When was the last time you thought about infrastructure? Your mind probably drifts to roads, bridges, subways. But when was the last time you thought of the infrastructure that is so boring that it's thoughtless? Things like your water, electricity or plumbing?
The scale of these projects is breath taking. In the US and Canada everyone who wants to be wired with electricity is wired with electricity. And it just works. You never flip a light switch and think "I hope the lights come on this time." The same is true for plumbing, or water if you're in an urban area. These things work and they're enormous.
Step back and consider electricity. How many miles of electric wires are there in the US? Google tells me that the US electric grid is the largest interconnected machine on the face of the earth at 200,000 miles. And right now everything is working. I mean there are probably a few localized outages, but it all just works, and will work tomorrow, and the next day, and the day after that.
This giant machine marches forward every day regardless of what's happening. But what's even more unique about the system is that any outage is quickly localized. If you plug in too many items into an outlet you'll blow a fuse. If a tree falls on a line and overloads a circuit a fuse blows at a distribution hub. There have been a few rare instances where a portion of the country goes offline, but the entire grid hasn't gone down.
The reason for this is by design. Issues are isolated to the smallest area possible. If a lamp is bad it's just a fuse. If a house goes bad then maybe a neighborhood. But plugging in a counterfeit iPhone charger into a wall socket doesn't have the ability to down my city. This is by design.
So what does this have to do with portfolio construction? Most portfolios are constructed where the errant iPhone charger can take a country offline. Investors concentrate their portfolios into similar companies, or companies that rely on each other, or on specific conditions in a given country continuing.
The challenge is to design a portfolio that's like the electrical grid. If you make a mistake and buy a dud (and we all do) that the damage will be limited to that dud.
The natural answer is to state "buy an index and you'll get a bit of everything and be safe." Unfortunately it isn't that easy. The largest companies in the S&P have underfunded pensions that are invested in....the other largest companies in the S&P! Smaller companies are reliant on suppliers that have financial difficulties of their own.
If you start to follow this train of though you'll end up in some tangled web of interconnected liabilities that looks like something out of a CSI show. But just because something is connected doesn't mean that an issue can bring the entire company down. What you want a resilient companies with strong balance sheets and a growth mindset to overcome setbacks. A balance sheet gives a company time. And time is necessary in any situation where the future becomes unclear.
It's always a good time to look through your portfolio and make sure you aren't concentrated in any sector, or that companies don't rely on each other. Sometimes you can load up on companies in the same sector and avoid contagion effects. Whereas contagion exists across sectors, especially with manufacturers who have specialized suppliers.
Call me old fashioned, but I always want a solid balance sheet. A company with a shaky balance sheet and growth can outrun their liabilities, but it's never a guarantee. A solid balance sheet gives the company and investor time to react to market realities.
In the end I want my portfolio to be like the electrical grid. I want it to be able to withstand a few trees falling and a hurricane in Florida without a blip in New York.
Looking for value in the overlooked margins of the market.
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