Owning company shares will deliver better returns than cash
• Protecting the value of your hard-earned money is even more important these days
From the future speech of some great economist: “Dear ordinary people, it gives me great joy to announce that we are introducing negative interest rates at 3%. Our economic theory demonstrates that this step will bring you enormous benefit. It is true that we will take 3% of your savings each year, but do not forget the most important thing — that at least something will still remain for you. After 20 years, it will be a bit more than a half.”
Holding cash has historically been a bad investment choice because its real value is always sinking. “Today the situation is even a bit worse, and may get even worse,” says Daniel Gladiš in a Vltava Fund letter to shareholders. “Some economists are seriously recommending substantially negative interest rates — to start with on the level of -3%.
“It is a bit depressing,” Gladiš goes on to say, “to think that a person can work, earn money, and then instead of having and enjoying that money in peace, he or she has to continue investing just to protect the value of that money. This necessity is becoming ever more urgent even as there are fewer investment opportunities. The majority of debt assets are today essentially out of the game. Their real returns are either very low or they are inadequate relative to the credit risk taken on.
“Essentially, the only way of preserving at least the real value of money over the long term remains ownership assets, and particularly shares in companies. Ownership of company shares should continuously bring greater returns than other investments, for two main reasons: shares represent the creation of value by human work, and there is opportunity to reinvest capital at higher rates of return.
“I perceive every company as a living organism wherein people endeavour to create value by their work — contributing their ideas, efforts, creativity and common everyday labours. It may not succeed every time, but on average and over the long term, this influence is very positive and, most of all, it is not eroded by the decreasing value of money ...
“People cannot by their work influence the value of other asset classes, such as cash or gold or bonds, or they may be limited by the possibilities offered by such assets, as in the case of land or real estate. In the case of companies, they have the greatest room, flexibility and largest opportunity to adapt to changing conditions. This is the first and main reason ownership of shares brings — and over the long term must bring — higher returns than can ownership of other asset classes. Nothing should change this in the future.”
ADAPTED FROM THE ALLUVIAL CAPITAL 2019 Q4 LETTER ON WHERE “YOU MIGHT SUCCEED ”:
● Undiscovered markets. Searching for value in littleknown market segments with barriers to investment can be a
THE ONLY WAY OF PRESERVING AT LEAST THE REAL VALUE OF MONEY OVER THE LONG TERM REMAINS OWNERSHIP ASSETS
profitable enterprise. Airports, for example, are regulated, tollbooth-like monopolies with higher margins than most software companies.
● Corporate actions. The market can be slow to price in the effect of major corporate events such as acquisitions, debt refinancing, and changes in strategy. It can take months for the market to comprehend the effect on a company ’ s worth.
● Obscure value. Situations in which a company’s earnings power or asset value is not captured by its financial statements.
● The truly illiquid. Accumulating shares of the smallest, cheapest and least liquid companies. It may take years for these shares to trade at their intrinsic values, and some (most) may never. However, there are value realisations from catalysing events such as buyouts, up-listings, or returns of capital.
● Special situations. An unusual event that compels investors to buy. Alternately, an attempt to profit from the anticipated recovery. From time to time attractive arbitrage opportunities arise — including liquidation and merger transactions — providing healthy returns with little correlation to the market.
WHERE YOU RE UNLIKELY ’ TO SUCCEED:
● Cyclicals. It’s easy to become over-optimistic in assessing the potential of companies in deeply cyclical industries, particularly those with exposure to the prices of commodities, with potential losses compounded by the financial leverage some of these companies carry.
● Secularly challenged industries. When a company must dedicate all its free cash flow to stem the decline, it winds up “running to standstill”. The opportunity cost of holding these sorts of companies is high.
● Betting against trend. Well-entrenched trends, whether they apply to the overall market, stocks, interest rates, inflation or the economy, are difficult to reverse. They usually last longer and go further than most everybody expects.
the
● Dishonest or inadequate management. There is almost no discount large enough to account for the liability that bad or oblivious management represents.
To (once again) quote Charlie Munger: “The only way to win is to work, work, work, work, and hope to have a few insights. Guard against the effects of hubris and boredom. Determine value apart from price; progress apart from activity; wealth apart from size. It is better to remember the obvious than to grasp the esoteric. Be a business analyst, not a market, macroeconomic or security analyst. In the end, it comes down to preparation, discipline, patience and decisiveness.”