Cyclical Investments: Learning from Calvin Froedge

I know I mentioned Calvin Froedge before, an American entrepreneur based in Panama and private investor extraordinaire. He also has quite the following on X aka Twitter. He is acerbic and sometimes way out there but you cannot say he isn’t smart and original. 

I listened to a great interview he did a few years back that really still holds strong. It’s quite insightful and gives you an idea why he has done so well investing. You should watch it yourself:

https://www.youtube.com/watch?app=desktop&v=VCTc3Btp8O0

I pulled some interesting points from the conversation: 

“the nice thing is that you remember Gordon Gekko and Wall Street talking about: ‘I create nothing, I'm at the top of the food chain, I own everything.’ I mean that's really what Equity investing is all about.  

I mean you've got the ability with practically no regulation with no employees with you…. You know you don't need to make sure your contractors get there.  You don't need to make sure that nobody gets drunk on the job. You don't need to make sure that everybody's doing their quality control. You just need to be right. You are only responsible for you. I mean that is the ultimate, the most refined form of capitalism that exists right! That is pure capitalism.”

This is why I get the appeal personally as a private investor. I wish I had discovered equity investing much earlier. Unfortunately or fortunately, my realm of so called expertise is in startups, investing in startups. Super illiquid startups. So in the few cycles where I got liquidity I ended up putting money into real estate VC funds and startups versus equity investing, much to my chagrin and financial pain. There is much to love about equity investing for sure. Especially in unsexy cyclicals. Doubly so as the world fractures and refocuses on reindustrialization and securing their own supply chains. 

“I love equities, I really do. I love equities also because you know there's a saying that the most about the most volatile thing is the equity, the earnings are the second most volatile thing and then the replacement value of the assets is the least volatile thing. 

And you know that's the great thing about the stock market is if you have a long enough, if you can look back long term at a particular sector, mining and shipping are two outstanding examples.”

However, as Calvin states, it’s not for everyone. You have to be a long term investor and have the emotional stomach for the inevitably crazy ups and downs. 

“You can see that there are cycles. You can see that sometimes times are really good, sometimes times are really bad. When times are really good, people are paying crazy multiples for these companies, right crazy multiples for the assets.

You know when times are really bad people think that they're never going to have value again they think everything's a zero. You might in equities, have to weather a 50% drawdown on something. Like that could happen especially in mining stocks. 

I have had 80% drawdowns before. I've just you know sat there and watched

it and did nothing. And just accepted it and waited.

But in cyclical Industries you know that the Mania times are always going to

return and the depression times are always going to return.”

And there are opportunities in these cyclicals everywhere, unlike in real estate or even startup investing. 

“In real estate I can go out and look for something cheap. And occasionally here because it's not a very liquid Market I seldom find something like selling for less than replacement value. But I gotta look over every rock and maybe I'll find something that's selling 40% or 50% off. 

In equities you frequently find stuff, I mean in these cyclical businesses you frequently find stuff that's had 90% drawdowns. Like I buy stuff all the time that what I paid for it, a couple years later they pay me that much in a dividend in a single quarter. I mean it's just stupid. Equity is the only asset class where you can find that.”

I also got some good nuggets on how Calvin manages his business life, between a core money business he runs, called Marhelm and his private investing. And the critical importance of patience. Something I lack and am working hard on. 

“I'm trying to spend almost all of my time on Marhelm my shipping information Service and I think that we've got a pretty good track record and we've done a good job. I love shipping because it's cyclical. I like cyclical businesses because I know that other people are impatient and they lack the emotional fortitude to wait on through these cycles. People have some cash that they want to put to work. 

They want to put it in, you know they want to do it now. They don't want to wait. They don't just want to sit on cash for a year or two years and just wait for the opportunity. 

They want to buy something now and in cyclical businesses you can't do that. You have to be patient and you have to wait for different points in the cycle. You have to look at those long-term fundamentals and you gotta wait for the right opportunities or move on.  

But you know these cyclicals, they're always going to give you the chance for multibaggers. Mining, shipping, steel, even agriculture. But mining and shipping, those are the kings of cyclicality.” 

So if you are interested in equity investing, and assuming you have the willingness to do the research, have great pain tolerance, patience and a long term inclination, cyclicals are an interesting area to look at. The cyclical industries Calvin discusses are well set up during this time of major geopolitical and global macro change. I hope you found listening to Calvin Froedge to be as instructive as it was for me.