An Investing Method For All Market Environments

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Rather than focus on a specific stock this week, we want to take a look at the entire market. Over the past two weeks, the major indices have all fallen over 10% and entered correction territory. With no end in sight, investors must ask, “how can I protect my portfolio through the ups and downs in the market?” Luckily there is a tried and true method, value investing, which has been in use for over a century. We use value investing principles in all our research and especially in this week’s long idea,

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Photo Credit: LendingMemo (Flickr)

1 Comment

  • John

    August 29, 2015

    But what about all those technical analysts on the Forbes400 list? Such as, well huh, there is, wait a minute, I recall, uhm, hmm. Let me get back to you on that.

    Of course, you have to consider the macro situation, right? Do you really expect Hasbro to be able to sell toys and Cal-Maine to sell eggs if Janet Yellen raises the Fed Funds rate by a quarter of a percent? Also, what are Xi JinPing, Alex Tsipras and Mario Draghi telling us about investing in these companies? Their investment opinions must be critical as pundits on financial news shows tell me I have to hold my bladder until they save the world from economic catastrophe.

    All joking aside, I read David Stockman’s argument and while he lambasted Mr. Buffett (someone whom I admire and think was criticized inaccurately in the article because his gains came from outsized growth in economic book value and not just multiple expansion), Stockman makes a good point. If monetary policy continues to drive up valuations, relative to output on a global scale, at some point this unwinds, resulting in prices coming down (of assets, inventory, etc.) and rates coming up (no continuation of artificial support from central banks). Hence, NOPAT comes down and WACC goes up as valuations come in line with output (As David Stockman may argue). As a result, the price of eggs comes down and cost of borrowing goes up…perhaps and hopefully, in a controlled manner. Thus, it becomes more crucial, particularly in this environment, to own quality, where companies have moats with embedded pricing power, at substantial discounts (priced at 50 cents per dollar of economic book value), just in case the great deflation becomes a reality. However, if the great deflation is held at bay indefinitely, holding quality cheaply is still a pretty good strategy and thanks to NC for providing it quickly and transparently.

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