As we begin a new decade, the primary theme for financial markets remains interest rate suppression. Global developed world central banks continue to purchase government securities of their own country(there is some peculiar circularity to this monetary experiment), thereby lowering interest rates on their own government debt. While this policy may have the positive impact of extending the economic recovery, it has the pernicious effect of enabling the growth of government, increasing financial asset inflation, penalizing low-risk investors, increasing the wealth gap and lowering the hurdle rate for risk-taking.
In the stock market, the concomitant rise of exchange traded funds and passive investing and their superior backward-looking performance has made many a fundamental investor, like us, wonder if it remains useful to painstakingly review financial footnotes, management conference calls, 10Ks, 10Qs, prospectuses and research reports when one could simply purchase an index and record superior investment returns.
We remain stubbornly interested in engaging in single company research to try to identify asymmetric risk-reward opportunities. Over the long term, we have found this approach to provide the highest confidence level in our capital allocation decisions. Interestingly, despite the ten year bull market and historically elevated 18-19X P/E ratio, we are still finding a number of very interesting franchises trading at single digit earnings multiples, either because the industry is out of favor, the stock has limited price momentum or the company’s business model is characterized by certain nuances that are not yet reflected in the stock price.
It is somewhat of a market of haves and have-nots. As usual, we find our portfolio filled with more have-nots than haves, but allocated largely to high quality companies at attractive valuations. Waiting for the have-nots to become haves is trying our patience, but that is a recurring challenge of investing for the very long term.