Why A Duck

During 2020, making money in shipping equities was difficult if not impossible, as everything went down regardless of balance sheet, risk or prospects. However, trading around there were some great opportunities, especially in the Prefs. This year, a long only investor in shipping equities, especially in dry bulk and containers, need only to sit tight.  But current conditions can also be dangerous. To quote Charlie Munger of Berkshire Hathaway fame, “Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.

Corporate governance is getting short shrift as everyone is doing well.  In fact, some of the most poorly governed companies benefit the most when the tide is rising for all owners in a ship class. Many investors, who are renting stocks by just owning them short-term, don’t care. However, as a long-term investor, it is still important.

I sold a container stock in July of last year when management took the unnecessary decision of reducing their dividend. They felt they weren’t being rewarded for maintaining it. However, they still kept their investor unfriendly corporate structure in place. The day of their announcement, I swapped it out for a well-managed container-shipping operator with a traditional C corporate structure. They left their dividend unchanged because they saw the worst of the rate plunge was over. It had a relatively high dividend yield of 8%, but they were committed to consistency in maintaining a steady distribution. Looking back a year, the well-governed company is up 252% including dividends, while the other is up 134%. Governance at this point in the cycle is critical, as having too much cash can be dangerous if it results in peak stock buybacks or new buildings. And in the case of these two container ship lessors, the one that did good, one must note, has done better.