Value Investing During Worldwide Quantitative Easing
Arnold Van Den Berg
Founder of Century Management
11th Annual Value Investor Conference
May 2, 2014
I would like to thank you for inviting me and Century Management to be part of this wonderful conference. As I was preparing for this program, I thought that sharing my experiences and lessons learned during the early 1970s, when the country had a high rate of inflation, might be of interest to you as a value investor. I believe this is a relevant topic today, because we may experience higher inflation at some point given the Federal Reserve’s— and for that matter most of the world’s—embracement of quantitative easing. Although I’m not predicting it, and I am hoping it does not happen, it is possible we could experience a repeat of the 1970s, and therefore, we need to be prepared. The five points I hope to cover today are listed on Chart 2.
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First, I believe that only three things matter in understanding stock valuations: interest rates, inflation and fun- damentals of the business. Next, it is very important to understand that once inflation begins, it can increase very rapidly. You really have to be on your toes so you can react quickly if inflation begins to occur. In addition, whether we experience inflation or deflation, I believe multiples could come down quickly, which will affect stock valuations. The most important point in this quantitative easing environment is to be flexible in your investment allocation. I believe that the unwinding of worldwide quantitative easing is going to be very challenging and that it will create a lot of volatility in the markets. However, once the U.S. goes through what I believe will be a very challenging period, I think the U.S. will be the place to invest and that U.S. stocks will be one of the best invest- ment choices for the long run.
Let’s now look at worldwide quantitative easing on Chart 3. We pulled all the central banks together to see how much money they have created. This is truly extraordinary. Over the past 10 years, there has been a 250% in- crease in the world’s money supply. That’s a compounded rate of 13.5%. This is not sustainable! Now, individual countries have done this over the years with disastrous results. But there has never been a time in history when the whole world was printing at the same time. This is truly unprecedented. If you would have told me 10 years ago this was possible, I would not have believed it, but here it is.
Full presentation inflation-june-2014