“There is a basic investment principle which by and large seems only to be understood by a small minority of successful investors. This is that once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all. However, recommendations and comments continue to pour of the financial community giving other types of reasons for selling outstanding common stocks.
Most frequently given of such reasons is the conviction that a general stock market decline of some proportion is somewhere in the offing. Postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly. This is because investors are ignoring a powerful influence about which they have positive knowledge through fear of a less powerful force about which, in the present state of human knowledge, they and everyone else are largely guessing.”
Philip Fisher, Common Stocks and Uncommon Values, 1957
Fear is a powerful emotion but we must overcome it through positive knowledge. Philip Fisher wrote his seminal book about investing, building on Benjamin Graham’s Intelligent Investor, in 1957, at a period when the United States was in the midst of an unprecedented boom, a decade or more of investment in capacity and technology that built the foundation for the growth and prosperity it has delivered in the decades to come.
It is well worth re-reading Fisher today, not just because of the widespread fear of a general stock market decline of some proportion, as he phrases it, and not just because recommendations continue to pour out of the financial community saying to sell outstanding stocks because of short-term concerns about inflation, interest rates and the impacts they may have on discount rates that are used to value the future earnings and cash flows of companies, but because we are at an important point in the global economy that has parallels to the 1950s when Fisher wrote Common Stocks and Uncommon Values.
Globalisation and digitalisation have been two of the major drivers of the global economy and of stock markets over the past 30 years. Going forward, they will be joined by a third major driver, investment in capacity and technology. There is a tremendous opportunity because populations and economies have grown but companies have not been investing sufficiently to increase their capacity and take advantage of technology at the same rate.
Investment in capacity and technology will help to address the current challenges that the world is facing right now. Short-term these challenges include the current supply chain crisis and the shortages of many materials and products. Much more importantly, long-term they include climate change, the transition to a low-carbon economy and the achievement of Net Zero by 2050.
Over the past decade we have developed a lot of the technology that will allow us to produce the equipment to solve the supply chain crisis and reduce carbon emissions. We just have not produced it yet. The boom in investment in the firms that produce it, paid for by public and private money, will be the next driver of growth in global markets. Were it not for the pandemic, this boom would already have happened.
Global capital goods and industrial companies such as the technology and manufacturing leader Honeywell, the power and smart grid management firm Eaton, or electronic connector provider Amphenol, all will benefit from the much needed and inevitable investment in capacity and technology.
Our approach of investing in companies that have quality and value for the long-term, with strong and sustainable competitive positions in good and growing markets, solid managements and strong balance sheets is grounded in our positive knowledge based on our fundamental investment research and financial analysis.
The companies we invest in can prosper through periods of inflation and interest rates like we will experience as a normal part of the global economic growth we expect over the next several years. This is because they have the abilities and resources to innovate and grow their businesses over time, the pricing power to increase prices with inflation, the scale to purchase their inputs at lower costs than their competitors, and the operating leverage to maintain or increase their margins, allowing them to prosper and generate value over time.
One of our favourite cartoons summarizes our outlook for 2022. We expect that the coming year will thankfully be a year of greater population immunity, either through vaccinations or natural infections. With the aid of new vaccines, therapeutics and treatment capabilities we are in a much better place than ever before to manage future outbreaks. We foresee continued recovery from the impact of the pandemic, although as last year it is unlikely to be in a straight line.
