2021: Playing the long game in global equities

We often get asked about our outlook or “what’s the market going to do from here?”. Well…we do not make market predictions for a living. We’ve yet to see the person in this industry, no matter how bright they may be, who can consistently make money from correctly calling what the short-term gyrations of the market are going to look like.

We don’t waste our time trying to make these types of prediction, and we’re not going to add our guesses to the useless pile of market predictions for 2021 that you’re about to get from every direction in the next month. What I think can make you a better investor are a few things to think about that have guided me every day of my career.

There seems to be a great deal of controversy in the financial media around the question of valuation, and the struggle between “Value” and “Growth” for style supremacy. People love labels. The people that know me for the past 20 years know I hate labels. They are the enemy of great investing. In general, we think the entire discussion around style misses the point. The market has a valuation attached to it – sometimes it’s fair and sometimes it is too high or low, but we don’t buy the market. We buy a highly curated list of great ideas all around the world.

Additionally, there is much discussion around the P/E (Price to Earnings ratio) of individual stocks or sectors. That’s useless information without a thorough understanding of what is happening to their fundamentals. Both have to be taken together. In general, I think the market is fairly valued but that doesn’t mean you can’t do well – it depends on what you buy and how much you pay for it. We’ve done well in fairly valued markets many times before. This time has obviously been no different. We are not concerned about the valuation of what we own or the overall market in general. Fundamentals are very, very strong and there is much to like on offer.

Always and forever, within the broad aggregate valuation level, the market continues to make mistakes…our job is to be prepared and willing to act with conviction when it does. Market mistakes, like much of what we witnessed during the month of March, create opportunity for long-term investors like us, and many of you. In particular, there is a group of companies that are leading the way in structurally growing areas of the market.

Things like e-commerce, cloud software, medical diagnostics and life sciences tools, digital payments, immuno-oncology…these are several areas undergoing once-in-a-generation changes, and we think the market continues to underestimate the sustainability of the growth potential of the leading companies in these areas and valuations remain very attractive.

In the year ahead, we caution the investors we speak with to not use “cheap” as their gating factor when looking for investment ideas. There are many optically cheap companies out there, from the standpoint of traditional valuation metrics. However, we think they’re cheap for good reasons, and their relatively inexpensive valuation levels will not protect you from the inexorable structural changes some of these companies are on the wrong side of.

Paying 15 times earnings for a company growing 3% per year, and that’s operating in an industry experiencing structural decline; that’s where “cheap” can get you into trouble in 2021, and in most other years too.

As active managers in an industry where passive strategies continue to take market share, we remind everyone that great companies run by the right people do earn excess returns over long periods of time. We’ve built very successful careers around identifying these companies, and buying them at the right price.

This philosophy has survived bull markets, bear markets, the global financial crisis, wars, and now a global pandemic…whatever has been thrown at us, we’re still here and our clients have thrived through it all. If you’re focused on the right things, superior active returns can be earned in a sensible, repeatable way, and these results can make a substantial difference over time, compared to an index tracking strategy that by design will underperform the benchmark it tracks.

As we close 2020, we remain focused on areas of structural change and companies with durable advantages…what are the areas within the global economy that are expanding at a much faster rate than the economy as a whole? These changes usually create fertile ground for investment opportunity, of the sort that allows a powerful compounding growth effect to unfold over a multi-year period. These types of structural changes will not be tossed aside by the pandemic’s beginning, or its end. By staying focused on the long-term, in the face of disruptive short-term events, that’s how you can make a real difference for your clients and in your own investments. 

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