Recent market dynamics have many analysts asking fundamental questions about how to select the right stocks for the portfolios they manage. Advocates of a valuation discipline, in particular, have been feeling the pain that comes when that approach underperforms momentum. Expensive stocks got to be very expensive and very expensive stocks got to historic highs, and then continued to go up from there.
In addition, the traditional idea -- that small caps stocks outperform large caps (at the price of a higher volatility, bumpier, ride) -- has also come into question.
And in the midst of the distortions of some of the lowest interest rates in history; doubts about whether or not valuations even matter any longer; and political uncertainty… with all of that in place, along came a global pandemic.
Times like this should drive us back to the foundations. A wise approach is to take periods of heightened uncertainty, or periods when strategies are out of favor, and use such circumstances as opportunities to learn. Data is a gift. In fact, the word data comes from the Latin word for 'givens'. Data is given to us, so we can learn and improve.
Think of what you will read in this series as something like 'lab notes' from the research and development team. Such research is, or should be, almost always going on. The point of this series is to share that process openly with investors. Along the way, we will be consulting with a multitude of wise counselors, thinkers who see the big picture and who are committed to following the truth wherever it leads.
Here are some of the questions we will be looking at:
- Is human productivity truly at the center of long-term corporate performance?
- What is the best way to capture the advantage of the principle of human productivity at the level of the corporation, as opposed to at the country level?
- Which factors tend to drive performance in the long run?
- When do those factors work, and when do they not?
- When are companies so productive that they should reinvest in themselves, and when should they instead pay profits out to shareholders so we can reinvest in more productive ventures?
- What is the best model for structuring the leadership and governance aspect of a company for the best long-term results?
- How can you know when corporate managers' interests are properly aligned with investors?
- Is there only one good model, or are their multiple models which tap into different aspects of incentives and human nature for strong performance?
- Are there systemic problems with balance sheets' capacity to capture the intangible assets which reflect, and create, human productivity?
- Are factors such as strong relationships with shareholders (such as highly engaged blockholder groups), with employees (as reflected in employee knowledge, quality, and experience), and customers (as captured in customer loyalty and brand reputation) all additive and quantifiable?
- How do you factor in the intangible values into an enterprise value with lower tangible values in an evolving service economy?
- What is the best way to judge the historic operational performance of a company’s use of shareholder capital?
Along the way, we consult fundamental principles, sound reasoning and rigorous reception of, and interaction with, the gift of data.
There's a saying in Latin from the 16th century: Semper Reformanda. It means that institutions must always be reforming themselves. Financial institutions are not exempt from that imperative.
Semper Reformanda, and stay tuned.