I am enjoying reading the book The Outsiders this week and highly recommend it (click here to get a copy).
The author, William Thorndike, highlights the little-known CEOs (Warren Buffett being an exception) who outperformed the overall market by undergoing a discipline seen as “renegade” and “innovative.’ Ironically, in most cases, that approach meant doing nothing, and waiting for the right opportunity to present itself.
Thorndike, highlights Teledyne’s CEO Singleton, who achieved extraordinary above market returns over 20+ years at the helm. What was his key to success as an investor? Consistency and a pragmatic approach to capital allocation.
How does that approach serve us in today’s market?
On the face of it, nothing has changed. I always like using Marty Zweig’s quote: “Don’t fight the Fed.” You and I can pontificate forever about Fed policy, but at the end of the day, it is a decision we have no control over.
What we need to pay attention to is what the Fed says it will do. In that regard, the Fed has been quite unambiguous. The Fed has been explicitly clear that any indication of wage growth would require their immediate focus to help stem off inflation.
What did the markets do?
Violently sell-off and begin pricing in a potential fourth rate increase.
In the days of old prior Fed Chair Volcker was clear regarding his focus on the monetary supply numbers, and he was entirely consistent with his approach to wring out inflation. Today, with Chairman Powell’s continuation of Yellen’s mandate, market participants should expect the same.
However, as stated before, the Fed has their hands full. They have four major concerns:
1. The advent of wage growth
2. More US debt
3. Quantitative tightening
4. Fed tightening
The Fed Chairmen has his work quite cut out for him as he needs to balance a strict anti-inflation policy as he unwinds a massive QE balance sheet and an Administration h**l bent on massive fiscal stimulus (as noted by The Economist).
I recommend we error on giving the Fed Chair the benefit of the doubt, and assume the Chair will manage this anti-inflationary process.
Where does that leave us with regards to Singleton’s approach on capital allocation in today’s market?
We have to seek returns where we, as investors, can best obtain them.
From a relative standpoint, we can see this quite clearly in Asia.
To my American readers, this may seem like sacrilege, but I prefer to rely on the data. The data tells us several clear things that the American investor is ignoring:
· Asia is not as dependent on the American consumer
· The rise and independence of the Asian consumer
· The strong local GDP growth story in Asia
Finally, living in Singapore and as a “local” investor, I can take issue with the term “emerging market.” Markets here do not fit the Wikipedia definition:
In the 1970s, "less developed countries" (LDCs) was the common term for markets that were less "developed" (by objective or subjective measures) than the developed countries such as the United States, Japan, and those in Western Europe. These markets were supposed to provide greater potential for profit but also more risk from various factors like patent infringement. This term was replaced by emerging market. The term is misleading in that there is no guarantee that a country will move from "less developed" to "more developed"; although that is the general trend in the world, countries can also move from "more developed" to "less developed".
I personally believe that we have an interesting “informational arbitrage” in front of us today in the Asian markets.
The ignorant investor may conclude that the emerging markets present a higher degree of risk than is appropriate, hence limiting their allocation.
The smart investor would recognize the “developed” aspect of these markets (again my apologies to all those I know in Singapore for the phrasing), and understand that the investment risk factor is in fact lower than priced in the market.
In some textbooks, they refer to an investors home bias, or the proclivity to invest in markets and companies they understand. But let’s be candid, is British American Tobacco really only a British company? I think not.
As investors, we should be rational and let our natural “home bias” not interfere with our investment decisions.
That said, Asia is cheap relative to the “developed” world.
In the coming weeks, I intend to highlight this opportunity in Asia. I will have the opportunity to review both the equity and fixed income markets. Alongside that I anticipate we will inevitably cover commodities and foreign exchange.
We’ll have the opportunity to meet some of Asia’s leading portfolio managers, economists, and investors.
My objective, is for all investors to see the fallacy of the "emerging markets" and recognize Asia growth story for the investment reality that it is.
My Keynote in Sydney!
In late February 21-23, I will be speaking at RFI’s Mortgage Innovation Summit Event in Sydney. If you are in town, let me know and it would be good to get caught up then! The link to the event is here.