Global View Investment Blog

Constant Vigilance to Improve Client’s Risk (and Return)

In Summary

Fundamentals like earnings, valuation and quality drive returns. Get fundamentals right, reduce risk. It’s why it’s important to keep an eye on fundamentals.

In recent further analysis, we discovered incorporating two new fundamentals into our in-house stock portfolio reduces risk. Not only will this reduce the risk of loss, but it may also reduce the frequency of short-term losses. This will improve client’s investment experience.

This is important because it helps clients have better odds to achieve their goals. This is true in our in-house stock portfolio. It’s equally important we use this rigor to select investment partner Portfolio Managers with the same focus.


More Detail

In the 30 years I’ve studied companies, I’ve learned a thing or two about the drivers of long-term stock prices. The premise is simple: Buy something today worth more later. It’s the how that’s confusing. “Value” investors buy things that are cheap. “Growth” investors buy things that are growing well. The problem is that this is the same thing, but not everyone knows it. Whether something is valuable or not depends on what happens in the future, i.e. how it grows. Moreover, something might appear to be cheap. But it's not if it can’t generate earnings in the future. The days of Benjamin Graham investing are gone.

In other words, it’s not as simple as growth or value. About 15 years ago, I called myself a value investor. Since then, I’ve found managers focusing on growth delivering great returns and low risk. The secret is they do real fundamental analysis to make sure growth is sustainable. They visit companies and talk to suppliers and customers. Because when you buy shares of a company, you buy today’s and all future profits the company makes.


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Warren Buffett coined the term “wide moat” to describe companies that stay profitable a long time. First, they are more profitable than competitors. Second, they have an advantage ensuring they stay profitable for a long time. All things equal, you’d rather own a wide moat company. But you don’t want to overpay.

Another metric reducing downside risk is a company’s dividend. Investors profit from a combination of dividends and capital gains. The higher the dividend, the more predictable that component of total return. The more predictable the total return, the more stable the price.

The good news is we can measure this. We have excellent data on well-known U.S., European and Japanese companies. But because there are many other companies not as well known, we need help. It’s why we spend a lot of time getting to know managers focusing on these companies. We leverage their expertise across the world including U.S., international and fast-growing, emerging markets. The world is a much bigger place than companies everyone knows in the U.S., Europe and Japan. There are more than 30,000 such companies available to invest in. And 90 percent of new companies are formed overseas. It’s impossible to know them all.

When investing, the trick is to make sure you don’t lose money you can’t make back. There are many roads to Jerusalem. One way is to focus on avoiding loss at the individual security level. In this approach, you try to avoid losses on every security you buy. Portfolio Managers at International Value Advisors take this approach.

Another way to is to avoid losses at the portfolio level. In this approach, investors know some bets won’t work out. They make bets that are proportionally small. They’re OK with some being completely wrong and losing the entire (smaller) bet! Portfolio Managers at Grandeur Peak make “exploratory” bets on companies they are getting to know. Later, they may take bigger stakes, as their confidence increases.    

The point is, we use managers who use both approaches, but understand their short-term volatility may differ.

The answer to reliable returns is not in technical analysis. Despite completing advanced technical analysis training and understanding the concepts, I don’t trust it. Sure, it seems to work at times. But when it doesn’t work, it fails. And I have learned to avoid doing things I don’t trust, because you don’t really understand them. Because when you don’t understand something, you can lose everything. To win, you must first survive!

That’s why it’s about fundamentals. Now, during a recession, during an expansion, in the U.S., overseas and in emerging markets. In stocks and in bonds. Fundamentals. Everything else is smoke and mirrors.

We can identify well-known companies likely to do well in-house. We buy the most unbiased, high quality research available. Then we analyze more than 2,000 companies on quantitative metrics expressing growth, value and quality. These metrics have been proven effective for more than 25 years. We exclude companies that don’t meet certain metrics, like dividend yield versus industry peers. Then we rank the companies. I have addressed this before: Read A Practical Approach to Valuing a Stock and Not Understanding Securities and How Returns are Generated

We use this system because it works. But it doesn’t mean we don’t constantly test it and try to improve it. In a recent analysis, I found new metrics I believe will reduce portfolio risk and possibly enhance long-term return.

I have always known that earnings momentum (how much recent company earnings are changing) has an influence on the price of a stock in the short-term. I have also known dividend growth is a proven metric for long-term performance. These metrics are signals to investors for how well a company has done (earnings momentum) and its willingness to continue to reward shareholders (dividend growth).

Purchasing companies with better earnings momentum reduces portfolio downside risk. This reduces the initial portfolio risk investors face. And because it takes some months to put cash to work, it reduces downside risk due to timing.

Companies who focus on rewarding shareholders with dividends are less risky. And when a company stops growing dividends, this is a signal to shareholders of possible problems. We can include this into our system. We screen companies for positive earnings momentum when buying. And we screen companies for falling dividend growth when selling. This reduces the risk of buying a company too early and helps to sell before things turn south. We believe this may marginally improve the repeatability of positive returns, hopefully giving client’s less performance regret.

Economics have falsely predicted 7 of the last 5 recessions. But we will eventually have a recession. And when we do, the prices of most stocks will fall. This won’t be limited to the U.S. or to larger stocks. It will happen to most stocks. But it won’t happen to all of them, not all of them will fall as much, and some will recover faster than others.

There is no unambiguously right time to invest. There are almost always some companies that do well regardless of the economy. During the financial crisis, nearly every stock fell. You must put this into context. During most milder recessions, there is a rotation from one type of stock to another. This didn’t happen during the financial crisis, like it didn’t happen in 1929. But it did happen during the Dot Com bubble. Investors who owned the right stocks fared very well then. It happened during most bear markets.

We know we can’t eliminate downside. That’s why we coach all our clients on what to expect in the short-term. But we aspire to get predictable positive returns over a reasonable longer-term period. These changes are a promising improvement.

There are a lot of changes coming. We are preparing for them.


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Ken Moore

Written by Ken Moore

Ken’s focus is on investment strategy, research and analysis as well as financial planning strategy. Ken plays the lead role of our team identifying investments that fit the philosophy of the Global View approach. He is a strict adherent to Margin of Safety investment principles and has a strong belief in the power of business cycles. On a personal note, Ken was born in 1964 in Lexington Virginia, has been married since 1991. Immediately before locating to Greenville in 1997, Ken lived in New York City.

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