Mid-Summer Update: Ownership vs Playing Musical Chairs

If one were to ask an investment strategist from a bank which way the market will be headed in the next year, they could reasonably expect to hear “higher”. That has always been the case. Wall Street’s modus operandi is to sell optimism; it’s hard to sell investments with bad news. Usually, it’s letter writers that sell gloom. It reads better for some reason.

Today, Wall Street has lots of doubters. Twelve out of twenty-one forecasters tracked by Bloomberg expect the markets to fall as the year ends. The optimists are forecasting modest single digit returns.

One could then argue that the risk/reward to investing in the market is not great.

Some might argue that so much bearishness and caution are contrary bullish signals. We’re not so sure that anyone has a consistent record of forecasting the end point values of a market, much less forecasting using contrary methods based on shaky statistics in the first place.

We are sticking to our knitting and focusing on the fundamentals of the businesses you own. We have spent a great deal of time learning what makes these companies tick. We look at the facts as they are reported quarterly, and gauge if it is reasonable that business will carry on generally improving under the stewardship of management.

We don’t worry too much about how much someone may raise or lower interest rates next year because it’s unlikely to materially affect the number of hamburgers McDonalds will sell, movies Disney will make, or computer chips Amazon buys to drive their business.

We want to see that management keeps its eye on the fundamentals of growing their business. Good businesses that grow profitably will ultimately be valued higher in time. To grow, businesses’ profits must be REINVESTED. The most successful businesses in the world invest massive sums of capital into their future plans. That is how they stay competitive and relevant to their customers.

Recently, some of the companies you own have cautioned that profit growth may slow because they are investing heavily into new initiatives that will yield better results in the future. Quick twitch traders – mostly computers reading and reacting to headlines – panicked. To these geniuses, investing is not about owning a business for its product or service merits, but rather “renting” stocks: playing musical chairs.

When we see Quick Twitch (QT) at work worrying and bemoaning business investment or short term ‘headwinds,’ we get excited. QT can have meaningful impacts on a company’s valuation in the short term. To us, QT is a value creation generator.

As the hot hazy days of August pass by and QT gets back from the cottage, she will feel the need to look busy. She will dust off her QT playbook and plug in code to her computer. Headline words sure to be hard coded will be: ‘interest rate’, ‘hike’, ‘Fed’, ‘disappointment’, ‘future investment’, ‘hospitalization rate’, ‘fiscal cliff’ to name a few. We expect lots of headlines mostly caused by QT spraying the markets with orders to buy and sell.

Meanwhile, we will just keep counting hamburgers sold and other such mundane things, watching the steady pace of business doing what needs to be done to build long-term value for its rightful owners.

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