Focusing on time-in-market versus market timing.
Focusing on time-in-market versus market timing.
Focusing on time-in-market versus market timing.
Focusing on time-in-market versus market timing.
At Langdon, we spend our time exhaustively examining businesses and constructing concentrated, high-conviction portfolios. Currently, the Canadian Smaller Companies strategy holds 18 businesses. The average business in this strategy was founded in 1987 (ranging from 1962 to 2020). As long-term investors, we often remind ourselves that the businesses we own have demonstrated resilience through economic cycles and their many accompanying (positive and negative) shocks. It is important to focus on time-in-market instead of market timing, and thinking like owners allows us to differentiate ourselves relative to traders of a stock.
Allow me to summarize the trading activity of one portfolio holding during the month of January. Aritzia, a fashion house headquartered in Vancouver, reported revenue growth of 38% for the 3- months ending November 2022 (bringing revenue growth in the 12-months prior to 52%). As we are all well aware, supply chains have been strained and delivery of inventory has taken much longer than pre-pandemic norms. To combat this and to avoid lost sales, Aritzia has ensured it purchases material and manufactures its best-sellers months in advance. As supply chain backlogs have eased in recent months, Aritzia found its Spring 2023 inventory starting to arrive earlier than expected. With limited distribution center capacity remaining, Aritzia had to pay to use the space of third-party distribution centers, incurring short-term cost pressures. They do have a new Toronto located distribution facility in the works, but it does not open until Summer 2023. Despite reporting exceptional revenue growth, the short-term cost pressures led to a 10% decline in the stock price (an erosion of approximately C$600MM of market value).
Now, let’s imagine that this business was our family business. We would be very encouraged by this revenue growth and with the opening of a new distribution center in several months. We’d likely be pleased with the proactive decision to ensure Spring inventory would be stocked in an effort to avoid lost sales. Not to mention, Aritzia has demonstrated continued discipline with promotional activity (limited sales) relative to many retail peers. Would we believe the short-term use of third-party distribution center capacity had impaired our business by ~$600MM? Likely not.
A lot has been written in recent years about high turnover in the stock market. Recently, the average holding period for companies traded on the NYSE was just five and a half months, down from 14 months in 19991 . The ‘renter’ of a stock for such a short period is not focused on the long-term value that a business can create and is definitely not applauding a management team for its proactive decisions that will benefit shareholders in the coming years. We recognize that the businesses we own are not our family businesses, and we know that stock market fluctuations will continue to happen. Not only are we okay with this, we are excited by the opportunities that this creates for long term investors like ourselves. By emphasizing the factors that will compound wealth in the long-term, we believe that our strategies are positioned to stand the test of time and compound returns.
This article is prepared by Langdon Equity Partners. Content in respect of the Langdon Smaller Companies Fund (ARSN 657 901 614 (the Fund) is issued by Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238 371 (‘PFSL’) as responsible entity of the Fund. PFSL is not licensed to provide financial product advice. It contains general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so.
Past performance is for illustrative purposes only and is not indicative of future performance.
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FOR AUSTRALIAN CLIENTS:
The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Link to the Product Disclosure Statement: here
Link to the Target Market Determination: here
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FOR CANADIAN CLIENTS:
Important information about each Langdon mutual fund is contained in its prospectus, AIF, fund facts document and in its management report on fund performance. Any potential investor should review these documents prior to making any investment decision relating to such fund. You can view copies of these documents by following the links below:
Link to the Langdon Global Smaller Companies Portfolio Disclosure Documents: here
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