STEWARDSHIP 34 may 2025 www.goodnewsfl.org Good News • South Florida Edition We moved to the beautiful South Florida coast in 1988. As native New Yorkers, seeing the majesty of God’s creation at the beach quickly became a cherished time with family and friends. We would often take our young children, and now grandchildren, to soak in the sounds and the sights of the Atlantic Ocean. While the kids swam, played, built sandcastles and collected shells, we would reflect on the beauty of God’s creation so vividly surrounding us. More recently, on a calm water summer day, our grandchildren had the spontaneous experience of several manatees frolicking with them near the water’s edge. They could reach out and brush the manatees’ bodies as they swam by. We are certain it will be a lifelong memory. However, not every day brings us calm waters and frolicking sea life. More often than not the mighty Atlantic roars with waves and white foamy waters. And if you want to spend a day like this at the beach, you quickly realize that you cannot stop the waves, but you must learn to navigate them. The financial markets are much the same. There can be periods of calm and seemingly life altering financial success, but when you least expect it, the mighty markets throw us a storm of volatility and extremely scary headlines. The foamy waves come crashing ashore. Similarly, a wise and deliberate investor learns to navigate these waters too. Consider the balance sheet This month’s core investment principle is… consider the balance sheet. Successful companies that are light on debt have the latitude to weather most of any waters that come their way. And the passage of time works in these companies’ interests, as the allocation of capital finds its way towards long-term business strategies that will often benefit shareholder value. Said another way, a wise and deliberate investor favors investing in businesses that outperform in times of panic and economic downturn. And debt adverse companies are the ones that generally do. It also makes it easier to hold onto them and not panic when the inevitability of strong waves of bad news flow through the financial marketplace. We learn to ride the waves the ocean of the markets sends our way. Here too, Wall Street perpetuates a view that is mostly short-term in nature, but those of us that live on Main Street should think differently. Wall Street likes to chat up momentum and short-term daily moving averages. But we seldom hear about the strength of a company’s balance sheet or breadth of its economic moat. Those of us on Main Street should camp right there. Recently, we saw a headline that U.S. credit card debt reached a record $1.21trillion. People living life in temporary calm waters and the immediacy of satisfaction that debt gives them have no real recognition of what happens when the storm arrives. And it will. It is much the same with some companies. They ride the wave of “easy money,” but eventually an economic reckoning or company specific crisis arrives that finds it out of position to thrive through the downturn. Instead, these companies become a slave to the debt on the company balance sheet. Another nugget of wisdom can be found in Proverbs 22:7, a debtor is a slave to the lender. It applies to people and companies alike. Dig a moat around your castle When a business possesses an economic moat, it can not only keep its competitors in their place but can also separate overtime from those that fail. Warren Buffett, whom many believe to be the most successful investor of all time, has spent many a moment using the moat metaphor. The castle surrounded by a water-filled moat parallels a business that has competitive advantages that protect the company’s earnings from the invading tactics of competitor companies. Some examples of business moats are being a low-cost producer (ex, Walmart or Amazon), an easily recognizable brand (ex, McDonalds or Coke), technological advantages (ex, Microsoft or Nvidia) or unparalleled service (ex, USAA or Chick-fil-A), to point out just a few. We would say that being a company with little to no debt, especially in an industry that traditionally has plenty, provides a moat too. And a highly sustainable one at that. Speaking of Warren Buffett, he once quipped that when at the beach, you don’t get to see who’s swimming without their trunks until the tide goes out. As we all well know, inevitably tides come in and go out. It is all part of God’s majestic design. Tides happen in markets too, so let’s be sure we’re all wearing our trunks by examining our investments balance sheets. Patrick J. Kelly has spent more than four decades at the most senior levels in the financial services industry. He has held executive leadership positions in banking and securities firms, served numerous profit and nonprofit boards, possesses advanced education in economics, accounting and finance, and has been a featured guest in numerous financial media forums. At present, he endeavors to impart his experience and knowledge to younger generations whenever possible while also offering consultation on securities and banking industry practices for litigation-related expert witness testimony. Life at the Beach - Patrick J. Kelly - President, Kelly Advisory Group
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