ARE BUSINESSES GETTING WEAK?

Launa and I recently returned from a photo safari to Africa. Even though it was on our bucket list, we had some apprehensions about this trip given the immunizations, safety warnings, political uncertainties, etc.. The unknown always brings with it some anxiety and so we did all we could to educate ourselves on our destination. As it turned out, Africa was one of our favorite trips ever. There is so much beauty there, in the land, the animals and especially the people.
 
As part of the plan we decided to travel during the dry season. The temperate part of Africa where we visited has two main seasons, a wet and a dry. During the wet season it rains almost every day and the land is lush and green. During the dry season it rarely rains, the landscape dries out, and water is difficult to find. One would think the beautiful wet season would be a better time to travel, but we had read that there are benefits to travelling when it’s dry. Though the trees are mostly bare and the fields dry, the lack of vegetation makes it much easier to see the animals. During the wet season there are lots of animals, but the abundant vegetation gives them many places to hide and an easier life. During the dry season life becomes tough so only the toughest animals survive. Those that do are easier to find as they congregate around the few watering holes and streams that remain. So, for those looking to see the strongest animals, and their interactions with each other, the dry season is the best time.
 
The economy also has its wet and dry seasons. Often investors are tempted to rush and buy during the good times when markets are strong and profits are rising. But the problem with good times is, it is very difficult to distinguish between good investments and bad. It is easier for a weak business to succeed when the economy is strong, and investors can be lured into buying companies that may not be able to withstand the economic dry seasons that surely will follow. I find that investing when times are tough is perhaps the best time to find great companies. Like the animals, if a company can do well during the dry times, they may be a good candidate to flourish even more when the spring rains come.
 
After 10 years of economic strength, many companies have gotten fat and happy and perhaps a little sloppy. Feasting on the lush economic forest from the steady rain, these businesses may not survive as well when the next drought comes. When I review investments, our office does what we call an economic stress test. Our goal is to calculate how certain investments might do when the rains stop. Assess your own investments. They may have done well during the easy rainy season, but how will they fare when things dry up? Todays’ profits won’t matter if you give them all back during the next drought.