Uncertainty, in our opinion, is one of the most difficult factors
for professional as well as individual investors to deal with,
and it is dominating the markets currently. Uncertain markets
are characterized by increased volatility and correlation between
asset classes, as well as increasingly shorter time frames for
investment decisions. None of this, in our opinion, will improve
the probabilities of earning a satisfactory return over a
reasonable period of time. Rather, we think that in most
instances, these will improve the odds of the opposite outcome.
Emotional and behavioral biases tend to win out over objectivity.
Today’s 24-hour news cycle doesn’t contribute much to rational
thinking. The adage in the media industry that “airplanes
landing don’t make news” has an element of truth. One relatively
new factor contributing to this volatility (and we admit that we
do not have a lot of empirical data to back it up) is the impact
of algorithm driven trading which, in the U.S. equity markets, is
upwards of 60% of volume. It is largely driven by
arithmetic-historical correlations volatility, and holding
periods measured in minutes if not seconds.
Couple this with day trading and you end up with completely
irrational price movements. By way of example, the price range
of Bank of America (a stock that we do not own) from its high to
its low on August 5th was 11%, and the company had a market
capitalization of $90 billion. Yesterday, the stock was down
another 20%. Another example is Royal Dutch Shell with market
capitalization of almost $210 billion. The price range of the
stock from high to low on August 4th was about 5%. It is
unlikely that the value of those businesses changed by this much
in one or two days, in our judgment. There are numerous other
examples, some we own and others we do not. The ability to
predict this sort of swing movement is virtually impossible and
the ability to explain them is equally so. In order to function
and make objective decisions you must have other parameters for
decision making. In our view, it is ultimately the economics
that win out, and in our case, the economics of the underlying
businesses we own. It certainly has been the case historically,
and in our opinion, profits and cash flow will remain the
fundamental long term drivers of equity valuations. The
probabilities of objectively valuing the economics and
sustainability of a business are far better than the alternative
of predicting the movement of “markets” over any given time
period and we think the empirical evidence supports this view.
This is not to say that we simply ignore “global” questions. We
do consider how larger trends will ultimately impact the
businesses we own. For instance, what do a large emerging middle
class or price controls mean for a business, etc?
So while we don’t enjoy this type of environment – to say the
least – we keep our focus on trying to buy a good business at a
very attractive price. In doing this, we seek to avoid highly
leveraged businesses and businesses with obsolescence risk.
These environments create some real cognitive dissonance – the
ability to buy into a company at a great price usually goes along
with having the ones you own go down in price. Nonetheless, to
put it simply, the investment framework at Tweedy, Browne does
not change – the number of companies to look at, not
surprisingly, has increased and some averaging-in on existing
investments is occurring. Most of what we do rests on the
process coupled with a realistic time horizon.
(Original Source)
