We are aware that many investors have an expectation that their financial advisor in his or her client letter will provide not only fresh insights into a complicated investment landscape, but a well conceived plan to successfully navigate any difficulty the world might throw in their path. Ideally, this missive would also provide a unique perspective on current events. However, these communications are frequently packaged within a time frame (quarterly/semiannually) that we believe is not terribly helpful when it comes to defining investment goals, i.e., what am I investing for and how do I achieve those goals? If the expectation is that we can, on a regular basis, lay out a new roadmap on how to get to a “better financial place” over the next three to six months, you likely will be disappointed. Frankly, we are often stumped when it comes to offering a new plan to address the “current” environment. We have written frequently over the years about the how and why of what we at Tweedy Browne do and the strengths that we believe are inherent in an investment process focused on the longer term. One client went so far as to say he admired our “belligerent consistency” when it comes to our investment approach. We guess, but are not completely sure, that he was paying us a compliment.
Tweedy Browne continue to sharpen their analytical skills
This is not to suggest, however, that nothing is going on at Tweedy Browne. There is no question that we continue to sharpen our analytical skills (there is no sense that we know or have seen it all), and we certainly believe there is a cumulative and compounding dimension to the judgment we have brought to bear in evaluating each and every investment we have made over the past five decades. The only dimension that has not changed is the framework through which we apply our analytical capabilities and judgment. We believe that most of you are familiar with that framework, and will refrain from a point by point discussion. In a profession that so far lacks any immutable laws of nature to rely on, we believe the simple insights of Benjamin Graham are invaluable. They can, and do, act as a firewall between an investor and some of his worst behavioral biases, as well as focus attention on variables that are more objective and therefore, in our mind, lead to better odds of positive outcomes. When talking about equity markets, the time period within which the discussion is framed will undoubtedly color a lot of what can be said. Making things a bit more difficult is the fact that our Funds’ reporting year does not coincide with the calendar year, which is the time frame in which most people organize much of their lives.
Looking back over 2013, it would be hard to conclude that it was anything other than a banner year for equity markets in much of the developed world. Japan was the hands down winner, apparently based on the assumption that Prime Minister Abe had a winning formula, although since the turn of the year some doubts seem to be creeping into that previously held conviction. (We refer you to our October 2013 letter (available on www.tweedy.com) for our view on Japan, which has changed very little since then.) European markets produced large stock market gains despite the fact that their underlying economies eked out by most measures only very modest gains.
Economically, the picture in the United States was better in 2013, but five years plus into an economic recovery with historically low interest rates, many economists have argued the recovery is substandard. This was clearly not an impediment to equity prices. If the only data available to gauge the economic health of developed world economies was the performance of the equity markets in 2013, the conclusion would likely be that those economies are in pretty good shape and their outlook seems promising. If, on the other hand, the focus was on emerging or developing world equity markets, the data might well lead to the opposite conclusion. Many of these markets declined substantially as projections for future economic growth were reduced.
Nonetheless, the bulk of projections still would suggest that most economic forecasters expect higher rates of growth in developing economies relative to developed economies, which we don’t think should be a surprise. Disappointed expectations sometimes translate into unexpected opportunities, and this is still, in a small way, proving to be the case for us.
Tweedy Browne: Economic demand remains weak despite unprecedented low interest rates
Focusing on a shorter time frame beginning with January of this year might result in a different set of conclusions, certainly with regard to developed markets. Whatever the time frame, though, there is certainly no shortage of opinions on where markets and economies are headed, and no consensus on the direction. What we believe can safely be said is that, over five years since the economic crisis of 2008-2009, the recovery has been much less than hoped for or originally forecasted. Economic demand remains weak despite unprecedented low interest rates. Mario Draghi, the President of the European Central Bank, has suggested he might move to negative interest rates in order to stimulate economic growth. Put simply, this means banks would have to pay the central bank to put excess funds on deposit with the hope it will encourage banks to make more loans to businesses and consumers. In contrast, equity markets have produced quite a different picture.
As we have said before, sorting out all these cross-currents and distilling them down to a coherent current investment strategy, which would no doubt be in need of frequent revision, is an effort with a low probability of success. Our approach, at the risk of being repetitive, is to look at the business behind the stock certificate and ask ourselves would we likely be paid more or less for our shares than the price at which they trade in the markets if a buyer came along and offered to buy the business. We are happy being owners when the market price is less, and willing to part ways when the market price is more. Our preference is for durable sustainable businesses with conservative capital structures, which should enable them to better withstand periods of economic difficulty. As we said earlier, we are now more than five years into a recovery in equity prices, and it should come as no surprise that most equity securities today are fairly priced and, in some instances, more than fully priced using our valuation framework. Our industry is chock-full of ambitious, energetic and sometimes overly confident and optimistic people who generally don’t leave many undiscovered bargains on the table. So we sell or trim back those stocks which are fairly priced and wait. Patience has generally served us well over the years, but not in each and every year. We have never enjoyed the idea of paying up for an investment just to stay in the market.
See full Tweedy Browne: Graham’s Teachings A firewall Between Investor And Bad Biases in PDF format here.