Pricing the unpriceable
The US stock market’s recent all time highs suggest the ongoing attacks in the Middle East, and the war in Ukraine, are not market relevant. They’ve been judged, so far, by financial markets and corporate planners as price insensitive events. But the scheduled electoral cycle this year adds a new calendar of risks.
TIME magazine calls 2024 ‘The Ultimate Election Year’. Elections will happen in 64 countries, representing some four billion people. That’s 49% percent of the world’s population. Of course not all of them will pass without some meddling in the democratic process. In some we probably already know the result - President Putin will be looking for another overwhelming mandate in March and will probably get it!
Margin of Safety
I recently listened to a Goldman Sachs podcast with Chairman and CEO, David Solomon on the company’s business priorities for this year. He talked at length about the challenge of forecasting market outcomes from political events, and how they can affect the deal-making environment and global economy.
Of course for some parts of the financial services industry, the media and PR companies, uncertainty is not something to be feared. Market volatility brings fee and trading income, it generates audience figures, and secures training and advisory mandates. Complexity and uncertainty can be good for business.
But for many companies and individual investors, the mix of political, interest rate, and inflation risk this year represent a heady cocktail. So what to do? While a plan is not a strategy, at least having a plan may help. And the plan that has evergreen defensive qualities is Margin of Safety.
In financial terms it’s the difference between the ‘real’ or intrinsic value of a company and the current share price. Ideally, an investor gets protection by buying a company at a deep discount. As a concept it has wider application to how you live your life or run your business. The idea is to create a buffer against an adverse outcome, and never be a ‘forced seller’. In the banking industry it’s called risk absorbing capital. It's a great antidote to sleepless nights, something Credit Suisse never quite had enough of despite the best efforts of regulators and the Swiss National Bank!
Ideally then as the world follows the twists and turns to the US election in November you don’t have to price in the unpriceable - but know there is already a plan to survive any outcome.
