The Covid-19 is the first pandemic of our globalized age. It is also the first serious crisis we have faced with our investment approach since we started our World Stars Global Equities portfolio in 2012.
As we said in a webinar that we held last week, we think it is fair to say that in these challenging times, quality stands the test.
Never has our insistence on quality been so important. Investing in quality companies is the answer to preserving and increasing the value of assets over the long-term, as the Stern family has done for 75 years. This month marked the 75th anniversary of the end of World War II in Europe. It was this global crisis that forced the Stern family to leave Paris for New York and faced with the loss of their assets and business in France to invest in stocks following the approach we follow to this day.
Nestlé and Roche have been positions since that time and continue to have great prospects for value generation that are as strong today as they were then. Our insight has been to look for quality in businesses looking forward, not backwards, and to recognize that the global leaders in digital transformation, Amazon and Alphabet have prospects that are just as strong and as long-term.
We were asked last week about different approaches and whether our approach of investing in quality and value would be superseded by others. What about income? What about value? What about growth?
Our answer is that these approaches are about style, not substance.
What are the long-term prospects of a company that has a high dividend yield but pays it out of its substance or funded by debt or whose yield is so high because its business is pressured by disruption or cyclicality?
What are the prospects of a company whose share price is low compared to its past, whose multiple of book value is low because of physical capital invested in the past, and whose price/earnings multiple can be adjusted for a hoped for rebound in its earnings; but whose business is as troubled by poor management, leverage, cyclicality or disruption as the previous one?
And what are the risks of investing in untested companies in emerging businesses, with Icarus-like growth prospects but proportionate risks, whose equity value prices in growth not over the next five to ten years from existing or proximate revenues and cash flows but prospective future ones, whose share prices could soar as easily as they could crash, and who often burn cash that has to be raised from investors such as ourselves in good times and then runs out in bad?