Hey Friends,

I’m not sure I remember a time where macro uncertainty was more pronounced. Such uncertainties include:

-when will the pandemic end and how will it change earnings and even the way business is transacted going forward?

-how will the presidential election unfold?

-will we see resiliency of capitalism or more openness to socialism?

-what will the practice of law and order look like as lawmakers seek to address issues?

-what will happen next with the tariff situation with China?

These are but a few of what a list of uncertainties could include that can pose macroeconomic effects. Amid all the uncertainty, the stock market continues to “mostly” recover.

I’ve stated many times that the main reason for my book, “Choose Stocks Wisely,” is to persuade readers of the importance of proper balance sheet assessment in the matter of analyzing risk. A synonym for risk is “uncertainty.” Thus, we are in a time that throws a spotlight on the balance sheet.

In assessing the balance sheet at a time like this, a supporting tangible book value composed of a strong cash position and majority asset base that is “current” in nature — with little to no short term debt and only lightly levered by long term debt (if any) with very distant maturities — yes, a supporting balance sheet underlying the current stock price where the business is stable and necessary enough to sustain profitability through uncertain times is where one wants to park money in my view. Aside from such, being patient and having a solid cash position on the sidelines seems a sensible course.

I mentioned type I and type II errors in my book. The type I error is rejecting a hypothesis you should accept. Type II is accepting a hypothesis you should reject. The type I error is equivalent to “missing out” on potential gains. The type II error is descriptive of “losing” resources. The type II error is the one that brings portfolio destruction. So, avoiding type II is always critical in analysis. The balance sheet is our best tool for this kind of analysis.

See you next time.