Earlier this year, a classic Matt cartoon from the Daily Telegraph had an English couple walk by a deranged-looking man holding up a sign saying “Everything may be OK”. The man turns to his wife and says “Lunatic.”
It is an apt depiction both of the current state of discourse and the negativity bias we have been discussing in our comments over the past couple of months. We see it in politics, economics and markets, where predictions of impending collapse and tail events are a constant din and the much more likely outcome, that everything may be OK, is discounted and dismissed.
That is not to say that we should be complacent. On the contrary, we should be greatly concerned about the issues we face but should not confront them urgently, by taking action ourselves or by insisting that our representatives in politics and government address them with the greater means at their disposal. However, we have to be careful not to let our concerns and our frustration at the lack of progress blind us to the very means by which we can overcome those issues and achieve the progress we hope for.
Because we invest in companies that offer quality and value over the long-term, we have always been highly concerned with the sustainability of their industries, their businesses and their practices. Environmental, social and governance issues (ESG) have been central to our investment decisions. Quality is a gating condition for us and it includes key criteria such as a strong and sustainable competitive position in a good and growing industry.
The clue is in the name as we are sometimes reminded by younger members of our families. No matter how good it is today, a business cannot sustain its competitive advantage in the long-term if its industry is in decline, if it exploits resources in an unsustainable way, if it treats its workforce poorly, if it violates government policy or regulation, or if it is rejected by its customers because of real or perceived issues with its business and its practices. Nestlé is a good example. It has been in Stern family portfolios since the 1950s and despite the many issues it has faced, most prominently in infant nutrition and water, it would not have generated the strong returns it has since then and it would not still be a core holding for us if it were not continuously addressing these issues, innovating and changing along the way.
It is of great importance to recognize that companies like Nestlé and many others that we are invested in may be part of the problem, because they are large businesses that operate globally and have great economic and social impact on our societies, but they are also an important part of the solution.