Drew Dickson points out that there is one way to generate excess stock market returns over the long term, and it isn\u2019t to \u201cown winners at any price.\u201d Sure, in hindsight it was, but that is very convenient. It\u2019s very convenient to now ignore the stocks we thought were winners but weren\u2019t. It\u2019s also very convenient to draw parallels between past winners and newer companies as if it is a foregone conclusion they too will win in a similar fashion. Nor do excess returns come from \u201cowning good companies at any price\u201d or \u201cowning high-quality companies at any price.\u201d The \u201cone way\u201d to outperform is to buy a concentrated portfolio of securities that Mr Market doesn\u2019t own; names which are shunned because Mr Market has become overly pessimistic about the fundamental prospects for businesses that are better than he believes or realizes. That\u2019s it. That\u2019s the formula.
\nThis often isn\u2019t sexy, it often isn\u2019t fashionable, and it often isn\u2019t fun. However, a successful investor outperforming Mr Market over the long term owns companies that, by definition, Mr Market believes are pretty stupid to own.
\nInstead, Mr Market often thinks growing, glamorous, names are much smarter to own. They definitely are smarter looking. And it is surely more entertaining to own these stocks. It\u2019s also easier to sleep at night. They are obviously more dynamic companies and, in many cases, they indeed are better companies. And there are periods where these growing, good and glamorous names do tremendously, well. During these episodes, it downright sucks to be a fundamentally-driven value investor. Equity markets had one of those periods in 1998-1999, and \u2013 in Dickson\u2019s view \u2013 they may be having another one of them now. Paraphrasing Thomas Paine, these are the times that try stock-pickers\u2019 souls.
\nThe stock market, at least at the moment, seems most sensitive to whether or not a company is classified as a \u201cgood\u201d or \u201cbad\u201d business. And \u201cgood\u201d means your stock has already appreciated, is already expensive, and is showing even the slightest degree of business momentum. And no price is high enough for \u201cgood\u201d. Because good is good, so why wouldn\u2019t you own it? \u201cBad\u201d is the opposite. Bad is an already-inexpensive stock that has already sold off, and one that has already exhibited fundamental weakness, even if it\u2019s likely a short-term phenomenon. And no price is low enough for \u201cbad\u201d. Because bad is bad, so why would you own it? As maddening as this behaviour is, it is typical of investor psychology at peaks and troughs; and consequently, the \u201cprice\u201d of growth is higher than it has ever been.
\nDickson asserts that there is no new era. Stocks are still worth the present value of their future cash flows. While narratives can dominate in the short term, and while the short term is sometimes longer than we like, the fundamentals eventually matter. They have to. We are buying fractions of the equity value of large, liquid, listed, enterprises. The fundamentals \u201chave to matter\u201d because these fractions of equity, these shares, are worth the present value of all future cash flows to that fraction of ownership. We have no idea when \u201ceventually\u201d is going to arrive. Whether or not we are three days or three years away from this growth bubble popping, he doesn\u2019t know. But he is tremendously confident that it isn\u2019t \u201cdifferent this time.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
Drew Dickson points out that there is one way to generate excess stock market returns over the long term, and it isn\u2019t to \u201cown winners at any price.\u201d Sure, in hindsight it was, but that is very convenient. It\u2019s very convenient to now ignore the stocks we thought were winners but weren\u2019t. It\u2019s also very […]<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[74],"tags":[],"_links":{"self":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts\/1281"}],"collection":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/comments?post=1281"}],"version-history":[{"count":1,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts\/1281\/revisions"}],"predecessor-version":[{"id":1282,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts\/1281\/revisions\/1282"}],"wp:attachment":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/media?parent=1281"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/categories?post=1281"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/tags?post=1281"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}