Brook Report: Build on solid foundations
In the first Brook Report Katrina Kruger reflects on what world-renowned economist Marc Faber told delegates at the recent Financial Analyst Seminar in Chicago and what it means for investors and advisers in New Zealand.
Monday, September 10th 2012, 6:00AM
by Katrina Kruger
I recently had the privilege of listening to Marc Faber speak at the Financial Analyst Seminar in Chicago.
It can be easy to get caught up in his bearish view of the world. His newsletter is called The Gloom, Boom and Doom Report, after all.
His opening statement was that monetary and fiscal policy is destabilising and has unfavourable consequences in every respect.
He said US policy makers' short-term fixes for addressing long-term structural problems were not working, would not work and would lead to total disaster for economies in the long run.
He noted that flooding a system with liquidity, where an economic problem is caused by an asset bubble of one kind or another, only creates another bubble. His opinion is that it is not a fiscal cliff the US is facing, more a fiscal Grand Canyon.
Whether you agree with him or not, it is food for thought.
Most of us are responsible for managing money and making investment recommendations in one form or another.
The market these days is generally up and down. But we know that markets tend to be cyclical and over the longer term trends are easier to identify.
However, the high levels of volatility and continued uncertainty seen in recent years have made investors skittish and analysts hesitant. Waiting for a clear trend to emerge can lead to paralysis from indecision.
This is where I think it is essential to go back to the basics and remember the building blocks.
I used to work for someone many years ago who drilled the following into my head: Accuracy and discipline.
Hearing myself repeating it recently made me realise the advice stuck. A robust, tried and tested investment process and philosophy, which has shown its worth over time, is invaluable in this environment.
A disciplined process mutes the white noise and allows for rational decision-making. It discourages impulsive actions, while working through the process crystallises thinking.
At Brook we select investments based on their intrinsic value.
We believe every cashflow-producing asset has an intrinsic value, which can be determined by rigorous research within a robust process.
Part of our process involves a close examination of Michael Porter's five forces, described in his book Competitive Strategy, published in 1980.
More recent references of this in literature are of economic moats or sustainable competitive advantages of a company or industry.
Porter's five forces include the threat of substitute product, the threat of established rivals, the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers.
The five forces described determine the competitive intensity and attractiveness of a market or industry. An attractive market is one where these five forces act to drive up overall profitability.
We maintain that the patient investor focused on long-term sustainable returns can outperform the market by identifying those companies trading at a discount to intrinsic value, while avoiding those that are currently "in vogue" with investors and that trade at a premium to their intrinsic value.
To come back to Dr Faber's talk, he made a convincing argument for holding equities, highlighting that relative to other assets equities look cheap.
His concern is that corporate profits in the Western world are too high and while money printing is good for corporate profits over the short term, it is not sustainable.
Taking into account historically low interest rates, equities look even more compelling. Dr Faber also pointed out that keeping assets in cash would be detrimental to the value of a portfolio due to negative real interest rates.
He concluded that the best advice at the moment is to diversify assets.
In his view, there are too many concerns to justify investing in one particular asset class over another.
He recommended investing in a range of assets and asset classes, including real assets such as property and precious metals.
Diversifying assets is one of the building blocks of investment management theory and is sound advice.
In my view, long-term value comes from sticking to the investment philosophy I know has delivered through the good and the bad, and staying true to our unwavering commitment to investors, which is to deliver strong, sustainable investment performance.
Brook Asset Management Limited ("Brook")is a member of the Macquarie Group of companies. Macquarie Bank Limited is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. Neither Macquarie Bank Limited, Brook nor any other member of the Macquarie Group are registered as a registered bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989 (New Zealand). This commentary is class advice and does not take account of your objectives, financial situation or needs. We recommend that you consider the appropriateness of information to your situation and obtain financial, legal and taxation advice before making any financial investment decisions.
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