“Simplicity is the ultimate sophistication” (Da Vinci)
We live in interesting times.
It is very easy to get caught up in the hullabaloo of markets and forget the basics.
The genius of Warren Buffett is his method is so simple. He has a four filter model and sticks to it.
- Understand the business
- Moat around the business
- Exceptional management
- Reasonable price
As much as Trump’s antics are theatre redefined, they have very little to do with investing.
Over a 100 year chart, with no dates, it would be difficult to pinpoint the exact periods of most US presidents. Major market crashes may make certain periods more obvious, but the effect that presidents have on markets over the long-term is usually negligible.
The geniuses at Alphabet are not sitting at their desks thinking, “Donald Trump is president, let’s not invent driverless cars”.
I had a client who recently planted a mushroom crop. His expected return on invested capital is approximately 100% per annum. I can assure you that he is not thinking “If labor gets elected, I won’t plant my mushrooms”.
The decision to invest in an asset should solely rely on the expected return of cash over the life of that investment discounted at a reasonable rate. Short-term factors such as politics, a recession or a failed product of a well diversified company should be factored into the price, but over a 20 year period will likely have little influence on whether to buy that asset.
“Time is the friend of a wonderful company and the enemy of a poor one”. (Warren Buffett)
The last piece of Buffetts four filters is price. It is the least important of the four filters when purchasing an asset, however it still matters.
A business that earns $1 trading for $35 requires a perfect future. Businesses rarely have perfect futures.
The market seems to be ignoring price for a number of companies. Paying multiples of the value of a business can lead to a number of years of anaemic returns. There is much of this folly in todays markets:
“Fools rush in where angels fear to tread” (Alexander Pope)
Despite the lofty levels of markets, we recently added to our position in Ambev. Ambev is a wonderful company at a reasonable price.
Ambev is easily understood, has a wide moat, is run by outstanding management and is below our estimate of intrinsic value.