Valuation
Identifying quality companies at discounted prices requires looking at market segments neglected by investors. At the same time, discovering a good long-term investment is a long and tedious process that requires patience and discipline. In other words, a quality franchise at an attractive price is an opportunity that cannot be missed, even if it means getting to the game early and having to wait for it to start.
Becoming a shareholder before the others does not bother us because we rarely buy a company for an immediate return.
However, arriving early can have a negative impact on our short-term performance as markets can sometimes be irrational for a while, before finally proving us right. In general, we expect a new position to contribute in the medium to long term. This is quite an important point, as most investors are overly impatient, either by choice or by necessity (hierarchy, client reporting or competitive pressure). By demanding an immediate return on their investments, they end up following rather than anticipating.
Over the years, we have learned that the markets are very good forecasters but rather in short-term: analysts' estimates rarely go beyond the next two years, especially in the emerging world. It is very difficult, even for the best analysts, to be more precise than the short-term consensus. Long-term investors make the difference by looking beyond the next two or three years, where only a few have any interest. Few indeed are those who can wait, and we think we are among them.
Patience is an essential condition for a successful long-term investment.
Although we do not like to pay the high price, we do not believe that the low price is THE CONDITION for a successful investment. An attractive valuation should never be just a compensation for low quality, low earnings growth, or structurally weak governance.
Nor should valuation discipline be confused with VALUE INVESTING which seeks low valuations in absolute terms. When thinking about attractive value or valuations, we prefer to focus on situations where:
1) the market is undervaluing the company’s ability to grow longer than expected or
2) the market is underappreciating its capacity to return to its trend growth faster than expected or
3) investors are unaware of the structural acceleration of the company’s growth.
Those situations in particular make it possible to find quality franchises at reasonable prices.
We are completely aligned with the Warren Buffet quote that you are probably familiar with: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Markets are smart and most of the time efficient. They tend to value companies adequately. However, from time to time, Mr. Market becomes irrationally excited and asks the investor to pay way too much (investment mania). In contrast, a severe depression sucks all the optimism out of Mr. Market, giving investors the opportunity to buy at sharply reduced levels (crash, recession, sector rotation).
As contrarian investors, we rarely participate in manias, especially their later portions, and become braver during market depressions.