In January – March 2025, I published several posts touching upon the need to invest in great companies for the very long-term. These posts are accessible through the The FFJ Archives.
One year later and we are experiencing more market turmoil.
Looking at the Financial Industry Regulatory Authority, Inc.’s Margin Statistics over the past few years, it is readily apparent that many investors have tossed caution to the wind. Debit Balances in Customers’ Securities Margin Accounts in January 2026 exceeded $1.279T! In comparison, Debit Balances in Customers’ Securities Margin Accounts in January 2023 $641.228B. With this much money flooding the market, it is no wonder the valuation of many companies has become detached from the underlying business fundamentals. In the last few years we have witnessed the ‘get rich quick mentality’ to an extreme.
The number of unsophisticated investors likely outweigh the number of sophisticated investors. While the sophisticated investors typically have ‘deeper pockets’, the sheer number of unsophisticated investors has undoubtedly contributed to some of the unrealistic valuations we have witnessed.
Unless ‘this time is different’, I suspect many investors have recently faced margin calls. In the simplest terms, a margin call is a demand from a brokerage firm for an investor to add more money or securities to their account because the value of their investment has dropped too low. If an investor is unable to restore their account in a position that is satisfactory to their broker, the broker has the right to liquidate stocks without an investor’s permission to cover the shortfall. Quite often this means stocks are liquidated at the worst possible time (when the price is low). If the liquidation of assets is insufficient to ‘cover the shortfall’ the investor is very likely responsible for any remaining losses.
Although I wish for every investor to experience investment success, this is unrealistic. Some investors will ‘make out like bandits’ while others will face catastrophic losses.
Avoiding catastrophic losses requires investors to have the financial wherewithal and the intestinal fortitude to ride out challenging market conditions. Investing in ‘great companies’ goes a long way in helping an investor ride out market pullbacks.
I have no illusions of being a great investor, and therefore, try to stack the odds in my favor. Investing in a fairly valued or undervalued profitable company that generates strong free cash flow (FCF) and which has a ‘wide moat’, appeals to my investor profile. The companies in which I invest may not ‘knock the lights out’ from a total return perspective in the short-term. They are, however, likely to generate long-term total returns that exceed the rate of inflation.
Rule No. 1: Never lose money.Rule No. 2: Never forget Rule No. 1
Paying particularly close attention to a company’s risk profile reduces the need to monitor a company’s very short-term performance. Speculating, however, typically changes our investment behavior where we very frequently look at company’s share price behavior.
Having said this, great companies can stumble. In such instances, we should be in a position to opportunistically invest in them.
Another consideration is that well managed companies with a strong track record of exemplary capital allocation know when its shares are undervalued. I welcome the significant repurchase of undervalued shares which explains why I often mention that I want a company’s share price to plunge (if this also leads to a more attractive valuation).
Share price behavior viewed in isolation is pointless. Imagine a company’s share price drops from $100 to $50 and its free cash flow (FCF) for the year drops to $0 from $10 in the prior year and diluted EPS is $0.25 versus $8 in the prior year. This information is insufficient for us to make a proper investment decision. We need to analyze the company to determine the reasoning for such a dramatic YoY change. While many of us acknowledge this is rational behavior, a large segment of investors make investment decisions solely/primarily on share price behavior without any proper analysis.
Case in point….
Copart (CPRT) released its Q2 and YTD2026 results after the February 19, 2026 market close.
The company fell short of consensus diluted EPS estimates ($0.36/share versus $0.39/share broker estimates) and the investment community bid the share price lower. If we look closely at the company’s financials, however, it has:
- no long-term debt;
- ~$3.7B of unencumbered property of equipment;
- over $5.1B of cash and cash equivalents;
- a $1.25B unused revolving credit facility maturing on January 23, 2031; and
- 325,803,208 shares available for repurchase under its share repurchase program at FYE2025 (July 31).
In the first half of FY2026 (Q2 ended on January 31), it generated $0.663B of operating cash flow (OCF), its stock-based compensation was just under $20 million, and its CAPEX was just under $0.178B giving us free cash flow of ~$0.465B.
With a share price under pressure, CPRT repurchased just over $0.218B of its shares in the first half of the year. Between January 31 and February 19, however, CPRT repurchased additional shares. In Q2 and Q3, CPRT repurchased over 13 million shares for over $0.5B.
So….does it make more sense for a company to repurchase shares when the share price is above $50 (most of 2024 and 2025) or under $40 (most of the period after the beginning of November 2025)? The answer is quite clear. Spend $0.5B and repurchase at $50 is 10 million shares. Spend the same amount and repurchase at $38 is ~13.158 million shares.
CPRT’s diluted weighted average shares outstanding in Q2 2026 was 975,089 million. Thirteen (13) million shares is like a ‘drop in the bucket’. Nevertheless, the company’s decision to patiently wait for its shares to be undervalued demonstrates capital allocation discipline.
Final Thoughts
Periods of market turmoil present an opportunity for us to increase our long-term wealth….even if we do not have ‘deep pockets’. This is because great companies with a strong track record of exemplary capital allocation can aggressively repurchase undervalued shares. CPRT, for example, increased my ownership in the company (albeit minuscule) with the repurchase of undervalued shares. Despite this ~$0.5B cash outflow, the company’s balance sheet is still a fortress.
I am leaving very soon for a 3 week ski vacation to multiple ski resorts in Western Canada. My February FFJ Portfolio report will, therefore, not be published until late March.
For the sake of full disclosure, I purchased:
- Moody’s (MCO) – 100 shares @ $463.88 on February 4 and 40 shares @ $412.63 on February 11 in a ‘Core’ account in the FFJ Portfolio. I have not written a post about this purchase.
- S&P Global (SPGI) – 50 shares @ ~$438.5154 on February 6 and 50 shares @ $413.08 on February 10 in a ‘Core’ account in the FFJ Portfolio. These purchases are disclosed in this post.
- Intact Financial (IFC.to) 50 shares @ $254.34 on February 11 in a ‘Core’ account in the FFJ Portfolio. These purchases are disclosed in this post.
In addition to the above, additional shares were purchased in the following through the automatic reinvestment of dividend income:
- Apple (AAPL)
- Blackstone (BX) and
- Mastercard (MA)
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to finfreejourney@gmail.com.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
