Yes, there are problems in the world that are dreadful and complicated. We are constantly reminded of the political and economic challenges, and for investors, there are countless voices vying for our attention-warning of peril. The financial world this past 18 months has witnessed a bull market in negative opinions and market timing advice. It is surprising that such intelligent people continue to make arguments about when to “be in the market” when such strategies rarely work and have repeatedly been proven to be bad advice. The past 18 months prove the point that following and worrying about short term issues is a bad idea.
Happily, we do not subscribe to these strategies, and the results are measurable in the appreciation of some of the companies you own. That is solely because investors have begrudgingly been forced to accept that not owning the most advanced and successful companies the world has ever witnessed, is a mistake.
These are exciting times. Advancements in the way we can harness the power of electricity married with the speed of computer chips is unleashing massive opportunities for all business and their consumers. The potential for enhanced productivity, combined with the potential to profit from this revolution are very large. Some of the companies in your portfolio are at the cutting edge of this revolution. Some will soon be benefiting from its still early days of application. Others still have not even begun to consider its applications. It is still very early days. Think of this time as your first cellular phone era.
Some would have you believe that ‘Markets” have appreciated because of hype. Many would have you believe that it is only a very few companies that are up, and so, this must be bad. Mostly, this is the same crew that has told you why owning good companies has been a bad idea the past 18 months. We think it’s proof that investing is about owning great companies, not baskets of stocks. Simply, we paint with a brush not a spray can.
Is there hype in certain areas? Yes, likely. We do not invest in early-stage companies, and this is probably where most of this so-called hype is. Are some of the companies you own up on hype? Perhaps, marginally so, but there is no denying that: one, they ARE the most profitable businesses in the world, and two, likely to make the most of the money in this new revolution and, three, they are not being valued above their average valuations of the past. All things considered, with a 2-3 year view, they are cheap - considering the opportunities.
At Davis Rea, we have always chosen companies for ownership as if we had only a few choices on the shelf to choose from. First, we only shop at the store that carries the best merchandise. Second, we only buy the very finest of merchandise. Why? Are not the best the most expensive? No, because we are motivated by profit. We only buy that which everyone wants, over and over again. The companies that sell that product or service always have the most predictable and best margins.
It's that easy, but it's not simple.
The biggest trick is to be consistent and disciplined, and that’s hard because everyone screams at you in the store to buy everything. That’s just not a good idea. The fact of the matter is there are only so many great investments.
Today, many continue questioning if this is the time to ‘sell.’ There are thousands of reasons given. Just like last year. We find it difficult to be bearish. Sure, things could get bumpy. That’s always the case. But like we said, these are exciting times, and many of the businesses that you own are only starting to plan to benefit from these productivity tools, and this revolution will have a massive positive impact on their bottom lines. Many of these companies are trading 20-30% lower than they were a year ago, and to us that spells great opportunity.
Rather than screaming at the moon ‘its daytime,’ perhaps the right strategy is to consider what happens when these so-called dark nights of today fade to the brilliance of a new sun rising. This will likely occur sometime next year when interest rates are moving lower. In the meantime, all the companies you own are preparing for that day. In the meantime, everyone who wants a job has one and everyone buys the stuff you own.
See, it's hard to be negative if you are a true investor in great companies.
John and the Davis Rea Team