Scarcity Dictates Vigilance
There are many variations on the “measure twice and cut once” phrase. In Russia, the perpetually skeptical Slavs use the proverb, “measure 7 times and cut once”. Carpenters make the “measure twice and cut once” their mantra. The Dutch employ the phrase “measure thrice and cut once”. All regions of the world have a historic variation on the phrase and all have the same meaning:
“plan and prepare in a thorough manner before taking action“.
These historic adages typically arose during times of scarcity. The Italian tailor operating in the 15th century did not have the ability to order bolts of cloth with a 48 hour delivery period from a local distributor. No, silks from China, woolens from the United Kingdom, they were all ordered often years in advance, perilously making their way via ship to a handful of free ports where they were slowly carted off to the hinterlands. If the tailor were fortunate enough to actually obtain the specific item requested, the merchant vessel avoiding being sacked by Barbary pirates, a replacement supply might not be available for many years to come. Therefore, not a single ounce of precious cloth could be wasted due to a flawed measurement.
For carpenters of old, who lacked modern power tools or an ability to fix a mistake using adhesive glues (the first adhesive glues were invented circa 1750) for the purpose of patching up a botched cut, precision was everything, because a lack of precision would, more likely than not, result in an incredible delay in job completion, a delay or reduction in payment, and potential starvation for that tradesman’s family. In almost every trade, scarcity of the raw materials needed to complete a job evolved to a time-tested system of front-ending all of the measurements and planning, so that nothing would be left to chance, nothing wasted. And for millennia, such an emphasis upon precision, planning and drafting, prior to the execution of the actual task, served the craftsmen well.
Why then, with the most precious of raw materials, our own investment capital, do we perpetually rush things?
What possesses investors to jump at every investment ideal under the sun, most of them ordinary, some quite foolish, simply because of a glossy presentation, a tout by a tip sheet, a marketing heavy meeting with a wholesaler of investments?
We rush to decisions, because, for far too many, capital is deemed to be in abundant supply, so much so that it can be wasted. The adage of measure thrice and cut once has no importance in modern investment circles. Liquidity is king and transactions are made, not overwhelmingly due to investment merits, but rather due to an ill-advised presumption that in the event of a mistake, an investment may simply be sold and a replacement found. This presumption has a fatal flaw; in the event of a mistake, what was believed to be a finely crafted suit of cloth or chest of drawers is revealed to be inferior, and an inferior product typically does not command the same price as a premium product. The goal of absolute liquidity does not result in the return of all your investment capital and this diminished capital base buys you less of the replacement investment. In other words, changing an investment, just because you can, almost invariably serves you ill.
If one doesn’t take the appropriate time to fully understand the business that they intend to invest in, what one too quickly assumes to be a company that will aid them on their goal, could just as readily turn into a “gaol”.
Investors of all stripes, large ones and small alike, should treat capital with more deference. It is easily obtained during periods of expansionary money supply and just as quickly taken back during times of contraction. To remove temptation, I treat investment decisions on the basis that we have a finite lifetime supply of transactions, similar to a punch card. Once that card is filled, no more purchases may be had, so any investment had better be mulled over for a considerable period of time, before being acted upon. Any new investment proposed needs to be superior to what is already held, or there is no purpose in wasting a finite punch on the card. And to determine whether or not an investment is superior to what is held, that demands an investment of time before money, the same lead time that craftsmen throughout the ages have all required during periods of supply scarcity.
Adequate time to plan and prepare, prior to taking action, results in minimal surprise on any investment thesis.
Were I were to purchase shares of Taiwan Semiconductor (TSM-NYSE, $103.21 USD), one of the world’s largest chip fabs, a business producing a consistent 40.7% net, after tax, profit margin, and a 69.7% EBITDA margin, I would have modeled, long beforehand, a potential scenario whereby China would invade Taiwan and seize the productive capacity of TSM on the basis of “spoils of war” premise, one with no compensation. This would represent the basis of a worse case scenario in my decision to either use up a scarce punchcard, or to sit the opportunity out. After all, China has coveted the island of Taiwan for more than 73 years and has long maintained that they reserve the right to return what is considered to be a rebel state, by force if necessary. I would have also modeled in a continuation of the status quo as well as a best case scenario whereby China just goes away and leaves Taiwan alone. Finally, I would have certainly added a forth possibility to the multitude of outcomes, one whereby China continues to badger, threaten and browbeat the people and government of Taiwan to the point that, tiring of threats, Taiwan ultimately negotiates a Hong-Kong style reintegration with China, so as to remove the likelihood of physical harm to a person or short term expropriation of a business or capital. Under no scenario would I purchase TSM for a very short duration, then act surprised that China is threatening to launch a military campaign and sell out on that basis; because that contingency should have been modelled right from the outset and would have been integral to my investment decision to act, or to not act, on the initial purchase.
TSM represents the sort of equity investment that generates monopoly style EBITDA and profits. The hold-back for many is the widely publicized threat of Chinese military action to seize Taiwan by force. That is one scenario, to be certain, but is it the only option, or the most likely? At least one prominent investor has decided that to be the case. I, on the other hand, find monopoly style profits to be exceedingly rare to come across. They do not just fall out of the sky into your lap. No, any monopoly business carries with it, its own sets of unique risks; some are regulatory, some are capital based, some are the risk of obsolescence and in the rare case, represent actual threats that could result in expropriation.
Measure thrice, check twice, cut once.
The arduous and occasionally tedious legwork involved prior to arriving at any investment decision, be it to purchase an equity or to sit aside, using up a scarce punchcard and equally scarce capital, removes much of the element of surprise that rattles investors into doing something that they don’t want to do after the fact, but more realistically, shouldn’t have done at the outset. I understand that Taiwan Semiconductor might be seized by a grasping China. Were I were to purchase shares in the same, that basis would represent my starting point, instead of an afterthought.