas, but we found on the whole that, like we found in our effort in the oil and gas market during the last year, most names were falling from lofty levels not reflective of the cyclical reality of those businesses. This challenged our ability to find well-capitalized, truly undervalued securities. We did find a number of companies that looked more fairly valued and a couple of names that truly did look cheap. Unfortunately, we were unable to take advantage of Mr. Market on those two.
  • However, we believe that we properly focused on and prioritized the best long-term opportunities we saw at the time. The capital deployed during the quarter, while perhaps not directly a result of the brief downturn, was allocated to the best long-term, risk-adjusted ideas we could find.
  • We believe that we properly conducted an appropriate amount of diligence on the names we’ve added to the portfolio. Our process wasn’t rushed or cut short because the volume of opportunities was growing. We also didn’t become overwhelmed with the number of ideas being examined, to the detriment of those good ideas in front of us.
  • We believe there is still more we can do to focus our diligence efforts and decision making even more, with the aim of appropriately reducing the time between identification of an idea and commitment of capital. We can’t and won’t sacrifice quality of process for speed of process, but we can improve speed to decision by becoming more efficient.

Considering the information sources and technology available to investors these days, no one can control how long an opportunity will be available in a competitive market. Therefore, it is incumbent upon us to control the things we can control—most notably, our process.

This post has been excerpted from the Boyles Asset Management Q1 2016 Letter to Partners.