We have habitually re-counseled clients (and ourselves) that financial markets go down as well as up and that is actually a good thing as we get to “replenish the well” in periods of distress. Thus we generally do not think it is productive behavior to fire off missives to clients every time markets have a “bad week” or as a result of a seemingly scary group of headlines. We go about our business as we have for decades. Specifically, we focus on learning more about new and prospective holdings through careful reading, developing industry sources, visiting companies and meeting management teams, and intellectually jousting amongst ourselves—with the goal of putting together a portfolio that represents the best combinations of business, value, and people. That was our week.
But on a plane yesterday, I read this piece and thought it neatly summed up the baseline case for all that is negative, and so I am passing it along. Van Hoisington and Lacy Hunt have, for decades, methodically and convincingly documented the argument that it is deflation we should fear and that something like the last twenty years of Japanese experience is the world in which we all now live.
It is a view that is neither right nor wrong upon utterance (like any forecast), but one to which we attach a distinctly non-zero probability weight. Since the 2008 financial crisis, financial markets have swung aggressively between this view—one of deflation, poor corporate profits, flat or lower stock markets—and the view that things just tend to work out if you buy decent businesses at depressed values. Most companies are run by people who wake up every day, read the same news sources we do, and then inevitably get on with building a better and more valuable business that can adapt to the environment. It might seem Pollyannaish, but there is a century-plus worth of intensely documented history to support the idea that the world will move forward.
A strategy of “leaning against the wind,” irrespective of whether deflation or rapid inflation is the market fear du jour, has paid off over the last eight years. As has often been noted, the stock market predicts far more economic and global disasters than ever actually occur. As such, a strategy of sticking to business analysis rather than stock market or macroeconomic forecasting has paid off for decades.
And that’s what we are thinking.
Best regards,
Jeffrey Bronchick, CFA
Principal + Portfolio Manager
