“Buy when there’s blood in the streets!’
Baron Rothschild
Equity markets have been extremely volatile lately and we love it!
The source of this volatility has been the fear regarding the European sovereign debt crisis. As has widely been discussed Greece will likely default on its debt while Spain, Italy and Portugal are teetering. Many European banks hold these countries’ bonds and are facing massive write-offs. The fear has been that the European Union will not be able to arrive at a solution to their problems or solve the continent’s banking crisis. As a result, a global financial crisis may ensue. Based on this fear, markets incurred substantial losses in August and September. Just recently, European leaders have come to an agreement that they believe will deal with Greece’s debt and protect European banks. As a result, markets soared in October and erased much of the previous months’ losses.
We expect more volatility in the months ahead as the details of this plan are negotiated and worked out. In our view, the solution while not perfect protects against catastrophic bank failures which would freeze up the global financial system and could lead to a worldwide depression. We believe that politicians in Europe, pressured by other global powers, will find a way to implement the required changes and financial lifelines. They understand that the political, economic and particularly social costs of economic failure would be far too great to bear. Similar to other crisis, we are confident that common sense will prevail and that we will “muddle through”.
However, there is no free lunch. The cost of this massive bailout will be much slower economic growth for several years as governments implement austerity measures and raise taxes to deal with these large deficits and financial bailouts. Slow economic growth, burgeoning social unrest, and political gridlock in the developing countries will undoubtedly lead to more volatility.
Most associate high levels of volatility with increased risk and fear these fluctuations. We on the other hand view volatility as an opportunity to purchase high quality businesses on sale. In The Intelligent Investor, Benjamin Graham describes the market’s (Mr. Market) behaviour to that of a manic depressive. This comparison is very appropriate in today’s environment. Graham compared Mr. Market to a business partner who was euphoric one day and depressed the next. When he was excited he would ask to buy your shares at a very attractive price. When he was depressed he would offer to sell the shares back to you at an extremely low price. A rational buyer would sell to him while he was in an excitable mood and buy from him when he was unhappy. Fortunately, we have been able to take advantage of Mr. Market during the past few months and purchase very attractive businesses at prices that have the potential to offer an exceptional long term rate of return.
The confidence to buy from a despondent Mr. Market during these periods of extreme volatility is rooted in our process and philosophy. There are three critical elements to our strategy; the purchase of high quality businesses, buying these businesses at a substantial discount to their intrinsic value and time. These three factors allow us to take advantage of volatility and transform it from perceived risk into a source of long term returns.
The purchase of high quality businesses is important for several reasons. Because the companies that we purchase have successful long term records, several competitive advantages and strong balance sheets, business risk is reduced. Well managed and well financed businesses survive all sorts of macro threats. The probability that these companies suffer serious financial or competitive threats is quite low even under the most severe economic conditions. The strength of these businesses gives us comfort in the knowledge that irrespective of the economic environment or share price fluctuations the underlying fundamentals are sound. We invest during periods of uncertainty and as a result, our investments provide us with the time to allow our investment thesis to materialize.
Link to entire newsletter: http://www.patientcapital.com/newsletters/newsletter-2011-11.pdf
Baron Rothschild
Equity markets have been extremely volatile lately and we love it!
The source of this volatility has been the fear regarding the European sovereign debt crisis. As has widely been discussed Greece will likely default on its debt while Spain, Italy and Portugal are teetering. Many European banks hold these countries’ bonds and are facing massive write-offs. The fear has been that the European Union will not be able to arrive at a solution to their problems or solve the continent’s banking crisis. As a result, a global financial crisis may ensue. Based on this fear, markets incurred substantial losses in August and September. Just recently, European leaders have come to an agreement that they believe will deal with Greece’s debt and protect European banks. As a result, markets soared in October and erased much of the previous months’ losses.
We expect more volatility in the months ahead as the details of this plan are negotiated and worked out. In our view, the solution while not perfect protects against catastrophic bank failures which would freeze up the global financial system and could lead to a worldwide depression. We believe that politicians in Europe, pressured by other global powers, will find a way to implement the required changes and financial lifelines. They understand that the political, economic and particularly social costs of economic failure would be far too great to bear. Similar to other crisis, we are confident that common sense will prevail and that we will “muddle through”.
However, there is no free lunch. The cost of this massive bailout will be much slower economic growth for several years as governments implement austerity measures and raise taxes to deal with these large deficits and financial bailouts. Slow economic growth, burgeoning social unrest, and political gridlock in the developing countries will undoubtedly lead to more volatility.
Most associate high levels of volatility with increased risk and fear these fluctuations. We on the other hand view volatility as an opportunity to purchase high quality businesses on sale. In The Intelligent Investor, Benjamin Graham describes the market’s (Mr. Market) behaviour to that of a manic depressive. This comparison is very appropriate in today’s environment. Graham compared Mr. Market to a business partner who was euphoric one day and depressed the next. When he was excited he would ask to buy your shares at a very attractive price. When he was depressed he would offer to sell the shares back to you at an extremely low price. A rational buyer would sell to him while he was in an excitable mood and buy from him when he was unhappy. Fortunately, we have been able to take advantage of Mr. Market during the past few months and purchase very attractive businesses at prices that have the potential to offer an exceptional long term rate of return.
The confidence to buy from a despondent Mr. Market during these periods of extreme volatility is rooted in our process and philosophy. There are three critical elements to our strategy; the purchase of high quality businesses, buying these businesses at a substantial discount to their intrinsic value and time. These three factors allow us to take advantage of volatility and transform it from perceived risk into a source of long term returns.
The purchase of high quality businesses is important for several reasons. Because the companies that we purchase have successful long term records, several competitive advantages and strong balance sheets, business risk is reduced. Well managed and well financed businesses survive all sorts of macro threats. The probability that these companies suffer serious financial or competitive threats is quite low even under the most severe economic conditions. The strength of these businesses gives us comfort in the knowledge that irrespective of the economic environment or share price fluctuations the underlying fundamentals are sound. We invest during periods of uncertainty and as a result, our investments provide us with the time to allow our investment thesis to materialize.
Link to entire newsletter: http://www.patientcapital.com/newsletters/newsletter-2011-11.pdf
