Q1 2024
As another quarter draws to a close, I invite you to pause and reflect with me: Are opportunities really where you think they are? Amidst the rapid changes and noise, both domestically and internationally, distinguishing the signal from the distraction is more crucial than ever. This letter aims to challenge conventional wisdom and reveal where true opportunities may lie, often hidden in plain sight.
Change your thinking, change your future
Let us begin with some constants of the market; things often run in cycles and opportunities can often be found in this pattern. However, many don’t see these cycles, but instead, can only see the spikes and troughs that raise the most alarm. Whether it’s rising prices, dips in value, or the new shiny thing, most people view these things in the short term. Even purported “experts” with vast amounts of knowledge can fall into this trap.
Sadly, much of the advice from these people, and the actions of their followers, is reactive and emotionally driven. Or, in other words, they engage in level 1 thinking. This is when our brains can’t but help focus on a fast, automatic, emotionally driven response to situations. It causes humans to focus on what’s immediately in front of us. From what I have witnessed in my life, this is the mentality of the get-rich-quick schemers of the world, not the true investors. They see an opportunity, focus on the outcome that is desired most from it, and jump in without thinking things through any further.
The key here is that the opportunities aren’t where we think they are. In most cases, we need to look beyond the immediate to find these opportunities, which requires a different style of thinking.
Level 2 thinking, however, is a deeper level of thinking. This approach is more deliberate when it comes to decision-making and relies on breaking the potential consequences of our actions. For investors, this means looking past the immediate results and playing the long game. This approach allows you to look past the first effect of a decision and consider what follows, which is where the what/why of an outcome will become clear.
Whether you employ this specific approach or not, is up to you. What I will drive home, however, is that the opportunities we seek aren’t always where people tell us they are. Purchasing a house, despite the old wisdom, isn't always a guaranteed money maker. The latest fad or investment craze might have made someone a fortune yesterday, but this doesn’t mean it will do the same for you tomorrow. The opportunities that generate long-term wealth are rarely found in the level 1 short-term or immediate thought.
Take your brain out of the immediate, remove the blinders that have you watching the short term, and look at the bigger picture. Delve into a deeper level of thinking that questions “what” and “why.” Whatever cliche or metaphor you choose, the message is always the same. Rome wasn’t built in a day, Super Bowl rings aren’t won in game one of the season, and sustainable wealth isn’t built overnight. If you can shift your mindset, you’ll be able to find the right opportunities that will help you achieve your goals.
Ditch the herd and set off on your path. This is where the real opportunities often are.
Energy vs Technology: A Tale of Two Levels of Thinking
Having set the stage for a deeper level of thinking, let's explore two contrasting sectors that illustrate our investment philosophy: energy and technology. These examples not only highlight the cyclical nature of markets but also demonstrate the critical importance of foresight and strategic patience in capitalizing on real opportunities.
Back in 2014, I found myself suddenly at the helm of covering the energy sector for my team at JPMorgan, stepping into an arena where US oil production was experiencing a renaissance. Thanks to advances in hydraulic fracturing—or "fracking" as it's more commonly known—the industry was pulsating with excitement. Production soared from about 5 million barrels per day in 2008 to approximately 9.4 million by 2015, echoing the peak levels of the early 1970s. To many, this "Shale Revolution" represented a golden opportunity.
However, embracing a deeper, level 2 thinking approach, I began to question the sustainability of this boom. What happens when the initial surge ebbs? As capital flooded the sector, and as investors clamored for rapid returns, the industry shifted focus from long-term value creation to short-term outputs, distorting fundamental metrics like return on invested capital (ROIC). Production continued to surge, oversupply ensued, and soon after, the inevitable happened—prices plummeted, and the market's exuberance turned to losses. By the end of last quarter, those who invested in the energy sector in 2014 were staring at a stark reality: a nearly 17% drop in WTI crude prices, with returns lagging massively behind the S&P 500 by approximately 184%.
This experience underscored the importance of foresight in investment decisions. The energy sector, once a hotbed of speculative activity, has since matured into a more consolidated and seemingly less exciting industry. But as speculative interest waned, rational, cash flow-focused operations took root, leading to what might now be considered an undervalued opportunity. Even seasoned investors like Warren Buffett have recognized this, significantly increasing Berkshire Hathaway's stakes in major energy firms.
Conversely, I believe the technology sector is currently where energy was years ago. Capital is pouring into tech, driving valuations based on past triumphs rather than future potentials. From cloud computing to AI and Web3, the next "big thing" seems always just around the corner. But as we've seen before, today's investment darlings can quickly become tomorrow's cautionary tales.
Recalling my letter from a few quarters back, the comparison was stark: Apple and Microsoft alone had reached market valuations surpassing those of all 2000 companies listed in the Russell 2000 combined. This serves as a vivid reminder of the tech sector's current allure—echoing the fervor once seen in the energy market.
As we navigate these contrasting landscapes, the lessons are clear. While the energy sector teaches us about the perils of exuberance and the value of patience, technology offers a current snapshot of market euphoria and the need for cautious optimism. Both sectors demonstrate the critical importance of second-level thinking—a strategy that focuses on long-term implications rather than immediate gains.
Home and Abroad
Currently, US assets are very popular, an indicator that sentiment towards homegrown talent is high. We saw something similar in the early 2000s. People piled their funds into non-US assets and poo-pooed the US, only to find the US dominating from a returns standpoint for the 15 years that followed, while the in-vogue non-US markets have drastically underperformed. This just goes to show you it's not often wise to chase that emotionally driven level 1 thought.
Outside of the US, there are, of course, geo-political events that cause a great deal of concern and anxiety around the world. I don’t need to explore these events, those with more knowledge of them have already done so. What I will discuss, however, is how these - and any other events like them - impact the markets. In a previous blog, I shared data that point to some of the most renowned geopolitical events in recent history and their effect on the markets.
There are, of course, initial shocks, but you may be surprised to learn these shocks aren’t felt for long. The market often is a self-correcting system and is supported by people and forces that will it and work for it to succeed. Even the greatest of crashes (such as the Great Depression and the Financial Crash of 2008) have been recovered from, and if history is anything to go by, these events will play out much the same.
This is by no means diminishing their significance, but rather, simply putting them into the context of the larger financial picture. These events are often small and short-felt stumbling blocks, that the market recovers from. In other words, they’re the first order of consequences. This is an opportunity to use the level 2 thinking that I discussed earlier. Using this thinking, you’ll see that these events should only impact for a short period, and the opportunity is typically where it doesn’t appear to be.
The Bigger Picture
If there is one thing I want you to take away from this letter, it’s that it never hurts to take a step back and consider the bigger picture. Whether it’s in your financial, personal, or professional life, level 1 emotionally driven focus can leave you exposed to unexpected consequences. Sadly, long-term wealth isn’t built on the unexpected. It’s built on careful steps, consideration, and planning. It’s built using level 2 thinking, with a view of the big picture in mind. This thinking is applied by the most successful investors, and if you can do the same, you’ll be on the right track to achieving your own financial goals.
As we look forward, remember that the best opportunities are often hidden beyond the immediate and obvious. I encourage you to challenge the usual perspectives and think deeper about where true value lies. If you’re ready to explore these insights further or discuss how they might apply to your personal goals, I’m just an email or call away.
Thank you to each of our clients, new and longstanding, for trusting us on this journey. Here's to discovering new opportunities together in the coming quarter.
Until next quarter,
Jason Blumstein, CFA®
CEO & Founder
Julius Wealth Advisors, LLC
Disclosures:
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.