Not that I am a big fan of Warren Buffet, but a 20% annual return over his career forces respect. The guy had convictions as a value investor and he stuck to it. This is in stark contrast with the flimsy investor sentiment that we’re experiencing now.
Part of the explanation is that most of the market mantra of the past 10 years has been based on growth, not value. Value investment is essentially based on a bottom-up analysis, looking into the intrinsic value of an asset base, and making the call that its price is actually trading at a discount to the book value. It is much harder for growth companies, which asset base is more often intangible. Their price is therefore more predicated on external parameters, such as regulation intensity, rates, GDP growth, and future-gazing. More forward looking in a sense. Based on forecast rather than facts.
How fitting is such an investment theme in an era overruled by beliefs, with great disregard for truth. This was reinforced by very lenient external conditions. Financial conditions are at their most accommodative, rates are rock-bottom, and regulation has been rather soft until now.
The issue with growth investment theme is that most of it is based on momentum, and a good amount of guesstimating when the herd starts shifting mood. No wonder that there is an over reliance on sentiment analysis, as the best proxy to reading tea leaves.
This doesn’t mean that fundamentals for growth assets are all bad, this just highlights that investors globally stopped looking at them. Relying solely on sentiment has made them flimsy, and trigger-happy when it comes to buy or sell positions. Crypto is a case in point, a few tweets of Elon and a well-telegraphed regulation tightening is triggering a jaw-dropping 40% drop overnight, with utter disregard for the constructive development of the space.
Focus on your long game, analyze the long-term trends supporting the change of our society, and bear in mind that the price of an asset is only worth what the next buyer will offer for it. And you’ll become richer, my son.
360 Advisory – Markets