This is a bit dated, but bear with me. Last week, Jevic Transportation closed down. It looks like it is liquidating. On the next day, trucking stocks fell as a result. Are things tough in the trucking industry? You bet. Volumes are low, and fuel costs are high.
Now, Jevic wasn’t that big, but if I see a few more large-ish Truckers disappear, I will move to a major overweight in trucking stocks. Why? Pricing power will return to the remaining trucking firms, and after a time, the stocks will rebound. That’s what happened to steel in 2002. I owned Nucor, and did quite well, though, I sold too soon.
When my next reshaping comes up, I will toss some of the highest quality trucking stocks into the mix. The idea is that if the industry weakens further, they will remain among the survivors, but if pricing power comes back, I will make more than adequate profits.
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Now, if you have read me for a while, you know I like to rotate sectors within a value discipline. I do well at it. But who is the best of them all? Ken Heebner. Now, that’s a guy I would love to learn from. I deliberately don’t let sector rotation become the whole strategy because I am trying to limit risk. I also don’t trade like a maniac, because I can’t do that well. But I do more than adequately, and all of us could learn from the expertise of Ken Heebner. Unlike Peter Lynch, who was totally bottoms up, there are real advantages that come through analyzing the economy, particularly individual industries. But, if most investors ignore economics, or, if they only focus on broad macroeconomics, that’s fine with me. I will focus on the economics of industries, and that will help me invest well.
Excellent post (as usual!) but be careful pigeonholing Peter Lynch. The last time I interviewed him, back in ’02, he told many, many stories about when he was running Magellan and discovered unappreciated changes in broad industry-specific economics prompting to buy boatloads of stocks. When S&Ls were going public in the 80s, he bragged he was the biggest holder of thrifts west of the Charles River. When Sears gave him a tip about home renovations, he snuck to the bathroom and told his trading desk to buy every carpet maker they could find by sunset. He also owned the entire auto industry at one point and had some big theory about railroads that I didn’t quite follow.
Thanks, Aaron. Perhaps we need to distinguish between Peter Lynch’s public persona, which said don’t spend time thinking about the economy, and the way he analyzed companies/industries. He liked the work of Ed Hyman, and as you mention, he did concentrate industries particularly in small cap areas where to make a difference to the rapidly growing Magellan Fund, he had to play themes.
He was a bright and complex investor. He had the wind at his back for the latter part of his tenure at Magellan, as his style was in favor, but the early days of his time were pure genius, where he did so much on a small asset base.
Thanks for the interesting anecdotes, Aaron.
so why not the same argument for monolines?
You can make the same argument there, but MBIA and Ambac reinsure each other to a moderate degree, and RAM Re reinsures both of them.
The play would be to buy Assured Guaranty, like Wilbur Ross did.