Principles + Optimism + Commitment
The young monk carefully pulled each young sprout out of the earth, just a bit, to try to help them grow just a bit faster ... or so the story goes that has been used for years by Buddhist monks to teach their students the importance of patience and having faith in nature.
Of course, the next day the young monk found a field of wilted, browning plants ruined by his impulse to meddle in the natural flow of nature.
In the financial world where my team and I make a living, the lessons of patience and “faith” in the natural ebb and flow of business fundamentals are lessons that I find increasingly valuable. I’m blessed to have cut my teeth in an era when some of history’s greatest long-term investors (my investing monks, so to speak), such as Warren Buffett and Sir John Templeton, turned such lessons into timeless investing principles. I’ve found that over my 30+ years of professional investing, a combination of:
- consistently applying these investing principles
- approaching each day with a general sense of optimism; and
- remaining committed to investments throughout market cycles has been a simple formula for long-term investment success.
Among the many nuggets of investment wisdom I’ve gleaned from Warren Buffett over the years, perhaps the most important has been the simple concept that “price matters.” This principle, which has long been a core belief at FIM Group, proved especially valuable during the Internet bubble when we refused to speculate in hot Internet companies whose stocks traded at absurd prices relative to their financial fundamentals (many didn’t even have revenues to report!). Like Buffett, our team invests only when the price is right, and we spend significant time analyzing the valuation levels of both existing portfolio positions and new ideas.
We also monitor a wide array of broader market valuation tools, including one the financial media has dubbed the “Buffet Indicator.” The Buffett Indicator (See top of page 2) simply takes the total market value of a stock market and compares it to a country’s gross domestic product (GDP). In a 2001 Fortune Magazine article, Buffett described this measure as “probably the best single measure of where valuations stand at any given moment.” The higher the ratio, the more expensive stocks are and vice versa.
Below is a chart from dshort.com, which shows the long-term data for the Buffett Indicator against the S&P 500. Today’s levels certainly indicate a level of optimism toward U.S. stocks surpassed only once before during the tech bubble. As you might imagine, indicators like these are consistent with our team’s view that it is presently difficult to find U.S. stocks that meet our quality and valuation criteria.
Sir John Templeton taught us the importance of investing globally. Why would you pay $3 for a unit of earnings in the U.S. when you could pay $1 or $2 in another country? When you look at the great companies in Japan, England, Germany, Singapore, Norway and other developed countries, it is illogical that these should sell for much less or much greater valuations than those in the U.S. GM and Ford need to be compared to Toyota and other global brands, not just their U.S. counterparts. John Templeton said it was “common sense” to be global. He also said, along the same lines of Buffett, that it was common sense to avoid overvalued investments and embrace undervalued investments. He champion-ed the approach that opportunity exists where perception is different than reality, and was successful because he had a long-term view and did not follow the crowd. Templeton also believed that values mattered and embraced an ethical approach to investing.
Investors today certainly face no shortage of challenges. And only five years removed from a brutal global financial crisis, it is easy to understand why high levels of pessimism continue to persist through financial markets. I’ll be the first to admit that when I hear news of accounting fraud, political shenanigans, environmental abuses, mistreatment of workers and the like, it’s easy to get a bit bummed out. But investing requires that we seize an inner optimism and take a “glass half full” (at least) approach. Otherwise, why would we ever trade our cash for an ownership interest in a company and the expectation of a positive return for our effort some time down the road?
Fortunately, there are innumerable sources of optimism for those who bother to look. Take the BIG PICTURE trends in human progress GLOBALLY: higher life expectancies, lower infant mortality, higher literacy and education levels, higher incomes per capita, and lower poverty and extreme poverty, just to name a few. Despite centuries of wars, natural disasters, economic depressions and ravaging waves of disease, we’ve continued to find a way to improve our lot. And at the individual company level where we invest our client funds?
We continue to find no shortage of companies around the world with great prospect for increased value whether it be via industry growth (e.g., health and wellness), market share gains (organically or via acquisition) and/or simply better management (e.g., organizational restructurings).
Obviously, timeless investment principles and a healthy dose of optimism only get you so far. Just thinking about investing or all the great places to make money in the world won’t translate to investment returns. We must be able to take portfolio action. Translating investment philosophy and process into executed investment decisions and sticking with your convictions through tricky investment environments is where the rubber hits the road. As Warren Buffett puts it, “Investing is simple, but it is not easy.”
At times, staying committed to an investment idea seems like a walk in the park. Since deciding to invest against the crowd last year in a wide variety of fixed-income closed-end funds, our thesis has worked out almost exactly as planned. Interest rates moved our way (lower), fund discounts normalized (narrowed) and distribution yields came in as expected. The result was double-digit returns for many of our fixed-income positions in a world of historically low rates. If only every investment were so smooth!
We’ve certainly felt a bumpier course this year in deep value equity ideas like our U.K. supermarket and natural resources stock positions. As we’ve discussed in various communications this fall, we bought most of these at prices more than 30% off their highs. We’ve clearly been early and our short-term performance during the last four months of the year has certainly been temporarily impacted by further erosion of investor sentiment toward these stocks. While we’ve made some rotations in these areas and executed some tax loss strategies, we are generally sticking with our conviction that the companies we own, now trading at distressed prices, will ride through this turbulence and deliver solid returns with time.
Our general objective is to be as committed to long-term investments as we can be (of course, provisioning for client cash needs). This is especially the case today when the return on cash is negative after inflation. We know that sentiment toward companies (especially those trading at distressed prices) can change in a heartbeat. When it does, market valuations can explode to the upside. We also know that trying to time a perfect entry point is a fool’s errand and that we must not fear being early into a position.
Life Expectancy at Both Total World:
World Bank GDP:
The Istory of FIM Group
2015 begins FIM Group’s next 30 years of investment management. I fully suspect that we will continue to deploy a formula of Timeless Principles + Optimism + Commitment to achieve continued investment success. American author E.L. Doctorow writes that, “History is the present. That is why each generation writes it anew.” I’ll paraphrase and say that history becomes istory, or is-story, as we relate it to our current world and current conditions. The istory of FIM Group is based on a set of principles derived from some of the world’s investment legends like Buffett and Templeton. It is guided by a general optimism in the world we live in. And it is driven by a commitment to invest through all varieties of investment environments and staying true to our convictions.