Strategy Vs Tactics In Today’s Environment
Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat. - Sun Tsu
At the highest levels of organizations, leaders are often given titles to show the world occupation and function, or probably more accurate, their importance (in some minds, anyway). The term which primarily gets used is strategist. Strategy defines your long-term goals and how you’re planning to achieve them. Directly related to strategy are tactics. Tactics are much more concrete and are often oriented toward smaller steps and a shorter time frame along the way. They involve best practices, specific plans, and resource utilization.
These are the ways the organization is going to accomplish its strategy. As an example, if you are a football team, and you know the other team has a great offense, your strategy might be to keep that offense off the field. Tactically, the way you would do it would be to run the football, occupy the ball with your offense and control the game with your offense on the field. Now, let’s apply this idea to the current market environment, shall we?
Much has been written about the movement of assets into passive instruments (ETF’s or indexes- S&P 500, Nasdaq, Dow) across the investment landscape. Large company stocks, specifically growth companies, dominate the major indexes. Growth as a strategy has been a massive outperformer over the last ten years, and value a huge laggard. It is reflected in the valuations of domestic indexes relative to international indexes, as US indexes trade at much higher valuations as compared to their global counterparts. From a capital allocation perspective, there is more valuation risk investing in the United States than in other parts of the world.
In conjunction with this is the current political situation in the United States. Many investors fear the 2020 Presidential and Congressional elections will bring a massive change in the governing dynamics in the United States. Two of the three leading candidates for the Presidential nomination of the Democratic Party have made public their designs for overhauling nearly every part of the economy and many of the major industries which constitute our system: Health care, energy, banking, media, technology, and private equity are front and center areas which will be subjected to the premise of too much concentration.
As an investor, the question of where to have exposure and why is the key consideration. From my perspective, on the strategic front, preparing for the worst possible outcome is rational, the important question is how do you do that? If you make the assumption that a progressive candidate from the Democratic side ultimately prevails, you also have to believe in that scenario, Democrats will have a majority in at least the House, with the Senate the crucial wildcard. Irrespective of that, the move to break up large companies would begin the day after the election.
From a valuation perspective, with US major indexes and large cap stocks offering little value relative to mid caps, small caps, or global comparisons, it seems pretty obvious to focus capital outside of large caps. You can go small in the United States or internationally, or you can go big internationally. Interestingly, keeping your capital inside large companies might wind up being the biggest winner, as if these massive enterprises were broken up, the historical record of owning the pieces of the larger entity after a split shows outperformance. Taking all of this in, my own preference is to go small. Small is where there is the most inefficiency. Inefficiency means mispricing. Mispricing means opportunity. Opportunity leads to, well, that is why you are reading this. Plenty of time to ponder it, just make sure you are thinking strategically.
In the markets this week, a deluge of earnings reports from the largest companies in the world told us why the market continues to hold up. McDonald’s posted strong numbers but investors viewed it as a miss, while Microsoft’s cloud business continues to roar, even taking share from vaunted competitor AWS. Microsoft is instructive of what I mean as it has revenues of over a 100 billion dollars and grew its revenue nearly fifteen percent. It has long had great margins, and its earnings power just grows and grows. With so many large companies in a similar situation, along with ultra low interest rates, big profits dictate a resilient market.
Amazon saw strong top growth and continues to invest in one day shipping, although they guided down for the fourth quarter. Intel helped the semiconductor area with very good numbers, especially in the data center area. In the media world, the solid numbers from both Comcast and Charter showed why cable remains a focus of both investors, and yes, Mrs. Warren. Next week will be another big week for earnings as the largest energy companies report, along with technology and consumer related names.
Finally, got a nice mention in this article from Kiplinger’s about vulnerable stocks.
Disclosure: Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the ...
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