According to British economist Angus Maddison, these trends accelerated around 1820 when a “range of gadgets” swept over England, dramatically increasing the speed and reducing the cost of transportation leading to larger trade areas and a means for best manufacturing practices to spread. The result was an historic shift in world economic growth, as a consistent increase in productivity per capita allowed a consistent growth in population that continues to this day. It seems we may now also be in a period when a “range of gadgets” sweeps over not just England but the entire world at the same time.

As we’ve said in past letters, the COVID period has likely introduced a lurch in per capita productivity, as government lockdowns forced even older folks, skeptical of new technology, to learn how to do a few important things faster and cheaper. Like 1820, it is a transportation revolution, but in reverse. Resources used for years to move workers to their most productive location will now be put to better use, as will the time used for that travel. This may not matter much or multiply by billions of people, but it may have started a period of productivity growth that will sometimes be difficult to measure.

One thing that becomes apparent over a long career is that institutional investors, on average, spend too much time worrying about the short term, that is, if maximizing total return is truly their objective. A short-term focus erodes long-term return by extracting a cost for certainty during uncertain times in the form of a lower than “fair” price, which for argument’s sake, we could say is defined as average valuation or average P/E. Investors with a long-term focus that buy during uncertain times have traditionally beaten the averages, and the uncertainty that those better returns will continue likely means that they will. Of course, risk-adjusted returns may be the same for buyer and seller if each defines risk differently. The risk of earning sub-par long-run returns and losing more money later today can be mitigated in the same transaction.

Figuring out which information is important in the long run and which isn’t is difficult. The amount of news and information that is truly strategically important is but a fraction of what we see. Learning to discern between signal and noise has been important for millennia, and it may be among the most important elements of generating good long-term investment results. The other is not to overpay.

The Eisenhower Matrix, popularized by Stephen Covey, is a nice tool for organizing decisions into a matrix of “urgent / not urgent” and “important / not important,” which may be useful when seeking good long-term equity returns. If we recognize that stock prices are determined by supply and demand, and we re-define “urgent” as being high investor interest and “not-urgent” as low investor interest, we can readily adapt Eisenhower’sand Covey’s Matrices to equity markets and call it the Value Investor’s, um, Matrix!

The adaptation is that important information when a stock is popular is likely to deliver returns offered by the efficient market, or fair risk-adjusted returns, while important information discovered when a stock is in low demand is more likely to deliver excess returns as demand recovers. Obviously, “not important” information should be avoided. But when every news outlet, pundit, client, co-worker, family member, friend, boss, or stranger holds a strong opinion, all of which are worth listening to under the mosaic theory, it is difficult to determine which information is truly important.

Over time, one of the most important compasses or guideposts in our effort to discern important from not important has been the Consumer Expenditures Survey (CES). When looking for important information, we have found this data is among the most important. Outside opinions are good to hear, but why not also let consumers tell you themselves what they are doing? We like to overweight industries that are growing relative to GDP by investing in the most undervalued companies in those industries. This approach has worked for a long time. Often, even a weak competitor in a good industry can deliver decent relative returns, mitigating the long-term risk of earning sub-par returns. The growth in leisure, gaming, software, internet advertising, e-commerce, healthcare – the list is longer – was trending nicely in the CES, while bargains would regularly appear after a short-term earnings miss or an officer resignation. For us, companies trading at below-average valuations in industries consistently gaining a share of GDP is a nice wind at the back.

As an example, we attach a table that we use as a guidepost in our search for new ideas. Not surprisingly, information services, scientific equipment, and data processing are near the top of the relative growth list since 2019, while construction, petroleum, food and beverage, chemicals, and government are toward the bottom. We organize the table into various economic periods, looking for changes and new trends that may be emerging. These long-term, sometimes well-entrenched trends, in our view, are always a good compass to above-average returns, and so we continue to mine this data for new ideas.

So, thank you for reading our annual Year-End/Forecast letter. One very comfortable prediction is that, especially during uncertain times, our long-term research and focus on long-term returns should help us continue delivering good returns to our clients. Thank you for your interest in our equity strategies.