Republished courtesy of the National Post
by Tom Bradley
At our firm, we keep our employee reviews simple. We focus on three things done well and three that need to be worked on.
With this process fresh in my mind, I’ve prepared a mid-year review for our most challenging employee, Mr. Market. I’ll call him Mark.
What you’ve done well
Mark, I’d like to start with the positives. There are plenty to talk about.
First, you should be commended for providing such excellent investment returns. Sometimes your domestic stocks lead the way and other times it’s the foreign ones. When you put them together (50/50), your record is exceptional.
You’ve earned 10 per cent per year over the last ten years and six per cent over last twenty. The latter is lower, but I think more impressive given that it includes two tough periods — the tech wreck and financial crisis of 2008. Both numbers are well in excess of inflation.
There are always doubters who want to shift to fancier investment products, but you’ve consistently built wealth for our clients.
Second, a portion of your return is remarkably stable. I’m speaking of dividends, which generally rise over time and are tax efficient (if they come from Canadian corporations). At a time when yields on GICs and bonds are so low, this is an important feature of your return stream.
The other accomplishment I’ll focus on today is your ability to find true value. It sometimes takes a while, but you sort through the many variables and come up with an appropriate price. Companies can be over or under-valued for months or years at a time, but you eventually get it right.
I will acknowledge that you’ve been getting more help lately. Private equity managers have so much money to spend (US$2-3 trillion including leverage) that they’re increasingly bidding for your public companies. There’s nothing like an auction to establish fair value.
Mark, you’re an excellent contributor to our portfolio team.
Need for improvement
As you know, we can’t do these reviews without talking about things we’d like you to work on.
I won’t mince words — your behaviour is erratic. We just don’t know where you’re coming from most days. Your returns have little to do with current news or what’s happening in the economy.
The things you key off seem to change without notice. One day it’s tariff wars. The next it’s growth in Asia. And the next it’s interest rates. We appreciate that you’re a forward thinker, which is always imprecise, but if you were more predictable, we’d be able to accord you a better valuation.
The second area of improvement is also behaviour related. Mark, you really go overboard sometimes. You get carried away when things are going well and when they’re not, you’re downright gloomy.
Let me give you a concrete example so you understand what I mean. In his latest letter, Howard Marks of Oaktree Capital reviews nine issues that you’re wrestling with. Real hard-hitting stuff. Is a recession avoidable? Do government deficits matter? Can interest rates stay perpetually low? And so on.
The interesting thing, according to Mr. Marks, is that you’re optimistic about all nine. In other words, current securities prices are based on endless monetary stimulation (low interest rates), no recession, low inflation, and governments and corporations continuing to run up debt with impunity. And when it comes to valuation, growth is driving stock prices more than profits.
Mark, do you really think all these complex issues are going to turn out better than they have in the past?
Finally, you’re not sensitive enough to investors’ needs. I’m referring to your habit of not doing what people are expecting. Indeed, you seem to relish in doing the opposite. When everything is rosy, commentators are brimming with bullishness and investors are being more aggressive, you fall off the table. And when investors have fear in their eyes and are shifting to cash, you inconveniently go on a long, strong run.
Mark, your position is secure, even if your fellow workers think you’re unpredictable, unreliable and prone to exaggeration. What’s the old expression: We can’t live with you, but we can’t live without you.
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