I dont do writing assignments. I dont like
deadlines. I am not a writer; I am an investor who thinks
through writing. So when Institutional Investor asked me to
write on the future of investing, my instinct was to politely
decline. But the topic did seem intriguing. So I decided to
give it a try.
At first, I felt like I needed a healthy dose of Prozac to
tackle the article it is easy to get depressed about the
global economy. Europe is on the verge of disintegration; China
risks a hard crash landing; Japan is a prick away from its debt
bubble bursting; and emerging economies are too linked to
China. The U.S., whose GDP grew at a less than inspiring annual
rate of 1.5 percent in the second quarter, is the least-spoiled
banana in the whole rotten fruit basket, the valedictorian of
summer school. As I put down these words, the thought that came
to mind was, Do I really want to be responsible for other
peoples life savings in this tumultuous environment?
Maybe I should learn to love deadlines and take up writing as a
But when I step back and look at the past 100 years,
Im reassured by all the things that the U.S. and global
economies survived: pandemics that wiped out a percentage of
the global population, two hot world wars and a
cold war, the disintegration of a superpower, plenty of other
wars, a few nuclear plant meltdowns, economic collapses,
terrorist attacks on U.S. soil, stock market crashes, and
Im sure Im forgetting a slew of other bad things.
Somehow our economy (and economies that were affected a lot
more than ours) got through those things. Our will to survive
is so much stronger than any adversity.
Pause for a second. Put yourself in any moment in the past
century. There was always something terrible happening that
seemed like it was going to tip us over the edge of the cliff.
And every bad time seemed uniquely bad. But I suspect that,
outside of a giant meteor hitting the earth, the global economy
will survive whatever adversity is thrown at it.
An economy doesnt need a fertile ground of calmness
and abundance to thrive. Just think of Japan, a nation living
on a few big rocks, with no natural resources, in the middle of
the Pacific, surviving and prospering after two nuclear bombs
obliterated two of its largest cities a country
constantly abused by earthquakes and tsunamis
(tsunami is a Japanese word). Despite all that,
Japan developed into one of the most prosperous nations in the
world, with one of the highest life expectancies. Or think of
Israel, a thriving democracy of fewer than 8 million
people, surrounded by half a billion friends.
There are a lot of bad things brewing on the horizon, and
Id be the last person to tell you to bury your head in
the sand, pray to the gods of blissful ignorance, and just hope
for the best. Bad things will happen, but well survive,
and if history is prologue, well come out stronger. In
the meantime, Ill take the advice of Oaktree Capital
Management co-founder Howard Marks, who likes to say, You
cannot predict, but you can prepare.
It is still not too late to structure your portfolio to
weather the global storm. The key is to own quality. For me,
quality companies are the ones that need to exist, that you can
imagine being around five or even 50 years from now. They also
usually come with wide moats that protect them from competition
trying to take a bite out of their cash flows.
Companies with pricing power will protect you both in an
inflationary environment, by passing price increases on to
their customers, and during deflationary times, by maintaining
their prices. Strong balance sheets are not really appreciated
in an environment where everyone is drowning in liquidity, but
they will be appreciated by scared creditors when things go
bad. There is a tremendous value in the recurrence of revenue;
companies with plenty of it have to do less heavy lifting to
Dont pay high multiples for growth; you are setting
yourself up for disappointment. Returns for stocks are driven
by two factors: earnings growth and price-to-earnings expansion
or contraction. The external environment may not be kind to
earnings growth (the aforementioned recurring revenue will
fight for this on your behalf), but a stock bought at a
significant discount to fair value puts you on the right side
of the P/E trend and can handle a lot of bad news thrown at it.
In the longer run it will see P/E expansion.
Dividends are also important. They force management to focus
on cash flow dividends are paid out with cash, not with
earnings and serve as a deterrent to dumb
empire-building, value-destroying acquisitions.
If you cannot find enough companies that fit the above
criteria, default to cash. Even if we experience inflation,
cash is better than a bad stock.
Vitaliy Katsenelson (firstname.lastname@example.org) is
CIO at Investment Management Associates in Denver and
author of The Little Book of Sideways