Stay Focused on the Opportunity
Over the course of 16+ years of value investing, our firm's focus has always been on buying deeply undervalued securities in order to produce superior long-term investment returns for our clients. We have faced many challenging environments; the dot-com bubble, currency crises, financial crises, and recessions. Each period has presented its own unique set of issues, but the common denominator across these time periods is that in each, powerful consensus views drive wide valuation discrepancies. Today, the environment is dominated by the fear of a potential Eurozone meltdown and a weakening global economy. That has created a bubble in "safe" assets - U.S. government bonds, high dividend-paying stocks, and stable earners.
Although we are not insensitive to the outcome of macro events, we have learned that the valuation discounts created by these fears and uncertainties can offer significant rewards for the patient investor. Low valuation is the opportunity, but the key to successful value investing is understanding the business. Our focus, therefore, remains on identifying and owning good businesses, where we understand the reasons for undervaluation and where the long-term earnings power of the franchise is sustainable. We also look to protect against permanent impairment of capital by avoiding companies where financial risk (leverage in particular) can trump the equity holder's stake in the business. In light of today's heightened worries, we thought it useful to reinforce our investment process, including the lessons we have learned over the years to protect against permanent impairments. In this context, we review the current opportunities in our portfolios, including a range of global and regional industry leaders with high free cash flow yields and strong balance sheets that have been overlooked due to macro fears. Continue Reading »