Fourth Quarter and Full Year 2019 Update
We are happy to report that 2019 was a very positive year in both absolute and relative performance terms.
As you know, Globescan Capital was founded on the principle that investing in high-quality companies at attractive prices is the best and most consistent strategy to achieve long-run risk-adjusted performance. This remains as true today as it has ever been. Regardless of any recent market movements, we maintain the same disciplined adherence to that principle.
This approach – not being influenced by short-term news flow – benefited greatly in 2019. Looking at the main news and events of the past 12 months, I doubt any commentators or strategists would have expected the market to have posted one of its best performances in the last two decades. We had the longest government shutdown in history, an escalating trade war with China, Boeing being crippled from 737 Max crashes, Hong Kong erupting in protests, IPO carnage from Uber to WeWork to Saudi Aramco, Brexit uncertainty, the Fed being forced to cut interest rates, the Fed being forced to expand their balance sheet to prop up the Repo market, regulators attacking tech companies, and even a presidential impeachment. And yet the S&P 500 returned over 30%.
This is a powerful reminder that nobody (including us) has any idea how macroeconomic and sociopolitical events will play out in the short run, and even if anyone did, they still wouldn’t be able to determine how those events will be interpreted by the markets.
So, the question becomes: “In a world of complete short-term uncertainty, how do we invest intelligently?”
The Greatest Edge: Long-Term Time Horizons
It is important that we are all on the same page in that, although 2019 was a fantastic year for our investments, no one year of performance will determine long-run compounded returns. Consider a few points:
In 2019, the S&P 500 returned 31%
On average, US equities have historically delivered 8-9% per year
On average, each year there is be a 14% peak to trough sell-off
This isn’t to say that there will be a 14% correction soon (though statistically, it is likely at some point during 2020), or that we are due for a bear market, or that we can bank on an 8-9% return every year for the foreseeable future. It is to say that in any given year the stock market will go up and down and in the short term it is largely unpredictable and irrelevant to our strategy, outside of the fact that it creates opportunities for us.
Instead, what drives our long- term returns are the fundamentals of the companies we own in our portfolio; namely those company’s growing their earnings year after year.
Unfortunately, a lot of investment managers in our industry do not take such a pragmatic view. In a highly competitive environment, most of our peers are under persistent pressure to deliver returns monthly, quarterly, maybe yearly if they are lucky. It doesn’t matter how smart these managers are, or how much of an information edge they have (in reality there is almost none)- if they are constrained by a short-term time horizon, their success or failure will largely be dependent on the whims of the market and therefore luck. As such, many investment firms have increasingly focused on trying to generate accurate short-term predictions, a task at which no firm or individual has been able to succeed consistently. Everywhere you turn at this time of year you will see articles, reports and strategists outlining their views on the market for 2020- almost all of which will turn out to be wrong. This is simply wasted time and energy.
Where we differ, and the source of our most important edge, is that we choose to avoid the short-term prediction game and instead play the game of maximizing long-term risk-adjusted returns based on the moat-protected future free cash flows of the companies we invest in (thanks largely to you- our loyal client base that understands the dangers of short-termism). As such, we can ignore whether the market wakes up overly sad or happy on any given day and instead focus our energy on something that is both knowable and truly relevant – the economic fundamentals of each company we own.
It is because of this structural advantage that we believe we will continue to outperform the market over the next decade.
We thank you all for the trust you put in us and look forward to continuing working with you over the coming years. As always, please feel free to get in touch with any questions that you may have.
Please note: We recently moved offices – we are still in the same building on San Felipe Street, but our suite number has changed from 113 to 240 (the easternmost corner of the second floor).
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